← Motley Fool Hidden Gems Investing
Motley Fool Hidden Gems Investing
The Best Company in Big Tech?
00:29:16
Microsoft just got the market focused on business results again.
Loading summary
Transcript42 lines
- [00:05]
Dylan Lewis
The cloud spend ain't slowing down. Motley fool money starts now. I'm Dylan Lewis and I'm joined over the airwaves by Motley fool analyst Nick Sipal. Nick, thanks for joining me today.
- [00:26]
Nick Sipal
Great to be back here with you, Dylan.
- [00:28]
Dylan Lewis
We have been living largely in a market dominated by macro vibes and Microsoft and Meta reminding Wall street that earnings power exists with their reports this week.
- [00:39]
Nick Sipal
That's right. We're seeing why big tech are the big dogs on the stock market and seemingly immune to all the macroeconomic and kind of consumer demand concerns that we've been hearing about in the headlines all year long. And you see that in the performance of the shares this morning and pulling the rest of the stock market along with them.
- [00:55]
Dylan Lewis
Yeah, Microsoft posting up some pretty strong results. Revenue up about 13%. Net income up even more than that. And the market cheering that. Shares up almost 10% after the report. What did you see in the results?
- [01:09]
Nick Sipal
Yeah, analysts really drilling in on cloud results and really strong output from Microsoft in that respect. Cloud revenue up 20% if you drill within that. Azure revenue up 33%. Sixteen points of that growth associated with AI. But management called out, they're really stronger than expected. Performance from Azure came from non AI services. Things like accelerated cloud migrations which are still going on. I know AI is catching everything, but the cloud is still a thing. Microsoft really, everywhere you look, Xbox, even at the box office this year have had some success. Minecraft is the number one most successful movie so far here in 2025. If you had to look for one negative, it is cloud margins which are under pressure because of that continued AI spend. But really this is a big tech giant that continues to be a steamroller.
- [01:55]
Dylan Lewis
That keeps on rolling and they continue to spend. Right. That capex number not coming down anytime soon. Even with the macro picture being what it is, Microsoft's leadership team saying, hey, plans for the second half of the year remain what we outlined in January. We are not slowing down the spend. We continue to see the opportunity there. And I know that's something a lot of people were kind of waiting with bated breath for, wondering, is AI spend going to slow down? Is the macro picture are going to interfere with these plans? Doesn't seem like that's the case.
- [02:22]
Nick Sipal
That's right. I mean, you saw lots of headlines leading up to this report questioning AI spend. What is the return on investment suggesting that big tech may be pulling back. But if you listen to commentary from Microsoft's management, demand continues to outstrip supply. They said demand for AI Services is growing faster, they can bring a data center capacity online and the company expects to have AI capacity constraints beginning in June of this year. And that's despite spending more than $16 billion on CapEx in this quarter and plans to spend as much as $80 billion this year, demand continues to outstrip supply and certainly management thinks they're getting good return on investment.
- [02:59]
Dylan Lewis
One of the things I was really struck by getting outside of the cloud and just looking at the overall business was there are five different segments for Microsoft that are posting double digit revenue growth. They are seeing acceleration in some categories like Microsoft 365 they're seeing a little bit of a pickup when it comes to search and news advertising. This is a big business. Some of these are smaller segments. But I dare say that this might be a firing on all cylinders.
- [03:24]
Nick Sipal
Quarter Nick Yeah, hard to see anywhere where there's really disappointment. I mean you could say a little bit of deceleration in commercial cloud revenue, but when you're going from mid teens growth to low double digit growth, that's still pretty good. And if you look at guidance, still expecting to have strong growth in the quarter to come. Guidance for azure expected at 34 to 35% growth in constant currency. That's right in line with that 35% constant currency growth they put up this quarter operating margin still expected to increase. And management also called out that if you think about a business that's transitioning, Microsoft being one of these businesses transitioning to AI business margins reportedly better now than when Microsoft was at a similar stage from that on premise customers cloud shift. So really a business that's showing success across all metrics and guidance calls for more of that to come.
- [04:15]
Dylan Lewis
Staying with the big tech names market also very happy to see numbers out from Meta. I think shares were up about 5 or 6% after they reported and it seems like a similar story to what we saw from Google parent Alphabet last week. At least for the time being. Ad spend looking backwards remains strong. The results that we're posting look good. They're noting. There's the possibility of some softness in the outlook though.
- [04:37]
Nick Sipal
Yeah if you look at Meadows results, revenue up 16% ahead of estimates from analysts, net income up 35%. And really the big standout if you drive below the top line is engagement and advertising efficiency and a lot of that is driven by their investments in AI. Meta continues to be the dominant social media platform worldwide and you see that on how many folks are active on the platform. Family daily active people reach $3.43 billion for the reported quarter, that's like 60% of the world's total Internet population and again continuing to grow at 6% more daily active people year over year. Ad impressions up 5% year over year. Average price per ad increased 10% year over year. That's the fourth consecutive quarter of double digit growth when it comes to price per ad and a lot of that is being driven by AI. AI recommendations drove time spent gains on Facebook up 7%, Instagram up 6% and Threads up 30%. You're also seeing more advertisers use AI tools to put more inventory on the platform. Yet 30% more advertisers use AI creative tools in the first quarter and improved ads recommendations. Models for reels is increasing conversion rates on that platform and they continue to say that conversion is outpacing impressions. And if you look long term, Mark Zuckerberg said their long term goal is to basically make it where any business can give us the objective they're trying to achieve like selling something or reaching a new customer and they can just do the rest. AI can just do the rest for you. That he thinks if he can deliver on that vision and over the coming years that increased productivity from AI is going to make advertising an even larger share of global GDP than it is today. And so I think, you know, you look at these Meta results, it's a platform that was already dominant in advertising and I think these AI investments are making them that much stronger today and they're going to be even stronger in the years to come.
- [06:23]
Dylan Lewis
I do want to hit some of the AI stuff because we have some other new stuff there. But just sticking with the ad business for a second, we are seeing the way that tariffs reduced consumer demand can start to flow through to all of the other businesses that are reliant on it. Generally we think of Meta as this incredibly strong big business. It is going to be subject to whether consumers are buying stuff and whether advertisers see that consumers are buying stuff and are advertising to them. No surprise. We saw a little bit of a fall off with political spend management mentioned mentioned that on the call. But they did note we're also probably going to see a little bit of weakness from some Chinese retailers if the tariff situation holds up.
- [07:03]
Nick Sipal
That's right. And that was some big worries that folks had called out leading into the earnings report. Folks like Sheehan and Temu had been big spenders on Meta and other online platforms and with these large reciprocal tariffs put in place in April that the cost of those products on those platforms likely to go up significantly. And Meta did say that that has impacted their business in the current quarter. That said, if you look at revenue guidance for the quarter ahead in line with expectations, and that suggests that efficiency gains elsewhere, their ability to increase productivity of advertisements for their other advertisers are more than making up for that lost revenue. And that was a good sign to see part of why the stock is up.
- [07:44]
Dylan Lewis
Mark Zuckerberg was quick to note improved advertising definitely one of the major opportunities that they see when it comes to artificial intelligence. But there are other ones. He's got five he sees in particular advertising one more engaging experiences, another business messaging, Meta AI and AI devices. Any of those that you want to zoom in on, Nick?
- [08:03]
Nick Sipal
Well, I mean, certainly Zuckerberg has placed his chips on AI devices, felt he got burned in the past by Apple controlling the ecosystem on the iPhone and wants to make significant investments there and really own this new platform. He has said on the last earnings call that this is the year where we're going to prove whether AI glasses can be successful or not. They did call out Meta Ray Ban glasses. Sales have tripled year over year. They fully rolled out live translation on the Meta Ray Ban glasses in all markets. So that's again adding functionality to the platform. We'll talk in a second about the new Meta AI app, but that's directly integrated with these glasses. So I think you can kind of see where the company is beginning to go immediately. Today the impact of AI is making the core advertising platform stronger, but in the future you can see where the company is trying to evolve and I think that's worth paying attention to.
- [08:58]
Dylan Lewis
I think I'm a near term skeptic on the Ray Ban glasses. I think I am more easily convinced that the Meta AI ambitions might turn into something for the business. This is their new standalone AI assistant app, something that they are launching in addition to giving us this earnings report this week. And it is another hat in the ring for people who are already using Gemini, already using OpenAI, some of these other chatbot tools. What do you think we'll see from Meta here?
- [09:28]
Nick Sipal
You know, it is going to be interesting. They called out on the earnings call that Meta AI already has over a billion monthly active users. If you include the users on Messenger, Instagram, Facebook, WhatsApp, where it's really directly built in to the, to the chat tool. You know, if you, if you glance at those numbers, 1 billion monthly active users kind of puts it in the same ballpark with ChatGPT where the public numbers say they've got 400 million weekly active users, probably similar. That said, different use case of this kind of Meta AI app certainly integrated into these other platforms than what you had seen from ChatGPT. With the standalone app, we'll get a little bit more apples to apples comparison on how people use the Meta AI app compared to others. But I don't think, as I said earlier with AI glasses, I don't think the text based chatbot is what Zuckerberg sees as the end state for AI. I think he sees that as where we are today, but where things are headed towards, and he's emphasized this a lot, is voice based chat integrating with some of these other devices that they're working on, on selling. So I don't think this is the end of the road for where meta is headed in AI.
- [10:33]
Dylan Lewis
I think it's kind of interesting to have them in there because as a standalone app it will force them to think a little bit about the business model and the economic realities of AI chatbots. And we have seen companies like OpenAI say we are doing the subscription model. There's a free version and then there's a premium subscription. Alphabet historically has been a business that has been ads based. Their Gemini app is also a subscription model. Meta needs no introduction. It is an ad based business that is stepping into a spot where for the most part consumers expect subscription models. I have to imagine that that's where they would lean. But there also may be some more creativity here now that we have someone who has not been reliant on the subscription model for where most of the revenues come from.
- [11:17]
Nick Sipal
Yeah, I mean maybe you see the next generation of sponsored content right, where you're searching for a thing online and we can make a perfect piece of ad copy to kind of nudge you towards purchasing things. You could see how maybe ads could be integrated into that platform over time as folks use these things in a more robust way for shopping and less about just generalized chat purposes. But listen, I think Meta is positioning themselves to be among the leaders in AI. What's interesting is they also called out that they are capacity constrained when it comes to data centers, but they're not running a commercial AI platform where they're selling services to other folks like a white label ChatGPT or anything like that. Meta is using incredible amounts of AI resources just for its core business. And I think long term they are positioned to be a leader even though today they're not the one that's front and center. What you think about when you think about AI, one of the things I'VE.
- [12:15]
Dylan Lewis
Always appreciated about Mark Zuckerberg is he's able to communicate the vision very well. You might not always agree with the vision in the case of some of the Metaverse ambitions, but when it came to monetizing the portfolio of apps they had originally, there's a clear process to the way that they do that similar thing here with artificial intelligence and with what the company's ambitions are. We have five opportunities from them. Where would you put AI kind of existentially for Meta and how important it is for the long term thesis?
- [12:44]
Nick Sipal
I think it's super important for Meta. I mean, for the core. If you just put aside the Reality Labs business, the AI glasses AI directly drives the growth of the core ads business. To the extent that AI can let them lower the barrier to entry for creating ads and make those ads more efficacious and more targeted. It'll make Meta's core advertising business, which is already the best in the world, that much stronger and grow the core business. But then if you look outside of that to the Reality Labs business, again, you can kind of see where this is headed. In addition to offering the chatbot, this is also the app where you upload your AI glasses and start to communicate with those things. Also, Zuckerberg has repeatedly said their AI models are voice optimized. So you put those two things together, it looks to me like Zuckerberg wants to make meta AI. Meta glasses, kind of like Iron Man's Jarvis, right? Or what Apple always promised Siri could be, but never actually delivered. If he can deliver that in a compelling form factor, I think that can make AI meta AI the place their people go first. Right. If it's integrated in a super useful way and help those Meta AI glasses become the next computing platform. Zuckerberg has said this is the year where AI glasses go mainstream. It's really make it or break it for the company this year. So expect more acquisition. Excuse me, more announcements from the company. He also said on the call they have some new launches coming this year with Essilor Luxottica, that's the parent company of Ray Ban. So the existing form factor for Meta AI glasses that we know today may not be the state of the art of the technology here at the end of the year. So I think for their existing business can drive efficiency, make the company that much stronger. And then long term for where Zuckerberg thinks the company is headed, I mean, he's wearing these glasses on every interview he goes on. Now you can kind of see where things are playing out there as well.
- [14:32]
Dylan Lewis
We still have a couple big tech companies that are yet to report. We'll hear from Apple and Amazon later this week. Looking at Microsoft, shares spiked about 10% following earnings. As I said before, they are now the best performer in the Mag 7 so far in 2025. They're also the only company in the Mag 7 year to date that is currently in the green. Don't look now, but they don't have the antitrust issues that Alphabet has. They don't have the ftc. Looking at them the way that Meta does at the moment, they do not seem as subject to consumer spending and advertising as Amazon. Meta and Apple. Is Microsoft the big tech company that has the best outlook right now?
- [15:10]
Nick Sipal
I think in the near term here in 2025? I think that's absolutely true. In the long term. Maybe you could raise some other questions, but as an enterprise software company, Microsoft is arguably the most insulated from tariff and economic uncertainty because its products are mission critical and customers aren't likely to drop them under any economic circumstance. In fact, the company called out that they help their customers become more efficient during economic downturn. So maybe there's even more demand for these types of software products that can make your company more efficient long term. If you had to kind of point to a question around Microsoft, it's their positioning in AI. They're partnered with OpenAI, which is great. OpenAI is currently the leader with their ChatGPT model, but they've gone over the past year plus from close friends to looking more and more like frenemies. Microsoft reportedly has begun developing its own internal models and is testing some of those of competitors like XAI and other AI companies out there. Meanwhile, OpenAI has begun signing data center deals with SoftBank and Oracle and starting to distance itself from Microsoft. If you look at the earlier reviews on Microsoft's Copilot offering has been criticized as expensive and, and not that useful. And I think if you contrast that with the kind of positioning that I lined up for Meta, where they're not quite as hyped today, I do think the path that they're on I think is a lot more clear. Whereas Microsoft is in this frenemy relationship with OpenAI and may have to go their own, you know, when it comes to their aspirations over the long term. But as we sit here today, Microsoft is the business that no matter what happens with tariffs, I think they're just going to keep on ticking.
- [16:44]
Dylan Lewis
Yeah, I feel like Microsoft and AI are like that couple that gets together in the first season of a sitcom where you're like, this is either gonna go really well and they're gonna have the whole run of the series or they're gonna be broken up by about season two or season three and we're gonna start seeing them with other people.
- [16:59]
Nick Sipal
That's right. That's right. So I mean, I just, you know, for Satya Nadella, I hope, I hope Sam Altman doesn't break his heart. We'll just have to see.
- [17:05]
Dylan Lewis
Yeah. Nick Seifel, thanks for joining me today.
- [17:08]
Nick Sipal
Thanks, Dylan. Great to see you.
- [17:11]
Advertisement Voice
Right now the Home Depot has spring deals under $20. So no matter what you're working on, the deals are blooming at the Home Depot with savings on plants, flowers, soil and more. Then light up your outdoor space with Hampton Bay string lights was $34.97, now only $19.99. And get the grill going with two 16 pound bags of Kingsford charcoal was $19.98 now only $17.88. Don't miss spring deals under $20 now through May 7th at the home Depot, subject to availability, valid on select items only.
- [17:48]
Dylan Lewis
Coming up on the show, analysts Yasser Elshimi and Mary Long continue their conversation about Warner Bros. Discovery and Shine. A spotlight on David Zaslav, the man tasked with leading the media conglomerate into the.
- [18:03]
Yasser Elshimi
I want to turn to the man in charge, David Zaslav. So we what what spurred this conversation, Yasser, was that Michael Wolf recently wrote up a 15 page profile of Zaslav in New York magazine. The word mogul is used a lot to describe Zaz, or maybe more so to describe what he wants to be and who he wants to be perceived as. I'll leave it there for the time being. Just to to kick us off with this part, what impressions did you have as you worked through this article?
- [18:31]
Mary Long
Well, mogul is definitely Zaslav's aspirational self. He's a controversial personality in Hollywood, no doubt about it. He is perceived by many artists as kind of a slash and burn executive who's there to kind of only focus on the bottom line cut projects when they don't fit. His view on how to maximize profits and cash flow. And most famously, I believe there was this projects of the bad girl movie that never saw the light of day because he decided to effectively take a tax write off on it by just tanking it after every, after it had been shot and edited and everything, it was ready for release. So that has not endeared him to a lot of people in Hollywood and a lot of, you know, the also artistic journalistic community in and around Hollywood that cares about film and cares about entertainment industry from kind of an artistic perspective. Having said that, I mean, David Zaslav was a very successful CEO of Discovery and he had, he had turned Discovery into one of the most profitable businesses in the entertainment industry when he was at the helm. He has tried to effectively bring that same kind of logic into, into Warner Brothers Discovery where they are focusing a lot more on efficiency. He's not shy from going with kind of, let's say, non mainstream productions, right? So all you have to say to see is like open your Max app and you'll find all kinds of TV shows that are highly artistic, that are, you know, the White Lotus succession, you know, among others come to mind as kind of prime examples of that line of thinking. But also he is not afraid to yank a project when he sees it as not having promise of being successful. And he's also not shy away from licensing HBO content or other Warner Brothers content to other distributors and other platforms. Ted Lasso, for example, a head show on Apple TV that is a Warner Brothers production. And he was, he effectively did it for another platform. So he doesn't shy away from that. He also doesn't shy away from licensing older content into other platforms like Netflix, where you can watch Six Feet under right now, and so on. So he does care about the bottom line. That doesn't necessarily make him, you know, the, the grim reaper for all artists in Hollywood, but he's definitely viewed with a lot of controversy.
- [21:05]
Yasser Elshimi
One of the most fascinating and comical anecdotes from this profile of Zaslav, it opens telling this story about a recurring zoom meeting that happens at like 10am every Friday among a handful of 80 something year old one time media industry bigwigs that are now, perhaps they're not at the top of the hill of the industry as they once were. And so it's interesting, like this recurring conversation is all about the future of media, but it's from people who no longer really have the same pull in that media industry as they once did. And Zaslav, at 72, is the youngest person on this call. And it's one of the things that this article keeps hitting is that Zavlov seems to believe that it is his calling to save the media industry and to bring it into the future. He is, quote, a man charged with leading the media business into the future, navigating the business out of its cultural, generational and technological obsolescence. End quote. With all that said, what is Zaslav's vision for the future of media. What does he see it as being and why does he believe that he's the man for the job?
- [22:23]
Mary Long
I think he loves the industry. There's no way around that that comes through in all of his interviews and all the work that he has done. There was, you know, no need for him to take on the massive challenge that is merging with Warner Brothers had he actually not been really drawn into film, into tv, and kind of wanting to wade further into that world. And you can even see from the New York magazine piece that, you know, they're talking about how he bought, you know, an old Hollywood mansion that used to belong to the producer of Chinatown, a classic movie. And, you know, Zaslav tried to. To play down saying that he just appreciated the architectural style of the home. But, you know, I think all the whispers are that David Zaslav is a bit of a romantic when it comes to the film industry. And so his vision for the future of media, I think he, he definitely, while he has that romantic side to him, I think he is. He also is trying to salvage that film industry from going into obsolescence as, as the article said by, you know, he has to take on the likes of, you know, Alphabet and Amazon and Apple. It's no longer just competing with Fox and other studios, Universal and others. He now has to compete with the tech titans of the world. And to do that, he has to make his studio as efficient as possible to create content that will be popular either financially or through kind of a cult like following. And I mentioned all the artistic shows on HBO as an example. But he definitely sees franchising as a huge part of that vision, that he wants to recreate the magic that maybe Disney once had with the Marvel's universe, and maybe he can do that with the DC Comics universe. That's, you know, something he's been really focusing on with, you know, movies obviously, like the Joker, TV shows like the Penguin, but also newer iterations of Superman and Batman and so on. He's also going for a Harry Potter, a new Harry Potter series coming in next year. So he really thinks that franchising is going to be the future. And definitely when you can find a hit, you just double down.
- [24:46]
Yasser Elshimi
So another gripe that folks might have with David Zaslav is that while he has certainly made a lot of money during his tenure as CEO of Warner Brothers Discovery, the stock has not performed terribly well. And that's perhaps an understatement. So post merger, Warner Brothers Discovery started trading at $25 a share. Valuing the company at $60 billion. Now it's closer to $9 a share. So with a market cap that's about a third of its IPO value, we talked about Zaslav growing max, paying off debt. All of this in spite of the stock's underperformance Zaslav himself has brought home. In 2024, his pay package was worth $51.9 million. It was up 4% from what it was the year before. Interestingly, his pay package is tied to the generation of free cash flow rather than to the stock price. So theoretically, that enc what he's been doing to pay down that hefty debt load. But it also encourages these production cuts that we've talked about that get a lot of pushback from the people that are actually making the films in the studio.
- [25:47]
Mary Long
Right.
- [25:48]
Yasser Elshimi
All that said, what do you make of this incentive structure and Zaslav's pay package as, as it exists now? If you were tasked with building a pay package for Warner Brothers Discovery executives, but also for Warner Brothers Discovery shareholders, what would you tie the metrics of success for those executives, too?
- [26:09]
Mary Long
Okay, so let me start with saying maybe somewhat of a minority position here, which is to say that I actually think that the pay package makes some sense for now, at least, the incentive behind the pay package. I'm not going to comment on the exact numbers of how much he's paid, but in terms of the incentive structure that's in place to generate cash flow, being the barometer of rewarding his success or his tenure, I think makes sense. And the reason, of course, being that the company just was born with a massive debt load that needed to be repaid almost immediately. And so to generate cash flow is to be able to manage that debt load and to pay it down year after year. And he has done a fantastic job at that. I mean, as I said, you know, he's taken down the leverage of the business from five times the debt to EBITDA to 3.8 right now. Still more, you know, to go. But he has been getting it done. And so from that perspective, I think it makes sense moving forward, perhaps as maybe that net debt to ebitda, you know, margin ratio comes to closer to two times. Once that happens, then you want to perhaps incentivize other aspects of the business, including growth in both the studio and streaming divisions. I think that it's going to be extremely hard, if not impossible, to arrest the decline in the linear TV side of the business. So the best he can do there is to just manage that decline so that it's not a free fall. And I think he's been doing that to a good extent. But yes. So just focus on the growth on the studio and streaming division once you've cleared the hurdles that currently exist.
- [27:50]
Nick Sipal
Yes.
- [27:51]
Yasser Elshimi
Ralshami, thanks so much for the time. Always appreciate having you on the show. And thanks for shining a light onto not just this interesting company, but this interesting executive as well.
- [27:59]
Mary Long
Glad to be here.
- [28:04]
Dylan Lewis
As always. People on the program may have interests in the stocks they talk about, and the Motley fool may have formal recommendations for or against, so don't buy selling anything based on what you hear. Advertisements are sponsored content provided for informational purposes only. Motley fool and its affiliates do not endorse, recommend, or verify the accuracy or completeness of the statements made within the advertisements. TMF is not involved in the offer, sale or solicitation of any securities advertised herein. It makes no representations regarding the suitability or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult legal, tax and financial advisors before making any investment decisions. Team F assumes no responsibility for any losses or damages arising from advertisements. For the Motley FU Money Team, I'm Dylan Lewis. We'll be back tomorrow.