Meta, Microsoft and Alphabet All Report Earnings

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2:55Carol Massar:Let's head out to our Chicago News Bureau. That's where we find Bloomberg Intelligence Senior Technology Analyst Anurag Rana. Anurag, we want to give you a little time to stew over this. Walk us through what we've got so far from Microsoft, because investors seem a little disappointed. I mean, I don't really find a whole lot of mistakes in these numbers. When you look at Azure growth of 39 percent, I mean, given that size, that's pretty good. The margins actually stood out way higher than what we were anticipating. we thought there was going to be pressure on margins because of all the spending.

3:27Carol Massar:And then lastly, when you look at the CapEx number, substantially higher than the$30 billion that they talked about. Now, to some people, maybe that's a disappointment. But for us, that's a good thing because I think they have so much demand coming in. They're going to add more capacity this year. And that's something that we have been saying for a while. I'll ask you the same question that I asked Angelo Zeno a little earlier. And maybe it's too early to tell. Maybe we won't hear anything about it on the call. But the cloud race between the three biggest providers out there, AWS, Azure, Google Cloud, is there an opportunity for Azure to get market share from companies that might have been affected by last week's AWS outage?

4:09Is that an opportunity?

4:11Carol Massar:Well, typically, I would say no, because they are facing the same problem today, frankly. So when you look at some of these large install bases, it's very difficult to change your applications. But what is the big opportunity, not just for Amazon or not just for Microsoft, but for all of them, including Oracle, is most companies eventually will have a backup cloud provider. They don't have it right now, but that is going to be one of the bigger growth drivers down the road after the AI boom is done. So, I mean, from our side, the market is big enough for all of them to prosper very, very well in the coming years.

4:47Carol Massar:I mean, as you said, the Azure cloud computing unit posted a 39 percent revenue gain in the quarter when adjusting for currency fluctuations. That did beat the street estimate of 37 percent. I'm reading some analysis that says, well, that was a disappointed. The expectations were high. Was there a whisper number in terms of growth on the street? No, the consensus was 37. This is what the company said. Now, if you really want to dissect it badly, then you could say, well, Google Cloud growth accelerated in the quarter compared to the previous quarter. But Microsoft, it was 39. It's still at 39.

5:27Carol Massar:But there are different bases. Microsoft is running at about$75 to$80 billion in annual run rate. Google Cloud is still at 30%. And yet, Azure growth is higher than Google's cloud growth. So, you know, I think people are probably just splitting hairs at this point. Yeah. And you referenced that when you were answering my question, you referenced the outage that Microsoft is having right now, this global Microsoft outage. So we should note that, yeah, just cloud companies are cloud companies. And sometimes it's AWS that has the outage. Sometimes it's Microsoft that has the outage. Hey, the open AI question.

6:04We talked a lot about this with you yesterday. And I imagine that on the call, investors will have a lot of questions about, OK, this close to 30 percent ownership of OpenAI, the parent company of ChatGPT. What is that going to do for Microsoft?

6:20Carol Massar:See, I think from our side, the equity part is not what, you know, for our concern. It's really the technology that Microsoft is holding on to. That's really the critical piece, because, you know, one of the ways we think about is they will sell more products. They will sell more cloud services using that technology than they would just on the share side of it. And that's a bigger thing for us because they have a hold of that for the next seven years. Hey, one of the things I want to ask you, and I know this isn't typically your coverage, but you're smart and you cover all things technology. But Meta, Meta down almost 8 % here in the aftermarket.

6:57Carol Massar:As you see this, what's this one-time tax charge? I guess we're still trying to figure this out, but is it all about that or is it just that we were caught off guard? See, I think that could be a lot of the noise than the number. And, you know, I'm very sure they're going to give clarity on that. But the big question of the overhang of a meta always is, you know, how are you monetizing AI? You're spending all this money. Where is the revenue you show for it? I think that's where management really needs to give and address that in a much more succinct way than they have. The other side is they don't have a cloud platform, just like Google does or Amazon does or Microsoft does.

7:34Carol Massar:So Meta is the one that needs to explain these things far better than, frankly, the other three. I want to bring in Ivan Feinseth, Research Director and Chief Investment Officer with Tigris Financial Partners, got over$500 million in assets under management and posed that same question to him about Meta platforms. The company saying that the implementation of the one big beautiful bill act led to the recognition of a valuation allowance against our U.S. federal deferred tax assets, reflecting the impact of the U.S. corporate alternative minimum tax. The result of one time non-cash income tax charge of fifteen point nine three billion dollars.

8:11Shares carol down seven point eight percent. Ivan, you've had some time to dig into this a little bit on the meta platform side. What's going on here? Well, all right. So the big, beautiful bill caused the recognition of a deferred tax asset. It's actually a non-cash charge. And while it caused a spike in their tax rates, 87 % for the quarter, it actually goes down significantly going forward. I think this is really a non-event. It's an accounting issue. And I think any weakness is a buying opportunity in the stock because there's so many positive long-term trends that will continue to drive the stock higher.

8:44But is that why the stock is down right now? Because of this one-time charge affecting the bottom line. Is that the concern or is it what Carol brought up? The idea of CapEx going up next year.

8:56Carol Massar:And the spend. Well, no. We have seen investors make a mistake consistently in selling meta platforms on capital investment increases. They continue to invest in driving their AI capabilities, which drives increased user engagement. It drives increased return on ad spend investment. So I like when they continue to invest. And we've seen this multiple times. If you listen to what Mark Zuckerberg does every time he invests from the beginning, from changing the company from Facebook to Meta, and when he was investing in mobile, the stock sold off. Now, most of the people engaging in Facebook and Instagram do it on their phones.

9:37So you have to listen to him. He says what he does, and he does what he says, and he continues to create value. So on any weakness over the increase in CapEx, And again, this is positive because there's been a fear that we're going to see this AI bubble burst, that companies are not going to continue to invest. We've seen all three companies reporting today, Alphabet, Microsoft and Meta, all increasing capital investment in AI development. And that's positive for the companies, those three companies. And it's positive for the bullish AI investment theme.

10:10Carol Massar:You know, this 15 % corporate alternative minimum tax. Yeah, I'm Googling some stuff here, folks, because I want to understand it. It came out of the Inflation Reduction Act of 2022. And it generally applies, I think, to corporations with an average annual adjusted financial statement income exceeding a billion dollars over three consecutive years. Yeah, we're all going to be learning a little bit more about this. But Tim, you keep bringing up like, why aren't we seeing this with maybe some of the other ones? Yeah, why are we only talking about this with regard to meta platforms? They may be one of the ones that has the largest deferred tax asset.

10:46And that has really to do with timing and expensing of things like R &D, as an example.

10:55Carol Massar:So, you know, we're talking about a lot of things. And, Ivan, we want to get your view on some of the other companies that have reported. Anurag, we do want to ask you, though, what are you thinking that you're going to be looking for on the call going back to Microsoft? if you will, as we continue to see that one trading lower here in the aftermarket. Let me just pull it up on my Bloomberg because we have seen some pressure here. The stock continuing. It's down still about 3.4 percent. Is it what do you want to hear from this company? I think I would be let me let me get Anarag first. Forgive me, Ivan.

11:28Carol Massar:All right. So the biggest thing for us is going to be, you know, what's the back half of CapEx spending? The capex in the first quarter was very high,$35 billion compared to$30 billion, which they guided to. We want to know what is it going to be in the back half of the year. Are they going to slow down dramatically or is it going to keep pace at where we are right now? All right. Anurag, we know you've got research to write. We're going to let you go and look forward to reading that. Ivan, we want to stay with you for a little bit. We are talking with Ivan Feinseth, Research Director and Chief Investment Officer with Tigris Financial Partners.

12:00Carol Massar:Anurag Rana, of course, our Senior Tech Analyst here at Bloomberg Intelligence. Ivan, other companies that reported, Meta obviously caught our attention. We just talked with Microsoft, or talked about Microsoft with Anurag. What's your take on what we got from them? Because that stock's down about 3 % here in the aftermarket. Well, right now we're in an environment of, you know, people have been buying these stocks, have had of results, they sell into the results. But I shall say that this AI investment theme is powerful. and the companies leading it are meta, Google, and Microsoft, and you've got to buy on any weakness.

12:35I want to hear from Microsoft about increased AI-driven application engagement and subscription increases, how users are buying and implementing and using Copilot. Of course, you want to see growth in all key categories like cloud, Azure.

12:53Carol Massar:I mean, Azure was up 39%. That's pretty good, right? Phenomenal. And that's their big growth engine. And they have been announcing huge contracts. So has Google. Unfortunately, Amazon had that outage. It was disappointing, but didn't really set back the stock. But these are the growth drivers, the cloud-hosted AI platforms. Yeah, I was surprised to see Amazon stock actually higher that day. I know. But I think it also speaks to the power of Amazon and you've got a good understanding of how much it has. Remember, the company is investigating outages. Microsoft is investigating outages of Office and game applications today also.

13:40So this kind of goes both ways. Ivan, on Microsoft, one more, and then we're going to get back to some more meta platforms, I think. But a small 1.2 % beat on adjusted diluted EPS on Microsoft. You know, everybody, the company does not give guidance in the statement. It does that on the conference call or it's doing that on the conference call. Is it like worth even talking about it without even having it? Oftentimes we wait for the call to get more information. But in this case, like forward guidance coming from the call, it's kind of a moot point. Well, the disconnect and the dichotomy that exists between companies and Wall Street is that companies plan for one, three and five years and Wall Street wants to measure everything on a quarterly basis.

14:25I mean, the guidance, it's somewhat important, but you wanted to see consistent growth driven by their investments in technology, the adoption and use of their technology that creates their competitive advantage. And those are the key things to look at. And we are in the first inning of the World Series of AI-driven economic, global economic growth. And this trend is going to continue and it's going to be powerful and it's going to be game changing. And I think that AI is going to enhance and create many more jobs than it will eliminate.

15:02Carol Massar:Going back to the cost thing, though, for Meta, you know, I'm just that operating margin, 40 percent for the third quarter, down from 43 percent last year. Is that worrisome or you think manageable? Not really. OK. I mean, we've looked at companies that have had huge growth trajectories while their margins were contracting. In fact, Amazon doesn't focus on margin. They focus on revenue growth. They don't focus on return on capital, actually, which is one of the key things we focus on, but they do drive a huge return. So, you know, there are times where your gross margin can contract, but your economic margin can increase.

15:43And that is the economic margin is the difference between return on capital and cost of capital. That is the most powerful driver of shareholder value creation. So it's not so much important about what happens with gross margin. And it's in fact, I've seen many companies drive huge growth by lowering their growth margin because you're just becoming more competitive and they're actually making it up on return on capital. OK, we're going to talk about Alphabet with you in just a minute. Carol reminded me that shares are surging higher in the after hours. Six percent. Six percent. OK, one more on Meta platforms down 8.4 percent in the after hours.

16:20Reality Labs losses for the third quarter, four point four billion dollars. It's about the same as one year prior. Obviously, it's a huge investment area for meta platforms. In the press release, Mark Zuckerberg specifically calling out the success of the eyewear and saying, essentially, I don't have it in front of me, but he essentially said, if we think the future is going to be what it is, this is going to be the most exciting moment for meta platforms ahead of us. These will be the most exciting years for meta platforms. What is the opportunity that meta platforms has when it comes to eyewear?

16:52this is going to be a tremendous communication and interactive platform and it's only going to get better in a few years we're going to look back on these original glasses the ones that they've launched from ray-ban the recent ones from oakley and the functionality in a few years from now is just going to be more and more incredible but this ability to engage with real-time information to share pictures and images and videos in real time with other people that you're talking to. And while Mark Zuckerberg believes that the glasses are going to replace your smartphone, you're just going to keep your smartphone in your pocket and you're going to interact with data and information and people who you're communicating with with these glasses.

17:37And eventually we're going to see ones that Meta just launched, ones with displays. It's going to to be all about having displays embedded in the lens so you don't even have to touch your phone. So this is going to be a huge growth op. This is going to be what the cell phone was in the mid-90s.

17:53Carol Massar:No rose-colored glasses there right now because MediShare is now down near their lows in the aftermarket, down about 9%. I'm going to remember that, Ivan said. This is going to be what cell phones were in the 90s. And by the way, he's not wearing any MediGlasses right now. Wow. And I will say our Mark Gurman really, really likes them as well. Hey, we do have to ask you about Alphabet because we are seeing this one actually up about 6 % here in the aftermarket. What do you like? What's of note, do you think, in their release? Cloud growth, big cloud contract wins that they've had over the past few months with Meta, with OpenAI, with other companies.

18:34This, you know, that Meta, Amazon, and Microsoft, I'm sorry, Alphabet, Amazon, and Microsoft are building the AI and cloud infrastructure that everybody is connecting to and going to continue. And increasingly coming are going to be connected cars as we move through to full autonomy. So we are going to need high-speed, real-time, constant connectivity to the cloud. And those are huge opportunities for the three major public cloud service providers, Alphabet, Google, and Microsoft.

19:12Carol Massar:Well, and they're spending big. They're now seeing fiscal year CapEx$91 to$93 billion. They had seen about$85 billion. So, hey, spend. You've got to spend money to make money, Carol. You've got to spend money to make money. That's what they say. It's wild, right? Like the number. They also, Gemini, their app now has over 650 monthly active users. 650 million? 650 million. Okay. Yeah. Didn't I say that? It's a lot. How do we know that this AI thing, how do we know that all this spend is going to pay off, Ivan? Are we still a little exuberant? Well, because the functionality we see today is going to be blown away by the functionality in the future.

19:54More and more people are going to rely on this technology for all different aspects. And I do give credit to Tom Siebel, the founder of Siebel Systems and C3AI, that I believe he said it, that every company is going to be an AI company. Every company is going to use AI on all aspects of their business, whether it's to manage supply chain, manage pricing, target marketing, that the functionality is going to increase. and people are going to use just like you said when carol when you wanted to understand more about

20:27Carol Massar:um meta's uh tax charge you googled it yeah and we're going to get more information i did also i i like perplexity i looked up it looked it up in perplexity kind of i and i did understand what they said but it gave me a little more detail and uh and you know it's right ivan you know it's right yeah is it right do i know what perplexity gave you back is right now yes well because i i do understand that the tax hat that it's really the timing and charge and of managing your tax payment and your tax liability that you tend to offset through capital investment through r &d and other types of things that happen so it's really timing issues on how your accrued tax liability or your accrue tax asset falls versus the taxes you will eventually have due or the tax credit you will eventually earn.

21:20Carol Massar:I just want to know, is this Sora, is this really Ivan Feinseth? I just want to make sure. It is really me. Listen, perfect guest to talk about all of this. So much coming at us. Ivan, thank you so much. Really appreciate it. Ivan Feinseth, Research Director, Chief Investment Officer of a Tigris Financial Partners, over 500 million in assets under management as of the middle of this year, joining us right here in New York City. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

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