Show Transcript
There were some hits and misses for Big Tech’s Q3 earnings. Kim Parlee speaks with Vitali Mossounov, Global Technology analyst at TD Asset Management and co-lead for the TD Global Technology Leaders Index ETF, about the outlook for FAANG stocks.
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- It was all about the big tech earnings last week, and there were some big hits, and there were some big misses. And here to give us all the details on what he's watching, what he thinks is material and why, Vitali Mossounov. He is global technology analyst at TD Asset Management, and co-lead for the TD Global Technology Leaders Index ETF. Vitali, it is great to have you with us. There's a lot to go through, so I'm just going to rapid fire give them to you. Let's start with one of the big misses that came out, and that was Snap. Stock was down 25% when they reported. What happened there?
- It snapped almost literally. We don't usually talk about Snap. It's not quite in the big tech camp, but it did scare everyone because Snap is an advertising-based model just like Facebook, just like Google. And Snap came out and said that, hey the changes that Apple has made in terms of letting apps and developers track the users, and really figure out what is it that they're doing, what are they worth to an advertiser.
Apple's changes really messed with the ability of Snap to do that. And so they really missed their numbers, their forecast was terrible. And that was heading into a weekend, so everybody all weekend was losing sleep. Investors were saying, oh my god, how are Facebook and Google earnings going to look?
- And then, of course, they reported. So let's start with Facebook, and the earnings was part of the story with Facebook. But I think you can tell me whether the bigger story or not is them rebranding themselves as Meta.
VITALI MOSSOUNOV: It depends if you're a bull or bear in the stock. You can imagine there's different views on it. But thankfully for many, Facebook's actual advertiser numbers were quite good. And they said, look, the concerns that Snap pointed out, they're there, but we're dealing with it much better. And you're right, what stole the show was one, the resegmentation. They really broke out what they would later call the Metaverse, as they would rename the company. And what that showed you is the core Facebook is actually immensely more profitable than people expected.
So you had this positive, the Meta investments, again positive or negative, I think that's a whole different segment we have to do. But then what they really announced is to make this Meta thing happen over the next few years, we're going to ramp up investments. Capex, OpEx, you name it. And so that's when people step back and said, hang on a second, there might not be any earnings growth in this story for one or two years. And what do we do with Facebook? Do we really trust them that the Metaverse is going to come? And again, that's a bigger debate for another time.
- It is, it's a lot of money going into one, well not one. I know the Metaverse is very-- excuse the pun-- meta. I mean it's in lots of different directions, but it is a bet that you're putting on a different direction. And if it plays out, it's great. If not, it doesn't. Amazon also getting punished by investors. I'm going to bet this is more of a supply chain story for them.
- It is, it's funny. Facebook got punished for Meta five, 10 years away. Don't even know what virtual world, and then Amazon is much more prosaic here. They're getting punished for spending money today. And they came out in the-- e-commerce is decelerating just because you have very tough comms to lap, but the top line numbers are fine. It's not going anywhere, Amazon will be here.
But what surprised everyone is they've been investing a lot. And they came out again and said, hey investors in Q4, maybe you thought we could have $6, maybe $7 billion in operating profits. Guess what, we're going to have between $0 and $3. And so people next day sort of started throwing in the towel and saying cost inflation in terms of wages, in terms of transportation, it's all Amazon talked about on their conference call. And it's really making people wonder when are they going to put up some real profits in the retail business.
- What about Google? Because that was another one that I think surprised and delighted. It was just that ad engine is just, it's powering up.
VITALI MOSSOUNOV: It is, and Google was squeaky clean. All the things you care about Google, it's the search advertising, it's YouTube, it's their cloud, and everything put up great numbers. Really not a lot of drama there. And they did say, look there are some headwinds, perhaps people aren't shopping for new cars as much. They're just not available, but people are buying more auto parts for their used cars because they still have to get places. And so they don't have this app, like a Snap or Facebook, where the Apple changes made a big impact. It really was irrelevant to them and they're frankly firing on all cylinders.
- Another one that got caught up, I know, with the supply chain side was Apple. And correct me if I'm wrong, Vitali, I know you will. But this is just about again, chips getting into phones. And they don't have them, so they can't sell them.
VITALI MOSSOUNOV: Basically, and not just phones. IPad, Mac, you name it. Now Apple, when the headline printed, a lot of people said these numbers don't look great. And then Tim Cook came on the conference call and said, well, we had $6 billion of sales that we missed out on because we couldn't get the chips.
And so if you do the math, they actually had good numbers that exceeded expectations. And they of course talked about how current demand trends are going. Demand, they said, is very strong for the iPhone 13. Unfortunately again, these supply chain constraints are going to cost them even more than $6 billion in the current quarter. So investors are really debating what to do with Apple here. A good demand, but if you can't fulfill it, will it still be there in 90 days?
- I guess the one thing you look for in this, I mean the short term, I mean that long term is these companies that aren't beholden to supply chains in the same way. Tell me, does Microsoft fit into that category? Software not as, probably is, I wouldn't think, as chip dependent, but they had a stellar quarter.
VITALI MOSSOUNOV: Yeah, you're spot on. And Microsoft said what supply chain, and they said what labor. Everything's being automated with software. So Microsoft, stellar quarter. As usual, mid to high teen revenue growth, 20% plus earnings growth, and it's all about the cloud. Everyone's shifting to the cloud, and Microsoft is making Capex investments to build that infrastructure. But those parts are there, they're able to make that work.
And then all companies seem to be accelerating their transition how to close their own data centers, how to modernize their IT infrastructure. And Microsoft, and frankly we talked about the negatives of Amazon, let's give AWS a shout out. Just like Microsoft's cloud business, Amazon's AWS also accelerated. So if we're going to pick, again, one theme from the quarter, it's all about the cloud. That's really the place to be.
- Any other themes? You mentioned cloud, I'm assuming supply chains. I mean are there any themes that we should be paying attention to for the next couple quarters?
- I think cloud continues, and it's not a controversial one, and I think that's the right case. You've got e-commerce, which is decelerating, but what you're hearing-- and, of course, Shopify was another 800 pound gorilla that gave a lot of guidance, good commentary rather than guidance, on e-commerce. And I think what we're hearing is, hey it's slowing down, but it's just normalized at a completely different trend line than it was pre-pandemic. And so don't worry too much about these businesses. They'll grow a little slower, but they'll be growing at a healthy clip for a long time to come.
- Vitali, last question for you. Just to circle back on Meta and Facebook. What would you say if they get it right, what's the upside, if they get it wrong, what's the downside?
- Well, the upside if-- you did tell me I only have 30 seconds there, so I'll talk for 10 minutes. I'm just joking, the upside is that they probably capture the same kind of market cap as someone like Apple. Frankly, the bet that they're making is that today Apple has capitalized the-- rightly so, through the invention of the iPhone-- on this current computing era. If the one after is the Metaverse, and Alphabet, or rather Facebook, becomes the Apple of that next computing medium, then they should probably stand to gain at least what Apple has gained in terms of value created for shareholders, market cap, however you want to phrase it.
So the opportunity is really immense. And the last thing I'll add is that, of course, this is many years away, there's big investments, but this is the last big tech company that's found a run. And they're making a big bet 10, 15 years away. They've pulled it off in the past, and I don't think you should necessarily bet against Facebook. I think they're doing the right thing with this.
- Fascinating. Vitali, we'll have to have you back to give you 10 minutes to talk about that one. Thanks so much.
- Take care.
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- It snapped almost literally. We don't usually talk about Snap. It's not quite in the big tech camp, but it did scare everyone because Snap is an advertising-based model just like Facebook, just like Google. And Snap came out and said that, hey the changes that Apple has made in terms of letting apps and developers track the users, and really figure out what is it that they're doing, what are they worth to an advertiser.
Apple's changes really messed with the ability of Snap to do that. And so they really missed their numbers, their forecast was terrible. And that was heading into a weekend, so everybody all weekend was losing sleep. Investors were saying, oh my god, how are Facebook and Google earnings going to look?
- And then, of course, they reported. So let's start with Facebook, and the earnings was part of the story with Facebook. But I think you can tell me whether the bigger story or not is them rebranding themselves as Meta.
VITALI MOSSOUNOV: It depends if you're a bull or bear in the stock. You can imagine there's different views on it. But thankfully for many, Facebook's actual advertiser numbers were quite good. And they said, look, the concerns that Snap pointed out, they're there, but we're dealing with it much better. And you're right, what stole the show was one, the resegmentation. They really broke out what they would later call the Metaverse, as they would rename the company. And what that showed you is the core Facebook is actually immensely more profitable than people expected.
So you had this positive, the Meta investments, again positive or negative, I think that's a whole different segment we have to do. But then what they really announced is to make this Meta thing happen over the next few years, we're going to ramp up investments. Capex, OpEx, you name it. And so that's when people step back and said, hang on a second, there might not be any earnings growth in this story for one or two years. And what do we do with Facebook? Do we really trust them that the Metaverse is going to come? And again, that's a bigger debate for another time.
- It is, it's a lot of money going into one, well not one. I know the Metaverse is very-- excuse the pun-- meta. I mean it's in lots of different directions, but it is a bet that you're putting on a different direction. And if it plays out, it's great. If not, it doesn't. Amazon also getting punished by investors. I'm going to bet this is more of a supply chain story for them.
- It is, it's funny. Facebook got punished for Meta five, 10 years away. Don't even know what virtual world, and then Amazon is much more prosaic here. They're getting punished for spending money today. And they came out in the-- e-commerce is decelerating just because you have very tough comms to lap, but the top line numbers are fine. It's not going anywhere, Amazon will be here.
But what surprised everyone is they've been investing a lot. And they came out again and said, hey investors in Q4, maybe you thought we could have $6, maybe $7 billion in operating profits. Guess what, we're going to have between $0 and $3. And so people next day sort of started throwing in the towel and saying cost inflation in terms of wages, in terms of transportation, it's all Amazon talked about on their conference call. And it's really making people wonder when are they going to put up some real profits in the retail business.
- What about Google? Because that was another one that I think surprised and delighted. It was just that ad engine is just, it's powering up.
VITALI MOSSOUNOV: It is, and Google was squeaky clean. All the things you care about Google, it's the search advertising, it's YouTube, it's their cloud, and everything put up great numbers. Really not a lot of drama there. And they did say, look there are some headwinds, perhaps people aren't shopping for new cars as much. They're just not available, but people are buying more auto parts for their used cars because they still have to get places. And so they don't have this app, like a Snap or Facebook, where the Apple changes made a big impact. It really was irrelevant to them and they're frankly firing on all cylinders.
- Another one that got caught up, I know, with the supply chain side was Apple. And correct me if I'm wrong, Vitali, I know you will. But this is just about again, chips getting into phones. And they don't have them, so they can't sell them.
VITALI MOSSOUNOV: Basically, and not just phones. IPad, Mac, you name it. Now Apple, when the headline printed, a lot of people said these numbers don't look great. And then Tim Cook came on the conference call and said, well, we had $6 billion of sales that we missed out on because we couldn't get the chips.
And so if you do the math, they actually had good numbers that exceeded expectations. And they of course talked about how current demand trends are going. Demand, they said, is very strong for the iPhone 13. Unfortunately again, these supply chain constraints are going to cost them even more than $6 billion in the current quarter. So investors are really debating what to do with Apple here. A good demand, but if you can't fulfill it, will it still be there in 90 days?
- I guess the one thing you look for in this, I mean the short term, I mean that long term is these companies that aren't beholden to supply chains in the same way. Tell me, does Microsoft fit into that category? Software not as, probably is, I wouldn't think, as chip dependent, but they had a stellar quarter.
VITALI MOSSOUNOV: Yeah, you're spot on. And Microsoft said what supply chain, and they said what labor. Everything's being automated with software. So Microsoft, stellar quarter. As usual, mid to high teen revenue growth, 20% plus earnings growth, and it's all about the cloud. Everyone's shifting to the cloud, and Microsoft is making Capex investments to build that infrastructure. But those parts are there, they're able to make that work.
And then all companies seem to be accelerating their transition how to close their own data centers, how to modernize their IT infrastructure. And Microsoft, and frankly we talked about the negatives of Amazon, let's give AWS a shout out. Just like Microsoft's cloud business, Amazon's AWS also accelerated. So if we're going to pick, again, one theme from the quarter, it's all about the cloud. That's really the place to be.
- Any other themes? You mentioned cloud, I'm assuming supply chains. I mean are there any themes that we should be paying attention to for the next couple quarters?
- I think cloud continues, and it's not a controversial one, and I think that's the right case. You've got e-commerce, which is decelerating, but what you're hearing-- and, of course, Shopify was another 800 pound gorilla that gave a lot of guidance, good commentary rather than guidance, on e-commerce. And I think what we're hearing is, hey it's slowing down, but it's just normalized at a completely different trend line than it was pre-pandemic. And so don't worry too much about these businesses. They'll grow a little slower, but they'll be growing at a healthy clip for a long time to come.
- Vitali, last question for you. Just to circle back on Meta and Facebook. What would you say if they get it right, what's the upside, if they get it wrong, what's the downside?
- Well, the upside if-- you did tell me I only have 30 seconds there, so I'll talk for 10 minutes. I'm just joking, the upside is that they probably capture the same kind of market cap as someone like Apple. Frankly, the bet that they're making is that today Apple has capitalized the-- rightly so, through the invention of the iPhone-- on this current computing era. If the one after is the Metaverse, and Alphabet, or rather Facebook, becomes the Apple of that next computing medium, then they should probably stand to gain at least what Apple has gained in terms of value created for shareholders, market cap, however you want to phrase it.
So the opportunity is really immense. And the last thing I'll add is that, of course, this is many years away, there's big investments, but this is the last big tech company that's found a run. And they're making a big bet 10, 15 years away. They've pulled it off in the past, and I don't think you should necessarily bet against Facebook. I think they're doing the right thing with this.
- Fascinating. Vitali, we'll have to have you back to give you 10 minutes to talk about that one. Thanks so much.
- Take care.
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