Instant Reaction: Microsoft & Meta Soar After Strong Earnings

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2:06Those are the big ones. There's a lot that are out there, but we want to get to it. We've got great team coverage here at Bloomberg and also some great outside voices. So let's get to it with Dan Ives. He's Managing Director and Senior Equity Analyst and Global Head of Technology Research at Wedbush Securities. We're going to start with Meta. let's talk about it. The stock's up about 8.5 % a year in the aftermarket. What do you like and what don't you like? Do you not like anything? There's nothing not to like. I mean, look, it speaks to, you go through this AI revolution, it's in this next stage of growth.

2:39And all the money that you're seeing these big tech players, capbacks, now you're ultimately starting to see some of those dividends get paid. And then you think about the advertising growth, similar to what we saw with Alphabet, what you see with Meta, subscriber growth. I mean, it's Goldilocks for tech. How does Meta harness AI to make money apart from making its advertising more efficient? It's about the billions of users. It's about going forward how they're going to monetize AI. They're not just spending to spend. They're going to be able to monetize from an advertising perspective. when you think about the billions of users they have.

3:23How do they do that, though, Dan? And the reason Zuckerberg right now is what I view as a wartime CEO, it's the view that when you think about AI today, this is just the beginning. And you're going to have AI-driven search. You're going to have sort of the future. that Meta, Alphabet are going to play huge pieces in the advertising piece. But I want to go, so it's just advertising that that's where they're going to make all their money back. We know that they have been on such an aggressive AI talent grab. And, you know, Meta has. I mean, hundreds of millions of dollars. Yeah. Like pay for individuals.

4:09So that's all going to pay off. Their return on investment. It's just the beginning. Okay. Advertising. Advertising just the beginning. When you think about full, what I view as sort of like full AGI, the holy grail, what Meta is trying to build, what every big tech player is trying to build. Meta is basically looking to create a whole other company over the next decade. That's what they're spending on. This is what I'm still waiting for. Meta platforms, look, No question this was an incredible quarter. The stock is up 9.3 % in the after hours. Just to repeat the numbers, second quarter earnings per share, a huge beat,$7.14.

4:54The estimate was for$5.89. Second quarter revenue, a huge beat,$47.5 billion. The estimate was for$44.8 billion. Third quarter revenue,$47.5 to$50.5 billion. That's the outlook. The estimate was for below that at$46.2 billion. But Dan, I want to look with you years out when the hardware that they're working on, that they're spending billions of dollars on, will start paying dividends. What does that future look like for meta users and for meta investors? You have to think about it like what's the future in terms of robotics, in terms of software, in terms of how AI is going to play a role in the everyday of a consumer.

5:37I mean, Meta's thinking, not in the next year, three, five, eight, ten years out. I want to bring in Mandeep Singh, if I may, of our Bloomberg Intelligence team. I don't know if it's too soon. I know you're going through all the numbers because I want to bring you into the conversation with Dan. Good quarter, killer quarter. How do you see it for Meta? Yeah, I mean, there is a sequential acceleration in ad impressions as well as ad pricing growth. And to my mind, that is a sign of them applying AI to boost engagement. Obviously, the user growth has been almost the same every quarter, you know, four to five percent.

6:18So the fact that impressions grew 11 percent is a sign that people are spending more time on their family of apps. And then the ad pricing going up nine percent. That to me is the real tailwind because that was the risky part. Chinese advertisers like Timu and Sheen pulling back because of the de minimis rule changes. That didn't happen. That didn't show up in the numbers. And look, when it comes to applying AI, I mean, small advertisers are now connecting meta to their CRM systems. And actually, that is what's driving the ad targeting and efficiency. That wasn't the case before. That has been enabled by Gen AI.

6:57So that's why you see that. So you agree with Dan? I think Gen.AI use case is quite prominent. We keep hearing about coding agents, customer service. Here is the precise use case for Meta. And that is what they are showing in their ad pricing numbers. Dan, come on in. I saw you're saying something. That sounds like a bullish Mandeep. On the Mandeep scale, that's pretty bullish. I like that. Hey, Dan, I noticed something striking today when I opened up Instagram. I was searching for a video from Mike Birbiglia, a comedian who I really like. And what I noticed when I was just I was just looking for his profile when I typed in his name, what appeared was as an A.I.

7:43answer about a biography of who he was, information about him is the goal. What is the vision for Instagram? Is this going to be Meta's super app? I mean, to some extent, they're basically creating a super, I mean, similar to what you see in China, but an AI-driven super. And you start to go through that, you're looking at a four-digit stock. They tried to do this years ago with David Marcus on the messenger side, Mandeep. It didn't necessarily work. It was supposed to be payments and everything. is that still in your view an area of growth for the company here or is that strategy gone i mean right now it feels like they have a lot of runway with ads and there is a clear use case for gen ai with ads i mean they still have to fix the model so uh i think the advantage that they have is really they are the best when it comes to ad targeting and with everything that's going on i I mean, they have the surface area to apply Gen AI.

8:50But look, when it comes to payments and other areas, they still lack the diversification of a Microsoft or a Google. It's still a one-trick, I mean, albeit a$200 billion company, but still dependent on ads. Dan, you know, it's funny because I was thinking about that because we talk about all of these companies and I think about the hyperscalers like AnAlphabet. We've talked about that a lot, Mandeep, about just all of their different platforms. and how much data that gives them to make their models smarter and smarter. I mean, Dan, is it going to be okay for Meta to be kind of a one-trick pony, even if it's a massive one-trick pony, but is it enough?

9:29Well, I mean, look, I think if you think about it on a pecking scale, of course, like NVIDIA at the top, Microsoft, and you look at these numbers, just unbelievable in terms of across the board. You look at Meta, yeah, you call it one-trick pony-ish, but they're going to significantly expand that over the coming years. I mean, at least for now, there is no proof. I feel they are under-earning by 20 % because of all the losses in reality labs, but the street doesn't care because their ad business is really going gangbusters. When the ads slow down and the comps will get tougher and there will be a point when ads will not grow 20%, that's when I think the question will be asked, why are they losing$20 billion on Reality Labs?

10:17Because it's not making any money. When will it start making money, Dan? And does it matter? I mean, look, it's going to be a while, but the whole point is right now that's background noise. In other words, like Street wants them to continue to invest and invest, build this further out. And at the end of the day, that is going to come into the fold. But you're not right now in this arms race in big tech. You're a laser focus on who's going to be the winner. And that's what we're seeing from Microsoft to Alphabet to Meta. You know, obviously, you know, cross-boring, we'll see it with Amazon as well.

10:56Like, it's an arms race. I mean, the one other data point I would want to bring in is token count. So Google and Microsoft have shared the Gen AI consumption, the token count. we don't know how much metas models are being used yes their ad targeting is great which is why ad pricing uh was such a uh solid number this quarter but at the end of the day if you're investing 70 billion dollars in capex you want to see your model being used and the open sales strategy work we have no proof points of that so i still believe they have the most uphill task in terms of showing ROI on the CapEx besides their family of apps.

11:40And that's still the case. Dan, I know you got to go, but 30 seconds. Last question for you. What's the one question you'd ask Mark Zuckerberg tonight? Look, I think it's really bad CapEx trajectory, because I think that's your shit. Even though that was slow a bit, they're putting, as they continue to spend, you know what that shows? Confidence. And that's what you saw in Alphabet. That's what you've seen to Microsoft. And that means it continues to be like this, the AI revolution, this AI party, it's 10 p.m. It was 9 p.m. Party goes to 4 a.m. Hey, listen, before you go, I know we said last question, but not that we lie, but you're here and you're Dan Ives.

12:20Microsoft, you said that was also a big, big, big killer report. I mean, the stock was just crazy in the aftermarket. It's up about 6.8%. Scotty's shuffle like results, right? I mean, the point is like massive beat on cloud. You see more and more of these use cases, these hyperscalers, those are the best indicators that just shows where the next spending in AI is going. And that's why right now, if you're a tech bear, you're in hibernation mode in that cave and you can't find AI in the spreadsheet. Pretty crazy. Pretty interesting. Hey, listen, we know you're busy. We know you're bouncing around and got stuff to do.

12:56But always good to get some time with you. Dan Ives, Managing Director and Senior Equity Analyst over at Wedbush Securities, also Global Head of Technology Research. I just want to remind everybody where we've come in the last few years with meta platforms. There was a lot of talk in late 2022 of leaving this company for dead when they made their pivot to the metaverse. Shares were trading at$88. Go back to the IPO. Oh, sorry. Yeah. But I mean, even a recent history, it's up 686 % since then. That doesn't include the surge in the after hours, which if it holds will be a new record for meta platforms tomorrow.

13:30Yeah. And look, when people were, you know, selling the stock at$80, then they didn't really factor in, you know, meta's engagement. So what's really brought them back in such a big way is people are still spending over an hour and a half across their family of apps. So that sort And look, that's where the real risk comes in. So ChatGPT now is about 30 minutes across its daily active users, which is much smaller than Meta. Meta has over 3 billion and ChatGPT is still, you know, less than 400 or 500 million. So still much small, but they are taking share in terms of engagement time. People are spending 30 minutes on ChatGPT.

14:13So as long as Meta keeps growing engagement, I think they will keep growing earnings. And that's what they're showing with their ad revenue. All hails Mandeep. Mandeep Singh, of course, with our Bloomberg Intelligence team. He is Bloomberg Intelligence Global Head of Technology Research. Be sure to check out his research on the Bloomberg when it comes to Meta. So appreciate it. Meta shares, by the way, are up about 11 percent here in the aftermarket. The company giving a stronger than expected third quarter revenue forecast, a sign that that core ad business is still growing quickly enough to support aggressive spending on AI.

14:50Devil in the details. And we heard that certainly from Mandeep. And then we've also got Microsoft. That stock is up here in the aftermarket. And that one, some really, really strong numbers as well. Quarterly cloud sales, profit exceeding expectations. They say they brought in more than$75 billion in the past year in terms of its cloud business as the company continues to commercialize AI services, Tim. We got a great group of folks, a great duo to talk Microsoft and more. I want to bring in Greg Halter, Director of Research at the Registered Investment Advisor, Carnegie Investment Council. They've got about$6.5 billion in assets under management.

15:29I also want to bring in Bloomberg Intelligence Senior Tech Analyst Anurag Rana. He joins us from our Chicago bureau. Greg, just for some context, Microsoft is the largest holding. Is it a largest individual holding for your group or is it because it's an index funds? I just want to set the stage before we get into the details. Thank you, Tim, and thanks for having me. We do not count the index fund holding positions in that number. If you look at our latest 13F filing, Microsoft is the largest individual stock holding at Carnegie. All right. So, Microsoft. Investors certainly like it in the aftermarket.

16:06As we mentioned, Greg, the stock is definitely soaring up about 7%, 8 % now as I speak. What jumps out at you? I think the Azure growth, 39 % versus the 34 % expected, that is huge. I'll also point out that their EPS beat of 8 % plus is the best in seven quarters. Usually, they do beat. I think it's been now only three times, four times over the last 45 periods they have missed on earnings. And this is a larger point of exceeding the estimate that they've had in seven periods. All right. I want to bring it. You like it. All right. Aniragrana, I want to bring you in here. I'm not sure. I think we all went into this week with a little trepidation over everything that was coming at investors, including some of these big tech earnings.

17:01But this, certainly investors like what they got from the company and certainly with the outlook. What's your take here? What's important for investors to learn off of this release? You know, I would echo what our other guests said. I mean, the acceleration in Azure is pretty impressive. And one of the things I think it's going to do, it's going to tell people that all the CapEx Microsoft is spending, you know, they're getting the benefit of it on the other side of it. And they're probably the first one to recognize a bigger, you know, load of AI revenue coming in. And, you know, this will pacify a lot of people out there that may be worried that why are these companies spending so much on AI infrastructure?

17:40And, you know, and where is the, you know, other side of the equation? So I think it's a good result, not just for Microsoft, but the entire tech platform. Well, that's what I want to just follow, Anarag. You know, our preview of all of this was Microsoft meta investors are going to be scrutinizing over the AI spending binge. So for Microsoft, clearly to you, we are clearly seeing the ROI when it comes to that AI spend. Yeah, both on the top side and, you know, they are doing extremely well on the expense management side because what happens is when you're seeing a rapid growth in Azure, which has a relatively lower gross margin than the rest of the Microsoft business, profitability does get dented with, in addition to all the AI investments that they are making.

18:19What they did this time was, you know, year over year, they kept their headcount flat. I mean, that's a huge boost to, you could say, profitability as well as productivity. And, you know, I think that's something for people to take home also. Hey, Greg, I want to bring you back in here. Looking at the Azure growth here, the company reported better than expected growth in its cloud business. Microsoft's saying it brought in more than$75 billion in the past year. The company continues to commercialize AI services. Give us your bull case on AI and Microsoft, because essentially this company is deploying AI tools and it's betting that these conversant chatbots and more powerful automation tools are going to boost sales of Microsoft's productivity software and cloud services.

19:04Is that bet paying off right now? I don't know that you can say it's 100 % paying off. The reaction to the stock indicates that investors believe that it will. You know, this stock was coming into the report at 34 times earnings, so a lot has to go right, and it appears that a lot is going right. So, yes, you know, we've done a look at their CapEx and R &D over the last 10, 12 years or so. It's not like this is new, it's just that the numbers are big. I mean, the percentages are also fairly large, but they're spending billions and billions on R &D. Of course, now they can get the tax benefits from that.

19:50Billions of dollars, not just Microsoft, but others. And you would hope that they're wisely investing in that R &D for future profitable products and services. Hey, I do want to point out too that we see Amazon shares up about 2.7 % here in the aftermarket shares of Alphabet are down about four-tenths of a percent. But, of course, Amazon reporting along with Apple tomorrow. Anurag, I don't know. Is there any cause for concerns or things that you want to question or would question with the C-suite following Microsoft's release here? You know, I think I would talk about the headcount growth for next year.

20:29You know, what are they baking? Because it's been almost two years where they have added very little headcount to the overall, you know, company size. And the big question over there is, is this something that we should anticipate going forward, that you're getting all this cloud revenue, but you're not adding a lot more headcount. Because I think that's slightly concerning, not so much for Microsoft, but the rest of the tech industry, because somebody that is selling HR software or sales software depends on companies hiring quite a bit because it's a seed-based model. And I think that's an area, but that's not so much, I would say, Microsoft's problem, but that the rest of the tech industry's issue.

21:06All right, gonna leave it there. Folks, thank you so much. Enor Agrana, Senior Tech Analyst with Bloomberg Intelligence out there in Chicago. And Greg Halter, thanks to you as well, Director of Research at the Registered Investment Advisor, Carnegie Investment, with the latest on Microsoft and Meta.

22:02This is Jacob Goldstein from What's Your Problem? Running a business is hard enough. Don't make it harder with a dozen apps that don't talk to each other. One for sales, another for inventory, a separate one for accounting. That's software overload. Odoo is the all-in-one platform that replaces them all. CRM, accounting, inventory, e-commerce, HR. Fully integrated, easy to use, and built to grow with your business. Thousands have already made the switch. Why not you? Try Odoo for free at odoo.com. That's Odoo.com.

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