There’s been big hits and a big miss for Big Tech this earnings season. David Kretzmann, an analyst at Motley Fool Canada, talks to Kim Parlee about which FAANG stocks are outperforming their peers and what the outlook is for tech down the road.
Earnings are in full swing, with some of the biggest tech companies reporting their results. And not long ago, we got results from Facebook. And its shares tumbled after the social media giant reported revenue and user growth that missed expectations, down more than 21% in after hours trading.
There's a look right now. So what is that going to mean for tech stocks going forward? What does it mean for Facebook?
David Kretzmann is an analyst at Motley Fool, Canada. He joins us from Washington. David, great to see you. Let's start with Facebook. What the heck happened there?
Man, that's a good question. I didn't realize it was down 21%. Last I checked it was down 12% or 14%. So the market clearly doesn't like this quarter, but I don't know-- this might be a contrarian take here-- but if this is a disappointing quarter for Facebook, sign me up for another.
I mean, a company growing 42% of revenue for a company that's already the size of Facebook-- sure, margins are seeing some pressure as the company invests in new product development, security for the platform. But this is a company that's very clearly investing for the long term. They're not investing to maximize next quarter's results. And if 42% growth is disappointing, I don't know what is a good quarter, in that case. So I look at Facebook-- go ahead
No, I was just saying, I think to your point, I understand a huge, huge growth in terms of earnings and revenues. But I think it's the growth levels. Sounds as though they're slowing down a bit, daily active users slowing down a little bit. So I guess just what is-- and again, I know you think it's compelling-- but what are the risks with this, in terms of just it's big. It is slowing down?
It is slowing down, but the company has actually been guiding for slower growth for over a year now. And you have to keep in mind that it's just three months ago that the company was going through the Cambridge Analytica scandal. They're going through a lot of scrutiny from politicians and the media alike. And their stock is still up over 20% since that time three months ago.
I think what the market might be concerned about is the fact that the company is guiding for operating margins to drop from about 50% today, which is incredible, to closer to 35% in the coming years. And while that drop might be disappointing for shorter-term investors or traders, you have to keep in mind that a 35% operating margin is still higher than Microsoft or Alphabet have put up over the past five years. So Facebook is still a very strong company. And if I'm looking out over the next three to five years, I think Facebook is poised to become more relevant in our society. They're still seeing increased total user counts on the platform. They're seeing increased engagement.
I don't really see that stopping over the next three to five years. So I look at the stock today, trading for about 25 times forward earnings, a strong founder/leader in Mark Zuckerberg, who's clearly focused on long-term performance. I think it's a compelling opportunity for investors today.
Let me ask you-- you mentioned Microsoft. You mentioned Alphabet, Alphabet also coming in with their earnings, had a pretty impressive quarter.
Yeah, Alphabet is really a broken record at this point. It seems like putting up 25% year over year revenue growth every quarter, the company has close to $100 billion in net cash now. They have seven platforms with 1 billion users or more, whether it's YouTube, Google Maps, Google Play, Android-- so many different levers that they can pull going forward. But really the name of the game for Alphabet continues to be that core Google platform, and that advertising market that they're serving. Advertising still makes up about 90% of the company's revenue today. And believe it or not, I think we're still in the early stages of digital advertising overtaking traditional marketing and advertising. So Google and Alphabet as a whole is a company that can probably continue this above-average growth for at least another decade, and probably more.
What's the risk with Alphabet? What would you say on that front?
I would say a common denominator here in terms of risks for Facebook and Alphabet is that increased regulatory scrutiny. Obviously, Google has already been levied with two fines from the European Union over the past year or so, to the tune of billions of dollars. I think there's a risk that politicians and regulators look to break up the companies. And that would be my main cause for concern.
But other than that, I think longer term-- again, similar to Facebook-- I see Google as a company that's poised to become more relevant over the next three to five years. And as an investor, that's the main factor I'm looking for initially.
All right, I'm going to try and be efficient here, because I had a couple of stocks I want to hear about. I've only got two minutes, David. So Microsoft and Tesla, what did you think of Microsoft? They managed to report earnings growth right across the board.
Yeah, Microsoft has really been a story of resurgence over the past four years since Satya Nadella stepped in as CEO. The stock has more than doubled since he became CEO. Microsoft is interesting, because they have several different segments, but they've really been seeing improved growth with their mobile and cloud segments.
But compared to the other tech giants, I'm a little less excited about Microsoft, because they've had to rely on big-ticket acquisitions like LinkedIn, and most recently GitHub, to fuel their growth, compared to Facebook and Google or Alphabet, which have largely been able to maintain that strong growth through their organic core operations.
OK, Tesla. You've got, of course, the news that they've been-- or at least, The Wall Street Journal I think it was, reporting that they are going out to suppliers, asking for, essentially, rebates, or money back. I think that's causing a bit of concern.
Yeah, I mean, the main concern with Tesla at this point is that they're investing so much back into the business. They're burning billions in dollars of cash. They have over $9 billion in net debt already.
And it's hard for me to see Model Three production scaling quick enough, and at a high enough quality soon enough, to the point where the company doesn't need to either raise more debt or issue new equity to fund the business. So the proof is in the pudding. They need to get that Model Three production scaled in a quality fashion, as quickly as possible.
All right, David. Great round-up of all the earnings. And great to have you with us. Look forward to talking again.