Amazon, Alphabet, Microsoft, Meta & Tesla Earnings, Cruise Pauses Operations, Zuck vs. Sam Altman

0:01Big tech earnings are coming in hot, but the stock market is reacting cold. SPF takes the stand. Cruz hits the brakes hard. And Zuckerberg is coming for Sam Altman. All that and more coming up right after this.

0:18You're used to hearing my voice on the world bringing you interviews from around the globe. And you hear me reporting environment and climate news. I'm Carolyn Buehler. And I'm Marco Werman. We're now with you hosting The World Together. More global journalism with a fresh new sound. Listen to the world on your local public radio station and wherever you find your podcasts.

1:03We'll get into that and plenty more as we go on. As always, we're joined by Ranjan Roy of Margins. Ranjan, welcome to the show. Hey, as the RBC Capital Markets Head of U.S. Equity Strategy said, the markets are in a spooky place right now. So I'm very excited to talk about tech earnings four days ahead of Halloween. Bring on the scary puns. Apple, of course, has its super scary event where it's going to introduce a whole lineup of MacBooks coming up on the 30th. You heard about that a little bit with Brian McCullough on Wednesday. But meanwhile, we can get down to these new tech stories. But first, on the subject of Halloween, I logged on to our little stream today.

1:46And I was like, Ranjan, you got a haircut. But it turns out that I had misread the situation entirely. Can you share a little bit more about what's happened here? Like an observant podcast host, Alex totally got the situation wrong. And it was not a haircut. I shaved my beard for the first time in three years. And for those on LinkedIn watching, you can see in the stream. But I will be Taylor Swift for Halloween and paired with a Travis Kelsey. But I have chosen to be Taylor Swift because it's just funnier that way. That's amazing. Well, yeah, I will say I've gotten, okay, very quickly, not to get too into Taylor Swift territory.

2:28But in researching this costume, as only a big technology podcast co-host could do and writer of margins, I will admit I have gotten more fascinated into how she conducts business and how kind of baller she is about certain things. Even recently, the Eras tour going essentially direct to distributor and bypassing the studios and going direct to the movie theaters, all these kind of things. I went into a rabbit hole and finally learned about how and why she re-released all of her albums and drama on the masters and stuff. So I'll say Taylor Swift, businesswoman extraordinaire. I definitely want to go see that movie in theaters.

3:11And, you know, Ron John, you know, sometimes you zig where others zag, but you are zigging where others are zigging because Taylor Swift is going to be the most popular costume this Halloween. Travis Kelsey, number two. And look at you go. You're going to be Taylor. I know, which is why I had to be Taylor in this situation because otherwise it would be too basic and too of the moment. So we had to mix it up a little bit. That was my zag. Okay. So speaking of zigzags, you have tech earnings and the market reaction to them. You have a really ugly slate of tech stock movement this week, led by Alphabet, which is down 10 % this week off of what I felt was a tiny miss.

3:54But Meta is also down 5%. After a huge beat, Apple's down 2%. It'll report earnings next week. Amazon just delivered this amazing, I mean, crushing earnings report in a good way. And it's up 3 % this week. And Microsoft also had such impressive numbers, and it's up 2%. So you look at the reaction, and then you look at the way that the market has treated these companies, and it seems to be quite incongruous, right? They're basically delivering almost everything Wall Street wants, and yet their share prices are falling. And it's like, oh, they just went through this whole cycle of year of efficiency and try to get into line with what the macro environment demands, and they're still getting punished.

4:34So what's happening, Rajan? I think the market is starting to understand, but we should definitely dig into each company because I think there's nuances within the different reports. But overall, and going back to that comment from the RBC equity analyst about spooky season in big tech, these companies had made such a big comeback. In the last year, in all of the NASDAQ's growth, they comprised, I believe it's 86 % of all of that growth. So the entire market, one of the analysts called them the Magnificent Seven. It's no longer FANG. Now it's a Magnificent Seven. Oh, yeah. They use that term every day on CNBC.

5:19Okay. Yeah. Apple, Alphabet, Microsoft, Amazon, Meta, Tesla, and NVIDIA. So the market has come to depend on them. But again, we're heading into a moment where now that all of their valuations have both recovered and then some, now the expectations for continued insane growth remain. And AI and all the excitement around it has saved the market and pushed it back into a point where people are excited but at a certain point especially given macroeconomic concerns geopolitical concerns and competitive concerns because can they all be winners in the ai space i think finally people are starting to go one by one and really try to understand where these companies are really going but here's the thing like they um they did have their run-up but they still remain relatively cheap and they're even cheaper now and you would imagine there would be i think they call it like a level of support where they don't fall this way, but they are falling this way.

6:19Just listen to something that Brad Gerstner, the investor, shared on top of his CNBC clip this week that basically went into more depth. So he said, when the market faces near-term uncertainties like war and higher rates, owning the future of tech and AI at multiples below Walmart and the S &P 500 for double the growth and much higher margins feels compelling. Zuck reduced his year-over-year headcount from 86 ,000 to 66 ,000 while doubling free cash flow to$30 billion. So it almost seems that, yes, these are serious macroeconomic factors, but if you look at the logic of it, these companies are still, I mean, Meta is at a 15 multiple, so it's trading.

7:02It's a less expensive stock than a Nike, which is effectively the point that Gerstner was making. So why are they continuing to fall? Yeah, but this is where I think it's interesting is that, and until you had shared that quote to me earlier and I actually was looking up, Walmart is trading at 31 times earnings. As you said, Nike, I believe, is around high 20s, low 30s. But what's really interesting to me is maybe part of what's being signaled here is big tech companies have dominated anything technology. And again, in their cloud divisions and around AI spend potentially. they could continue to dominate.

7:41But Nike and Walmart show that traditional companies outside of pure technology are, I hate to say, becoming part technology companies. This isn't kind of, you know, Adam Neumann, WeWork BS, where it's we're a tech company when we're really a real estate company. It's that Walmart has built a huge technology operation. Nike clearly is, I mean, a very innovative retail company. So as technology becomes more integrated into these more traditional retailers and retail or outside of pure technology companies, I think they become more interesting. That almost necessarily will limit pure big tech growth.

8:19Yeah. But if you look at a Walmart or a Nike, they still have higher capital costs than a tech platform. I mean, you know, the margins from a Meta are insane compared to the margins from a Nike. So even though Nike has a website or Walmart has an e-commerce division, it doesn't make any sense that, well, that meta is, if you look at earnings, you know, twice as expensive. Yeah, no, no, that's fair. I mean, we have to take Tesla out of that conversation, which we'll definitely get to in terms of capital costs. But I agree. But also remember, these companies are gigantic. So growing, again, Google's, this last quarter was$70 billion in revenue.

8:59I think it was$29 billion in profit. Microsoft,$56.5 billion in revenue,$22.3 billion in profit, which was up 27%. So already the market has factored in these insane levels of growth on top of just gigantic bases. I think that to me, that's the thing. It's we've become so accustomed to assuming, again, 27 % profit growth on a base of$20 billion plus is just insane to me. And in any other market or economy would never have even been imagined. But in big tech, it has worked so far. I think it's just a reminder that a little bit of caution is not the worst thing. Yep. So here's kind of how I responded to Gristner's comments on air.

9:45And I don't know how if it came out well or not, but I figured it's worth bringing up. If you look at the valuation of some of these tech stocks, you know, six months ago they were the valuations were richer than they are today absolutely they're cheaper now than they were previously but i think what brad is missing in the big picture is is that investors are spiritually metaphysically they're a little bit nervous about being in equities in a way that they weren't before to take all the logic you want out of it there's still a behavioral aspect to it and i think that's something to concentrate on i basically said that there's like a spiritual slash metaphysical aspect to this, which is that always on cable news and getting into spiritual.

10:23I do. I love to talk about it. But basically, like, that's a fancy way of saying that there's a behavioral aspect to it, which is that these companies have made up such a large part of the S &P 500 for so long. And when the market feels a little bit shaky, investors get jittery and they run away. That's basically the point I made is throw it like you might have the logic, throw the logic away because there's the behavioral aspect that you can't ignore. What's your perspective there? Yeah, I'm certainly the first to believe in animal spirits in the stock market and the idea that psychology drives things much more than pure numerical and financial analyses.

11:04And it's true. Yeah, these are the bellwethers. These are where everyone's money is. And also, let's not forget that these are companies where so many people in the economy have made so much money over such a long period of time now, going on 13 years, let's say, or even 23 years if you got people who are very early, that it's one of those things that at any point, the idea that they've already made their money selling at the first sign of turbulence is not always going to be the worst thing. So, yeah, I think they represent such a big part of growth right now that any sign of degrowth, they're going to be the first to kind of reflect that at least publicly.

11:48So I can buy that. Man, I wish I would have said it the way that you said it. That's very, very well put and is basically the point that I was trying to get at, but just far less eloquent. So one thing I did get right, though, was that Amazon was in a really good position to thrive this quarter. And if you look at it, they've had six straight quarters of AWS or maybe seven now of AWS growth contraction in their web services cloud hosting division. The thing is, you look at it and it's you're basically taking four quarters of comps onto COVID growth. Like when you have AWS growing 39 percent in the middle of COVID, because that was basically the entire entire economy.

12:30And then you come and you say, well, growth decelerated. It's like, well, of course it decelerated. The comparison was impossible to meet. You follow that up with two quarters of, you know, higher rates, unpredictable economy, maybe recession talk. And that's when customers go to Amazon Web Services and they say, well, we need to optimize our spend. And that basically means, you know, we're not going to grow our spend and help us take what our spend is today and get the job done. and so you end up with like yeah that's that's the recipe it's not because of business weakness weakness necessarily it's because of the broader context and what amazon's coming up now is it's going to be able to to turn in quarters looking back at those old expectations versus the impossible to beat expectations and it's really set up for a really nice run here and it seems to have its ducks in order when it comes to ai now with the anthropic investment and finally a coherent strategy with AWS.

13:30Retails picked up. We had a 4.9 % GDP growth that we just turned in this week. And so, of course, Amazon retail numbers were supposed to be pretty good. And then advertising, right? Like when advertisers need to spend smartly, they're going to spend on Amazon advertising because it's just the closest possible way to get an ROI. And lo and behold, the company did did quite well it blew out its earnings expectations and uh it's up uh you know three percent on the week but about seven percent on friday which is quite impressive yeah i think andy jassy has had a bit of a rough go in terms of like public perception of his performance but i think this was a good report for him again as you said these numbers still net income tripled to$10 billion from$3 billion just a year ago.

14:23And I think that's a good point. It's like we're finally, I don't want to say, the world is certainly not normal, but any comps against COVID, like the COVID era, call that six quarters maybe, maybe even up to eight, all of the Q2, 3, and 4 of 2020, certainly first half of 2021, maybe the entirety of 2021. Now, at least we finally have companies being able to have reasonable comps from a year ago. So being able to really understand, are they growing? Are they in a good position? It's starting to make more sense. And for Amazon, to me, the advertising numbers stood out, that they beat expectations and now it's a 12 billion dollar business analysts were expecting 11 and a half billion um as you said amazon web services beat expectations so the two very high margin businesses for them are doing well what's interesting to me as a company and and also it's it's it made me think is is andy jassy going to become kind of like could he be the wall street friendly version of Amazon CEO because he is going to be focusing on, again, high margin things.

15:36He's from AWS that Wall Street always liked versus Bezos, who was given plenty of leeway to do whatever he wanted, but still always focused on not making a profit and just growing. So it's going to be interesting for them. Yeah, the ship is definitely turning. I mean, you look at the advertising business. And that's coming in at almost half the revenue of AWS. And the margins are insane there. I mean, basically, it's 100 % margins. The stuff that they're paying for is everything on the retail side, which tends to zero out. Oh, hold on. One thing I had to, in the report, one of the things that jumped out to me is net income for Amazon included, to get that 10 billion number, included a pre-tax valuation gain of$1.2 billion from their investment in Rivian.

16:24Are you, uh, are you familiar with Rivian? Not only have you ever been in a, Oh my God, in a Rivian. Ranja, let me pick you up because, uh, in November I'm going to get, I think a week long, uh, lease or loan from Rivian of, uh, I probably shouldn't say this, but I'm saying it. Um, it's coming. I hope we're speaking to them now about getting a week long, uh, loan of their, their pickup truck. Uh, and I'm going to tool around New York with it for a week and then rj scaringe the ceo is going to come on the show so okay all right all right familiar interesting yeah i just interviewed him for gq but we're actually going to do an in-depth another in-depth conversation for the show which i'm stoked about okay yeah no i uh i wrote in one recently and it was a very very cool experience so i uh that one jumped out it was just always a reminder of how uh certain line items can actually make a big difference in these earnings reports that you might miss or don't actually have that much to do with the company itself.

17:21But yeah, I think Amazon, I will still say, and this is something happy to rant about, but as a user of Amazon and the core product, it still just seems to get worse and worse. And I still wonder, you know, when they have Prime Day summer, Prime Day October, like trying to create multiple holidays every year. And I don't know, overall, the experience, even things arriving reliably, it just seems to just continuously degrade. So I'm still curious where this goes. I mean, competitively against Ashi and Intimu, maybe that's the only way to play. But it feels like, I don't know if they're paying simply less attention to Amazon.com proper, but it's just gotten so much worse for me.

18:08So I have a column coming in big technology from Christy Coulter, who uh she was on the show recently and she's going to talk about why the design of amazon is so bad i can't i just we're going through an edit now it's such a good story so um we can talk about that afterwards it's bad sorry on purpose it's on purpose it's bad or i can't share anymore because i'm going to give away the story but when when it when we when um when it publishes we'll definitely talk about it maybe christy can come on to explain a little bit about what's going on there all right Let's talk about Alphabet, right? Very difficult week for Alphabet, which is interesting because it sort of beat expectations across the board, except for in one little area, cloud.

18:50Cloud is not even such an important part of Alphabet's business. And it didn't even miss, well, it actually did miss fairly decently. It was expected to bring in$8.64 billion in revenue, and it brought in$8.41. It had its worst day in the stock market since the start of COVID, since March 2020. and it looks like all of a sudden people are fleeing from Alphabet. What do you think is behind this exodus from the company as far as investors go? I think, okay, so I was surprised and felt maybe it is a bit of an overreaction, but I think it's a reminder again, and I mean on the topic of Amazon.com core versus AWS and advertising, Google's search and ad business has been a stable and steadily growing giant over years, but their cloud business has been a major source of growth.

19:44I mean, it's pretty nuts. It was, you know, only 8 billion in total in 2019. It's growing 50 % year on year. Still, sometimes it always just astounds me when you see those. Again, a company growing 50 % or a unit growing 50 % from$8 billion, now around$26 billion, I believe. So then if it misses and it's not growing at that insane rate, obviously that doesn't look good. And even more important is every investor understands right now that where and how people make money in AI, is especially in generative AI, no one really knows what that model is going to look like and how it's going to look like.

20:27Even if we think about it, and we've talked about this a lot here, like Amazon's investment in Anthropic is either 1 billion up to 4 billion. A lot of it is cloud credits. How much of it is actual cash? How do they even see a return? What are they hoping to get out of it? Like this stuff is so convoluted and complex right now and uncertain. So investors, they just want to know that Alphabet's cloud division, Google Cloud, or Microsoft, and Microsoft even breaks out what they call intelligent cloud, and that business line, which is their AI services, that these are growing, that they're actually figuring out, starting to figure out how to make money and showing they can grow.

21:09And Google didn't. And I think that that's going to cause more fear than anything right now, because that's really how people when you're thinking about this three to five years down the road that's clearly where everyone's betting on growth so my perspective on this and this i guess it plays off of what you're saying is that people are starting to have big questions about google's ability to do anything big again outside of search and cloud is a proxy for that because cloud is a proxy for ai and even though ai is only accounting for like what two three percent of revenue in places like azure where it's actually doing well.

21:44If Google's missing its cloud number, people just see that as like a glaring red flag in terms of where its business is going while the others are growing. What do you think? Yeah, I think that's it. It's, I mean, myself, as a major user of plenty of generative services and how this stuff is going to be profitable, it's so up in the air. And it honestly makes it, for me, the most exciting story to follow the topic as a user to actually use or technology to use because it's so up in the air like we might see some companies we're not even thinking about become giants right now because because the business model side of generative ai is so wild west still so so i think investors are just really desperate to see someone show something and i think i mean Honestly, Microsoft, you have to imagine from an enterprise side, to me it's almost like a tertiary benefit of the open AI relationship.

22:49They're probably closing major deals solely based on the open AI brand and big enterprises just being people using chat GPT. Exactly. And even when it comes to the stuff that has nothing to do with open AI, just the idea that you're loosely connected to one of their models is probably helping some enterprise salesperson on a golf course close a deal versus, I mean, you can see that that was a smart play like that. Absolutely. It's like, yeah, hey, one day you would like your cloud to speak with you, wouldn't you? Look, just give me an extra few seats. if you think of it now that i'm thinking about it so meta has made a pretty good splash with llama and you know we're taking this alternative approach of open source but there's still a brand there amazon now is trying to associate its enterprise business with anthropic which as a user increasingly of clod the anthropic chatbot which is really good i think it might be the best of the bunch.

23:55Really? Yeah, yeah, yeah. Because you can also, you can dump in massive amounts of text. I will admit, for this podcast, what I do beforehand is I basically copy the text of like 20 to 30 articles, dump it in Claude, and say, pull out all the numbers, and then pull out like 15 to 20 insights or something like that. And then go back and then read more deeply into certain things that like were of interest but that's where i start now because it can just take massive dumps of text so um we've been doing this show with the l lm the entire time my goodness i i'm not even i'm not even here i know this is just generated this is the future for sure yeah so you know instead of starting with reading all the articles you start with the extractions of insights and summaries and then then dive deeper to me as a research process is always better.

24:52But then Microsoft has OpenAI. Google does not have any kind of cool and sexy brand to any of their underlying models. You don't find Bard cool and sexy? No, neither do I. Still one of the worst namings. But actually, wait, hold on. Bard is pretty good. I will say. You've always been a Bard boy. It is true. a bard boy never a bing boy always a bard boy what bard i will use for is current events anything recent actually right now i you can put give me the growth of google cloud over the last three years in terms of revenue and growth rates and it'll make you a nice table whereas uh chat gpt will say i'm sorry my data is only trained up until whenever um anthropic will say the same thing so So Bard for pulling together, and this is where I think Google could do something huge if they execute on this well.

25:50Generative search, I think, is really impressive in Google for anyone. And we've talked about this, who's experienced it. When you get what that does to their business model, I have no idea. And it's going to be really interesting. But if they become the leader in continuing to have people search there and then presenting you with the best and right information. and Bard is actually doing pretty good at that kind of current event search as well or recent financial data or anything like that. So I think that's a huge opportunity for them. But do you know the name of Google's main large language model that they use?

26:27It's TextBison and then they have Text, a couple of other ones. But again, it's like these are not in headlines. So I think the branding element of all this enterprise AI definitely I think is playing a part in their behind. I want to put a point on something that you said about Microsoft being able to close deals based off of the OpenAI Association because let's move to that company on the golf course. Let's move to that company's earnings because they actually gave us some numbers this quarter about how many deals they are closing directly linked to OpenAI, which does make you believe that there are more.

27:01So look, the company, The Azure OpenAI service now has 18 ,000 customers from CNBC, up from 11 ,000 customers in July. I mean, to close an additional 7 ,000 enterprise customers in a quarter for this OpenAI service is just enormous. It's enormous. Jump 63 % in a quarter is wild. So we do know that this is having a material impact. And like, while, you know, it might be two to three percent, they'll say like this is growth that they can count on for quite some time and will just expand. And that's why when you think about the winners this week, you have Microsoft that's up in a week that most other big tech companies are down.

27:45Yep, I think that's that's definitely fair that. Yep, that captures it all right there. You know, one more thing about Microsoft earnings. So this is apparently something that has been around for the past week or so. They might owe the U.S. government like$29 billion in tax, and it has something to do with like trying to set up shop in Puerto Rico or something, and they're appealing this amount of fine. But that's also something to like look at for Microsoft is that$29 billion is not something you shrug off. I mean, that's a tremendous amount of money that they could potentially owe to the U.S.

28:23government. That's finally a number that actually would matter for one of these companies. It's not a fine. It's just the back taxes element. But if and when they do actually have to pay that, that's seriously going to hit that company's. I mean, you think about the loss they'll have for that quarter. It's going to be enormous. is but in terms of the other company i definitely wanted to touch on this week is tesla earnings because to me this is one of the bigger earnings reports for tesla because it wasn't a good one for them it was definitely and i know we we go back and forth in terms of i certainly lean more to the bearish side on the company but what was really interesting was i have been certainly seeing more Teslas on the road.

29:09I have talked to more people who have bought Teslas in the last year. And it's because they had made the, I mean, to their credit, the very specific strategic decision to go for growth over profitability. And we're seeing it in their margins. Margins have compressed down to net margin was 8%, where it was almost 19 % a year ago. So I think in terms of profitability, it's already showing up in the reports. And it's a reminder because the direction of the company and the valuation demands extreme profitability. Obviously, certain analysts will say the dojo AI systems are super high margin items like robots that will manage your entire supply chain are how you'll get there.

30:02But just on the cars alone, it's moving into a way where it's almost feeling too mass market and when you bring down the price i mean as a traditional like retail problem are they losing some of their cachet and allure when it's you can get it almost for cheaper than uh mid-level honda and what does that do to the overall brand as well okay and this is why i i feel like wall street is sometimes so unfair to companies, even though they've been very beyond fair to Tesla. But sometimes the stock valuations and the incentives that companies chase on Wall Street have nothing to do with like the actual company health.