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Making Markets EP12: Mega Tech Earnings in Focus: Facebook Changes Its Name, Microsoft Outsizes, While Apple and Amazon Miss
by Daniel Newman | October 29, 2021

In this week’s edition, we take a look at Facebook’s $10 billion dollar investment into the Metaverse.

We also take a look at Microsoft’s robust earnings as well as Apple and Amazon, which miss, but still leave room for optimism.

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Disclaimer: The Making Markets podcast is for information and entertainment purposes only. Over the course of this podcast, we may talk about companies that are publicly traded and we may even reference that fact and their equity share price, but please do not take anything that we say as a recommendation about what you should do with your investment dollars. We are not investment advisors and we do not ask that you treat us as such. 

Transcript:

Daniel Newman: A huge week in earnings as well as we will take a look at Microsoft’s big results while Apple and Amazon both missed expectations. All this and more on this week’s edition, Making Markets.

Announcer: This is the Making Markets podcast brought to you by Futurum Research. We bring you top executives from the world’s most exciting technology companies, bridging the gap between strategy, markets, innovation, and the company’s featured on the show. The Making Markets podcast is for information and entertainment purposes only. Please do not take anything reflected in this show as investment advice. Now, your host, principal analyst and founding partner of Futurum Research, Daniel Newman.

Daniel Newman: Hey everybody, welcome to another edition of Making Markets. Hope everybody’s strapped in. This was a interesting week. We knew it was going to be a big week with so many names reporting. Week starting out with Alphabet. Of course, you have AMD, you had Apple, we had Amazon, and then of all things Facebook threatens a name change and actually does a name change in a matter of days. So the company CEO, Mark Zuckerberg, comes on Facebook Connect, the company’s big AR and VR event, and essentially says, “Hey, we are no longer Facebook, we are now Meta. And we are going to own the metaverse. And he used the onus that Facebook being both the brand and the product was confusing. Of course, the company has Instagram and WhatsApp, and I guess for people out there perhaps it was confusing.

I think if I have to be completely honest, which I always try to be, the company is in the middle of a litany of scrutiny from regulators, from users, from partners. And while the stock is holding in really well, the earnings looked okay, it seems that the pressure for the company to change is mounting. So instead of changing in a little way, perhaps addressing some of the concerns regarding privacy or its practices in feeding information to people on the extremes that maybe causes the most visceral and outlandish reactions, company says, “You know what, we’re going to double down and actually create the future. We’re going to create the metaverse.” And the metaverse is effectively bringing together the physical and digital universe and building tools and technology and software that allows us to live our physical life in a virtual environment.

So we’ve been hearing about virtual reality and augmented reality for some time, and I think both of those things are growing and are going to continue to be trends. Anybody that has ever done Pokémon GO remembers just how much we like when we can blend our experiences, and we certainly spend a lot of time looking at our screens. And that’s Zuckerberg’s point, is why look at a screen when we can be in the screen? And at Connect, he definitely provided some interesting demonstrations that gave its viewers some indication and maybe some inspiration as to what the company is going to be able to do. I think it’s a little bit of a wag the dog moment or maybe more simply put, a way to distract from all of the regulatory oversight that is being put on the company at this juncture. And at the same time, I think it’s necessary because investors don’t get behind companies based upon their current numbers, although earning sometimes makes a good case against what I’m saying. But usually, especially your long-term investors and institutions are looking for companies that have long-term growth.

So Facebook’s going to spend $10 billion to build the metaverse, and that’s maybe just now. Company basically said it maybe five or 10 years before this really is a money maker for it. But at the same time, if investors, if the market is going to see Facebook as an innovator and perhaps forget about all of its misgivings over the past few years, then a major change may be what’s in order. I look at this as a mix of good and bad. I hate the name Meta, I don’t know why, just doesn’t sit well with me. I don’t know that the market ever really appreciated the name Alphabet, but for Facebook, it may be even worse. I think that its various products, perhaps maybe by giving it a parent and having things look like products instead of everything being Facebook, it will make regulators see it as less of a connected platform and more as a group of individual products, which could be good from a regulatory standpoint.

I think they’ll see through it. But as a whole, the whole metaverse, cool technology, exciting, Facebook’s planting the flag. I still think companies like Apple, Alphabet, Google, there’s just a few, Microsoft, of course, are going to play their part here as well. I don’t think anyone’s going to let them just have it. I’m still kind of curious if the market’s going to just be like, “Sure. Yeah, Facebook, we’ll give you even more of our data. We’ll invite you further into our homes, we’ll give you a physical map of our homes. We can create the digital universe, then we’ll invite everyone over, and we’ll share it with you.” But at the same time, I often wonder if anyone cares at all about their privacy and data or if that’s just a media and analyst musing that we like to talk about. I guess we’re going to see.

All right, let’s get into earnings a little bit. Let’s start off with Apple, and we’ll talk about Apple and Amazon first. These two companies had big expectations and came up short in terms of their results. And for Apple, it was the first miss in quite a long time, but it wasn’t that big of a miss. Tim Cook, CEO, basically came out and said that the supply constraints were bigger than expected. And finally, in its fiscal fourth quarter, the company was hamstrung by those constraints. And the market reacted somewhat sour, fell 3% after hours. But at the same time, it really wasn’t that bad of a result. So he, Tim Cook, provided the market with number of six billion as what he believed the supply constraints cost the business this quarter. And that’s really significant because the company came in at 83.36 versus 84.85, which was just under expectation. Now at the same time with that extra six billion, it would’ve had a pretty significant beat.

Also, that 83.36 did represent a 29% growth. And there was growth in every one of the businesses categories. So when people are looking at it saying, “Oh, Apple had a bad quarter,” I think that’s a pretty inaccurate description of how the company performed. But seeing that even Apple, one of the best companies in the world at managing the supply chain, can still be impacted by it shows just how severe this shortage is. Now, if you look across the portfolio, biggest hit came on iPhone. It was expected iPhone with its new iPhone 13 was going to come in at over 41 billion in revenue, it came in at 38. But it still grew by 47%. But if you actually just run down the categories, iPhone up 47, services up 25, other products up 11, Mac up a somewhat measly 1.6 given all the energy and attention to the new Mac launches. iPad revenue was up 21.4, and margins were up as the company was able to maybe push pricing a little bit and push its efficiencies. Like I said, very good in the supply chain.

As a whole though, I just don’t really think there’s much to worry about with Apple. As the supply becomes more available, there definitely does seem to be demand. I’m a little bit curious if the Mac revenue will be a lot stronger in the wake of supply becoming more available. We know how PC has been hit, and many companies have been hit at the same time across the board. Did the iPhone 13 flop at all? Like I said, still 47% growth, but everybody expects with these cycles that there’s going to be a huge outsize number.

Heading into the holidays, it’s going to be something to watch as well for the company because this is the time we sell a lot of iPads, you sell a lot of iPhones. And watching the company and what it’s able to do as it guides forward will be interesting, but it doesn’t really guide. The only thing we heard was that effectively Tim cook is expecting a pretty good next quarter. So we’ll watch how the holiday season goes, we’ll watch how supply becomes more available. Apple, it was not a bad quarter, it was not it best as a market. I think we’ve become overly expectant for massive outsize results, and that’s what happens when you have a really good quarter that’s not great. You just can’t make everybody happy.

Speaking of not making everybody happy, let’s bounce over to Amazon. Amazon got clobbered. And this is a company that’s only up about 5% year to date after this particular report, and was only up about 4% trailing the entire [inaudible] for the year. And I’m really just puzzled as to why. Of course, the eCommerce giant benefited massively from the impacts of COVID, but it’s also been one of the biggest investors throughout the entire COVID-19 pandemic with over 1.3 million employees now, worldwide expansion, a really big SMB partner ecosystem, upskilling initiatives, wages approaching $18 an hour, there’s a lot to like about Amazon. Of course it’s climate pledge, which now has hundreds of companies participating all with the same goal of carbon neutrality and negative carbon 10 years ahead of the Paris Accord.

So Amazon’s doing a lot of the right things, but what it didn’t do in the second quarter under Andy Jassy’s leadership was beat on either the top or bottom line. Company came in at 110 billion, 110.8 versus 111.6, so it really just missed on the top line. But on the bottom line, the investments, the impact of the supply chain shortage, labor shortages, physical expansion of the company, higher prices of goods, and like I said, the overall higher cost of labor and employment did impact the company’s bottom line. It came in well short of expectation at six dollars and 12 cents versus 8.92. And six dollars 12 cents of earnings per share is pretty good, but the market did not react very kindly.

Having said that, just like Apple, the company did still grow. You’re talking about a company that’s generating 110.8 billion in a quarter. And in this quarter year over year, it still grew by 15%. So I look across the board and I say, “Huh, this is a pretty good result.” Especially for a company that has real large employee base that has a very investment intensive CapX driven supply chain. You have high variable costs and fixed costs related to labor. And I mean, you have labor shortage, you have high employee costs, you have global supply constraints, you have freight costs, shipping costs, and the company as it always has under Andy Jassy is continuing the Jeff Bezos way, which is it invests to grow.

And so with its guidance forward of 130 to 140 billion also somehow disappointing the market because they want the top end of that scale heading into the holiday, it’s just really kind of hard to fully appreciate. Couple bright spots within the Amazon numbers was first of all, it’s very strong growth for its cloud business. AWS usurped $16 billion this quarter at a 39% jump. I was pretty optimistic that we would see a big number from Amazon Web Services. This especially because of the strong Azure growth from Microsoft, which we’ll talk about a little bit, coming in at over 50%. I also saw some strong numbers in the company’s advertising business as well that shot up this quarter.

Across the board, it just wasn’t that bad. But what the market has to be able to appreciate is on this route over a hundred billion, then to 150, then to 200 billion in revenue on a quarterly basis, the company is definitely going to have to spend some money to be able to meet the needs to keep delivering on these expect of customers. And so I overall tend to be more bullish than the market on Amazon’s results. Now, one thing of note that you’ll probably hear is that AWS and it’s really significant operating margin and profit essentially was the difference in the company being able to make money right now. But that again is all based upon its growth.

And a couple of other things, I mentioned all these different investments into the community. But the company also announced another 275,000 permanent and seasonal employees are going to be added and more retention bonuses, more investment to get employees in, and then even doing free college tuition. So sometimes I wonder as a market, we want these big companies to spend and invest and raise wages, and we want them to make bigger impacts in society, but at the same time, not at the cost of being able to hit a quarterly number. So in many ways, I admire Amazon for saying, “Hey, we’re going to keep investing, we’re going to keep trying to attract talent, we’re going to stay on course with our future of work, and we’re going to upskill our employees, we’re going to send them to college, we’re going to hire more people, we’re going to diversify geographically, we’re going to build more facilities. That’s how we’re going to grow. And sometimes some quarters, we’re just not going to be able to blow it out of the water on earnings.” But still an overall good result.

Speaking of overall really good results, Microsoft absolutely crushed it. Alphabet had a really good quarter too, I’m not going to talk about that here. But Microsoft, maybe of all the big tech companies this week, had one of the biggest and best results, 22% year on year revenue growth. And this was huge for the company. The result basically came in beating on both the top and the bottom line. And last quarter was about 21%, and that was the best growth year over year in three years or something like that. And now it did it again. And this kind of is interesting because everyone thought this quarter might be the quarter where we see some slowdowns.

And as we talked about with Apple and Amazon, there were some slowdowns, the shortage of supply chain has been impactful. But under Satya Nadella’s leadership, Microsoft just continues to roar forward. Two dollars and 27 to share earnings versus 2.07, its revenue came in at 45.32 billion versus 43.97 in expectation. It had growth in essentially every one of its major segments. And the only area that really sort of I took pause was just the struggle with Surface. Because Surface is such a good product, but yet it’s revenue continues to decline in that particular business. But overall, that business even with the decline still did well. The demand for Xbox is up, the demand for Xbox content and games are up. Of course, in the holiday season, I believe that will only continue to roar. But the big number, the big outsize number that everybody really wants to talk about, of course, is Azure.

So Azure was expected to grow at about 47%. And once again, it grew at 50%. This means it is making small gains on AWS in terms of its overall business albeit AWS had an outstanding number and still remains by a margin the number one. The company’s productivity in business, which focuses on Dynamics, Office, LinkedIn also had a really strong 22% growth. Dynamics 365, the company’s cloud, ERP and CRM and business applications had really strong growth in the high thirties. And it was overall a pretty strong quarter for the company. It’s hard to not feel very bullish about Microsoft.

Again, given the circumstances, given that companies from Apple and Amazon and Intel, for instance, all having somewhat muted results this quarter, whereas only a few Facebook, Alphabet were able to outsize expectations, Microsoft is in a situation where it’s so diverse, it’s so big, it has so many different businesses where you would’ve almost thought for sure that the company would have run into some more substantial hiccups. And it just didn’t. And so as I’ve continued on this trail of being very, very positive on Microsoft, that’s because they just haven’t given us much not to feel great about. Like I said, I’d like to see Surface perform better. I think that’s going to be an important long-term product.

It was good to hear Microsoft and Intel get together at Intel’s innovation event, talk a little bit about how they are going to work together to build innovative products, technologies, chip sets, and devices to compete with Apple’s M1. I think that’s going to be very important for both Intel and Microsoft and the Windows ecosystem. But this week, great result from Microsoft, great overall performance tying together a very interesting set of earnings that everyone was waiting for, everybody’s going to be watching. And now we’re going to head into the holiday season. As we do, of course, we’re going to be saying, “Can these companies do it again? Can the ones that missed get back on track and the ones that made it stay on track? And of course, is Facebook going to do anything else dumb this quarter?” And I think the answer of course is yes, but the metaverse may not be the dumb thing, it might just be most meta thing ever.

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About the Author

Daniel Newman is the Principal Analyst of Futurum Research and the CEO of Broadsuite Media Group. Living his life at the intersection of people and technology, Daniel works with the world’s largest technology brands exploring Digital Transformation and how it is influencing the enterprise. Read Full Bio