Big Technology Podcast - Merits Of Metaverse + Big Tech Wipeout — With Eric Jackson

Episode Date: November 2, 2022

Eric Jackson is president and portfolio manager at EMJ Capital. He joins Big Technology Podcast to discuss Big Tech's terrible week on the public markets, with a focus on Meta, which is now down 71% on the year. We also cover Alphabet, Amazon, Apple, Microsoft, Snap, and more. Tune in for a conversation that makes sense of these companies' punishing ride of late. And what the bottom might look like. Maybe we're already there.

LinkedIn Presents. Welcome to the big technology podcast, a show for cool-headed, nuanced conversation, of the tech world and beyond. Well, it's been a big tech wipeout. Earnings last week was a true disaster for these companies. We have meta falling off the face of the earth. Amazon dropping 20% and after hours before it returned a little bit. But it's been brutal. Microsoft had a bad week. Snap had a bad week.

I mean, take your pick. Even Apple, which had a good week, beat earnings expectations, also saw some shortage. So, you know, as we tend to do on the podcast, we are going to break down what the heck is happening with big tech, whether this is a blip in the radar or some bigger structural issues. And joining us to do it is Eric Jackson. He's the president and portfolio manager of E. EMJ Capital, one of my favorite follows on Twitter based out of Toronto.

Eric, welcome to the show. Hey, Alex. Thanks for having me. Great to be here. Yeah, great to have you. We spent Monday, I think, on the set of CNBC. The week's been a blur talking about whether Mark Zuckerberg would rein in his spending on the Metaverse as investor Brad Gersoner asked him to do. He did it.

And Wall Street is really metting out the cost. So we'll get into that. But just briefly from the top. What do you make of the fact that big tech has washed out so hard over the past few weeks and really just had a very disappointing set of earnings that's destroyed billions and billions of dollars in market cap over the past week? To me, I tend to focus on smaller growth tech rather than the Big Fang names. And that's simply because I think that it's, I want to find.

sort of the next generation of companies that are going to form some acronym one day before and those are the ones that hopefully still have a chance to double, triple, quadruple over the next few years. The fangs are great companies. They are not anything like the companies that existed during the dot-com craze. They're gushing cash. But when you're so big, and many of them a year ago, over a trillion, how much more upside do they have is sort of the question. They're certainly not as easily able to double and triple. So what's interesting to me about what's happened this past week is that 2021 was a great year for tech if you just looked at the NASDAQ.

The NASDAQ, I looked it up today, was up 21% in 2021. And the Fang stocks, and I'm including meta, Apple, Microsoft, Amazon, Netflix, and Google, collectively, those companies were up 31% in 2021. So 10% above the NASDAQ. But the smaller growth tech companies and the Kathy Wood type stocks had a brutal 2021. It really, the bare market for those kinds of stocks started really in mid-February of 2021. And so those were the companies that really felt the first tremors of inflation and, you know,

what was to come for the rest of the market. But in large part, Fang held up in 2021. And I think a lot of people started to crowd into kind of the Roach Motel. That's a little harsh on these names, but they really piled in. And I think now in hindsight, we're seeing 2022 being a sort of a rewind of those kind of Johnny Come Lately's into those positions. So for 2022, and I think this is pretty up to date, we're recording this on Friday, So the average, so NASDAQ is down 31% this year, instead of like plus 21% for the year before.

But the Fang stocks plus Microsoft, whatever they call that now, FAMG or whatever it is, those are down 41%. So basically the 10% outperformance you got in 2021, you're now seeing 10% of underperformance in 2022. And for a kind of a two-year period now, the fangs are underperforming NASDAQ. I've got like NASDAQ's down like 17% for those almost two years, whereas fangs are down 24% collectively. So this week was really kind of the crescendo, I think, of that unwind for a lot of these names, except for Apple. Apple's sort of a last man standing here. So what caused this? I mean, can you kind of unpack, you know, why we saw the smaller tech companies get at first than these bigger companies?

And then what caused the rough, you know, the mass exodus that we just saw? I think, you know, smaller stocks are always more volatile. So, you know, the Russell 2000 or 1,000, you know, are more volatile than the S&P 500 because they're, you know, they're just smaller. they're more prone to kind of earnings ups and downs. It can work great on the upside. They can be, you know, big outperformers when things are going well. But if they hit bad patches, they can be more tumultuous to the downside. And so I think these smaller, so tech in general, obviously, is more volatile than

consumer packaged goods and, you know, industrial companies, even energy companies. So the growth, the growth year tech companies just were inherently the most volatile of all of tech. And I think there was a false sense of security last year with the big Fang names. And it wasn't just last year. I think this has been growing some time ever since Jim Kramer kind of coined the acronym for Fang, which I think goes back like six or seven years when he first came up with it. It just becomes a shorthand, sort of an easy way for investors to say, hey, these are the biggest, safest tech names. They're the ones I know.

They're the ones I have experience with. So from a retail investor perspective, I think there was just a tendency to want to flock to them as sort of like a safe haven, almost like the banks of the world of tech, that they're going to be here no matter what. And I think, you know, this week and this year has shown that there's that that the complacency, you know, can be disrupted. And, you know, they're even, even for these stalwarts that they, it's just tough to keep growing at an increasing like year on year level after six, seven, eight years. Yeah, Liz Young from SoFi said something interesting on air on CNBC. she said that you first see the valuation contraction, which you certainly had, then the earnings misses, which seemed to have come in the past week. And then you start to see that show up in the economy. So, you know, these are companies that have large footprints in places like advertising,

you know, even the growth of the internet with cloud hosting. So do you think that this is a sort of precursor to a real downtrend in the economy? Can we read that from big tech? I don't think so. Not necessarily. You know, nobody knows. But I think actually this, my take is that these names and they're, you know, being taken out to the woodshed this week or this month, this year is probably a signal that we're closer to the end of the real kind of downturn in stocks. And does make me more, you know, bullish that, you know, there's always going to be interest in technology. You know, price is, you know, a cure for everything. So high prices, you know, after a while, they get cured by stocks dropping. Low prices get cured by people getting, you know, attractive that there's attractive valuations here.

And the one thing that technology stocks have going for them over all industries is, is there's always growth. You know, you might have to change horses and, you know, find a new technology company to get on board with. But, you know, they're on the leading edge. And so there's always a growth story somewhere. And people are always going to be attracted to that, especially in this environment of high inflation, low growth elsewhere. Like you're not going to find growth, you know, maybe for energy companies. But it's going to be a struggle to find growth out there. So there will be a search for new leaders.

And the smaller names, the lesser known names, have been beaten down so much over the last year and a half going on two years that, you know, many have been left for dead. And so I think people will stop, take a pause and start to get away from just the fang acronym as sort of like the quick and easy way to be invested in tech and start to look a little beyond that. And so I think these smaller names are going to be, they were the first into this downturn and I think they're going to be the first down, even if the economy generally that we see every day when we go out and get a cup of coffee is still challenged.

for the next six months to, you know, two years. Yeah, and some of these bigger companies are now starting to become those smaller names. Like, I'd love to go company by company now and sort of break down a little bit about what we've seen. But starting with meta, are they now small enough that they might become a company that you're interested in? I mean, they started, you know, what, 13 months ago, they were one point something trillion dollars. Now they're 265 billion. They've lost 70% year to date. Are they in that Eric Jackson area now?

or are they still a little too big? I always find it dangerous to look for value stocks in the tech world because usually you don't get the name value stock unless your stock's down a lot. And usually there's a good reason why your stock's down a lot. And so for meta or Facebook, obviously it's been the concern about their core business and how it's being attacked by TikTok and can it hold up. And what's the black hole that's going on with? with their investments in the Metaverse and Reality Labs.

So I guess on the plus side, you know, if you wanted to say like, okay, what's the case for investing in Facebook here because 70%, you know, you should take a look at something that's been so diminished. I think, you know, the bullish case would be that time spent on kind of the core Facebook platform is getting better. Reels is improving. It's amazing to me, like when you start to think about these numbers, they did $27 billion, over $27 billion in ad revenue in the quarter. The quarter, not the year, the quarter.

And but only, I think it was like something like 750, $770 million of that was attributable to Reels. But it was double what it was in the previous quarter. So you have, you know, you could say, hey, there's still a lot of upside here with reels. That's incremental. They've got the users. They've got $2 billion on WhatsApp, $2 billion on the main kind of core Facebook and Messenger. Instagram is huge. So there's still growth there.

In normal times, like not this past quarter when their free cash flow went from like $10 billion a year ago down to like almost nothing. And normal times they have a lot of free cash flow. Even though growth is slowing, they can put that cash flow to work on buybacks. And even if you say, well, is that really a growth story that you want to get behind in tech? It's certainly worked out for Apple over the last five years. They haven't had the highest, you know, top line revenue growth either. But they've bought back so much stock that that does have a material effect. on people, and it's attracted a new type of investor.

So, and then the last thing I would say, which would be a bullish sign for them would be, this is another mind-blowing stat. They've spent $69 billion in the last two years on capital expenditures. So basically building out their servers with the latest and greatest AI techniques to figure out just what type of ad you want to see when you're clicking through reels and all this kind of stuff. And that's a scale that we just haven't seen in the world before. And you have to believe that they are not idiots, and that $69 billion is going to have an effect down the road.

So those would be the bullish cases for it. But that said, I'm still hesitant to pull the trigger on owning the stock because of the fears of the, you know, where do things really bottom when TikTok is still growing like a weed and how does that affect the core business over time? And despite the stock buybacks or the promise of stock buybacks, what's going to happen with the Metaverse investment? Is it going to continue to be $10 billion a year? Is it going to grow to be $12 billion a year? I'm skeptical that that's going to see a payoff anytime soon.

Let me make the counterpoint to a couple of things that you mentioned and see how you react. First is this idea that Instagram and Facebook Reels are on the upswing. My perspective on that is I don't see, you know, despite there, they're showing some nice numbers, but I don't really see it as ramping up its competition with TikTok and YouTube shorts because we just started creating for those platforms, for all of these platforms on the podcast. And one of the interesting things is with TikTok, you could have an account with no followers, and that platform will blast out your video to people see if it's good and then keep distributing it. Same with YouTube.

But with Instagram, that's not the case. So TikTok and YouTube are actually taking into consideration a broad array of videos and bringing the best to people, no matter where the origin is. I think Instagram and Facebook way too tied to the follow model. And ultimately, that's going to lead to worse content to users and less incentive to create for creators. Now, they can say that they've seen growth. Of course, they had to start place to zero. But ultimately, is this like actually a competitive product?

You know, I just don't, I don't see it. I mean, it seems like lots of TikTok rip-offs from meme accounts that might let you to believe that you have a competitor where you don't actually have one. What do you think about that? Yeah, I mean, I haven't checked recently like in the last month, but the last time I was on Reels, it was like 50% of the videos seem to be TikTok videos

that might have been sort of cut in pace there. So you wouldn't think that that's a great competitive differentiator when you're building your, you know, it's not quite the same as the, Story is killer that they experienced with going after Snapchat back in the day. Totally, because stories was still social-based, and this is entirely algorithm-based. If the algorithm is not treating the videos the same as TikTok is, then you're up the creek. Yeah.

So, and how monetizable is WhatsApp, the $2 billion there? That's still an open question. What's going to happen in core Facebook Messenger? Is that just going to kind of slowly melt away over time? as the grandmothers and grandfathers continue to flock there. Yeah, so I take that point. And to me, out of all the fang names, I would say META or Facebook is the least interesting to me as an investor. Okay, so now I will make the case for META buying META stock.

I'm going to do this a little bit more on a special episode this Saturday with Marshall Kostov and Soccer and Jetty of the Realignment. So folks, we have a special one coming, focusing on the midterms and on, you know, broader U.S. global politics. And then we do a second half, short one on tech. But in case you don't get that far, I feel like it's worth bringing up now. If you buy meta stock today, and this is a little bit based off what Josh Brown said, he bought into it, you almost get two bets in one. You either bet, A, that this metaverse is going to work out or B, that they'll come to their senses and it won't work out. And then the stock market will be like, okay, you know, they're not investing anymore in the Metaverse and then take that stock and double it or triple it.

So for that one share, you get those two options. Appealing? Not to me. I mean, they're an ad company. The Metaverse is a product company. Or it's sort of like a product slash enterprise play the way that they've sold it. It's like it's not you personally are going to buy. this and take it to your meeting but if you work for you know big company a they're going to buy all

these VR headsets and send them out to all the the workforce to use to do zooms and stuff with i just don't think um i think it's real challenging for for a company with a dna you know that's been so successful in one area i.e ads to just uh change stripes to to a different type of type of company So I just think it's probably still years away. And yet the head count is enormous there. So there's that. I think like probably the, and then what if they cut back on spending? I was thinking like I liked the Brad Gershener letter from Altimeter.

Right. So for folks listening, Brad was saying instead of spending $10 billion a year, spend $5 billion a year in the Metaverse, and now Facebook said they're going to lose even significantly more next year. So they didn't listen. And I think he was saying just to have more job cuts in general across the kind of core business, which is more consistent with what other companies are doing. But I was thinking, like even if they did everything that he suggested,

maybe there would be a one-day reaction, stock would pop. But would it really carry through? Would it, you know, a month later, three months later, six months later, where would the stock be? And I think, you know, you'd still be probably with a challenged stock price because of just concerns about, you know, what is next for the main core business of Facebook? And is it really going to be to bounce back? Even if you do a bunch of job cuts, if it's still a shrinking business, you know,

people are reluctant to jump on board with that kind of a story in the tech world. So there's probably, I would say that their best bet is probably this kind of financial engineering, Apple, you know, massive buyback approach with like, you know, showing that they are conscientious about costs, you know, and they're going to pay homage to free cash flow and all this kind of stuff. That could happen. But my guess is that this is stock is going to be in the penalty box for the next six months regardless. And with Apple, it took some time for there to be a turnover of certain types of investors, like the growthier investors left when the buybacks became like, you know, center stage. And it sort of attracted the Warren Buffett's of the world and kind of these like more, you know, sort of traditional kind of, you know, slower growth, institutional investors to come in and kind of participate in the story. But that that took some time. It just didn't happen like overnight that, you know, one investor exits and one type of investor sort of arise.

And, you know, I was actually like seeing all this investment they're dumping in. You know, speaking of financial engineering, I was looking at all this investment, they're dumping into the Metaverse. And I was like, you know, does this, you know, can this hold up to the law of physics, like spending $10 billion or even more losing that much money, you know, losing more money next year. But it turns out that Meta's made this year $84 billion so far. And it's spent $25 billion on R&D.

it made $5 billion last quarter. So, you know, for all those people hoping that Zuckerberg might pump the brakes, it doesn't look like he has to and doesn't seem like he will anytime soon. No, he doesn't certainly doesn't have to. And you're right. Like the scale of Facebook is so enormous that I think sometimes we forget that. And so he would probably argue that the percentage investment relative to the size of the business is still, you know, modest. I don't know. I wouldn't agree. But, you know, YouTube was bought for $1.6 billion, like, back in 2006.

You know, if we have three years of Metaverse spending, what, you know, we're talking like, what, 30 to 40 billion that Facebook is going to make. If Facebook, like, announced on, you know, if they were allowed by the government to make a $40 billion acquisition, we would think it was nuts. And the stock would have a huge sell-off. So, but, you know, this is a company doing $100 billion a year. in revenue, too. So they see it as a bet the farm kind of thing. That's why they change the name of the company. I think that's what it also scares investors, is that, you know, things must be really worrisome with the core business.

If the management is just like burning the boats, you know, and basically saying, you know, we got to get to this metaverse future come hell or high water, even if it kills the company. Yeah, it's kind of interesting because with Zuckerberg, it doesn't have to be that the core businesses, you know, going down immediately, you could potentially have decades of, you know, good, good advertising returns. But then you look at Zuckerberg, he's just 38. And he has this ability to think in decades and not in quarters. And there's probably, there is definitely truth. Everyone can see it that that core business is just the writing is on the wall for it. But it's

going to be a while. But the fundamentals that it was predicated on, you know, broadcast sharing to friends and, you know, advertising with attribution, those have taken pretty big hits due to the fact that the social behavior change in Apple has come in the way. So if you're sitting in Zuckerberg's chair, you're 38, you know, you have a good business, but you care more about legacy and not becoming Microsoft. And he has good buddies with Bill Gates, who went through this where he built windows, didn't adapt quick enough because they had an asset that they could milk. and then paid the price. I think that, yeah, I think that's right.

But, you know, one counter is I was talking to a former Facebook, kind of long-time exact yesterday, actually. And they were saying the thing about Zuckerberg is he hasn't really, he has a reputation for not sticking with things. So you remember Facebook phone? Right. Remember Facebook was going to kill match and dating, online dating. So they have a history.

of these sort of big announcements and then Zuckerberg himself is obviously the one in charge but he's seen as like very interested in that particular area for a while sitting sitting in on meetings and Zooms or whatever

but then losing interest and kind of moving on to some other things. So this, maybe he's learned from that and maybe this is he's going to say that this is why I've got to double down on this. And I think another argument he would make is like hey, if I'm not going to invest in the Metaverse, like, I certainly know Apple's going to be, you know, and do I want to make kind of the same mistake I made, you know, with Facebook phone,

kind of like end-of-lifing that and sort of seeding the whole market to Apple and Android? Or do, you know, do I really want to go a whole hog now and keep up the investment so that I don't just seed the market to these other bigger players? Totally. And this is kind of, it goes along the lines of what I mentioned when I was on air with you, you know, last week, which is that Facebook starts initiatives, looks at the data, and then adjust basis for that. And that can mean, you know, tripling down on a project or that can mean, you know, ignoring the sun-sunk cost and then abandoning it.

So, you know, maybe that is what we see here. I'll read you what Brad told me just a few moments ago, quote, he may be king, but the best kings care about the well-being of their subjects. They are curious about ways to improve and talk to their stance. stakeholders about ways to make the kingdom even better. So that's from Gersner just a few moments ago, literally. How would you address the issue as to whether Zuckerberg's going to be willing to do anything that Brad suggests?

And they are just that. Suggestions, because as Bryn said, they can't be anything more. The way that the whole thing is structured with the voting power. The way that Brad describes Mark Zuckerberg, I would say, having met the guy, having spoken with his employees for years, is exactly the type of person that Mark Zuckerberg is. Now, I know it might sound crazy to say that Mark Zuckerberg is amenable to listening to stakeholders, users, and employees, but that's exactly the way that the man has made meta what it is today.

And I don't think it would be where it is today if Zuckerberg was not amenable to feedback. It's a value all throughout the company, and I expect that he's going to do the same thing here. Okay, I want to move on to the thing underlying all this, which, well, not all this, but underlying Facebook's business, underlying Alphabet's business. So that's advertising. We're in the middle of what looks like a pretty big advertising slowdown. You know, both these companies, Facebook, you know, did have its revenue contract. Okay, Apple is part of that, but it's also due to this advertising contraction.

So having looked at the reports from Facebook and Google or meta or an alphabet, whatever they want to call themselves these days, what is your view on the state of the ad market? because it's important that, you know, to these tech giants, to a lot of the smaller companies, I imagine, and to the economy overall, are we now seeing like a real drying up in advertising? I think we are. You know, I think that's definitely occurring. I think what really hurt Google in its report was CPG companies cutting back spending on YouTube. So that hurt them. We've seen Snap, obviously for five quarters now experiencing cutbacks.

You know, Facebook, you know, there's no question that when times get tougher, ad budgets, the easier ad budgets can easily be cut. And so I think all these companies are experiencing that and going through that. I think that, and I said to Scott when I was with you on Monday, I still like Google a lot because of the internet search still being kind of more resilient to that because it's serving a need. And so while this quarter was a setback for Google, I think they're going to be kind of one of the best positions going through this downturn because once the cuts are done in YouTube, you know, it's still a great platform delivering a lot of traffic.

So I think they'll be able to kind of move forward from that and people will continue to spend on search. But yeah, there's no question that this is a sea change for all these companies. And I mean, if you look at some of the small, like, you know, we talked about smaller companies like tech companies. Like if you look like, like there are companies like the trade desk or magnite, which is sort of like, you know, sort of like selling digital, they're selling digital ads on connected TVs and stuff, or Roku maybe is another, another example of this, like these smaller tech

companies that are, that are exposed to digital ads, like they've been hurt way more than these bigger players or even, you know, way more compared to somebody like a snap. So, yeah, it's, it's brutal if you're living and dying by digital ads these days exclusively in the business. Yeah, let's talk about SNAP before we had to break. I mean, it's very interesting with SNAP. They are having some of the best user growth in social media right now. Like Twitter for years is, you know, it's just clawed its way to add, you know, five million users a year, quarter, or whatever it is.

Snap added, you know, let's see. And daily active users increased 19% to 363 million. So it's way bigger than Twitter. But it's spending is still out of control losses worth $359. million over 72 million expected and it's really struggling to make money it's it has its slowest revenue growth i think maybe ever uh last last quarter so what's the hope for snap and what's the story there well i i see that they are trying to emphasize how they have such a lock of the younger demographic um and you know some high percentage um you know the folks 18 to 34 use use snap um and they

sort of are implying that they have this global footprint and a walk on this demographic that's just going to continue to age with snap. And so I think that's their argument for why they're relevant and they're going to, you know, become increasingly relevant as that demo ages and, you know, gets more income. Another friend of mine once said to me, like, one of the secrets is that, you know, young demos don't spend money. And so you've got to live like with the, you know, play the game on the field, right? And so while I have like a 13-year-old who's addicted to snap and sending messages to his friends all the time, I mean, he's not looking at ads.

He's not going to go into stories. So how are they going to make money from him? You know, that's been their challenge right now. So, and they've, you know, of course, they always have talked about things like spectacle. and we're a camera company and now they talk about AR. We're an AR company. We don't believe in the Metaverse

and we're going to help you do commerce with AR and stuff. It's just, again, kind of like Facebook with the Metaverse. It's just tough. I remember 20 years ago, Alex, I was at Columbia Business School in the middle of dot com era

and I took a job working for a company that was a software company basically doing like Siri, Alexa type voice recognition apps for all different kinds of companies. And I remember when I joined this company, you know, in like early 2000, they were saying to me like, man, you know, this thing is going to be a rocket ship because they started working on voice recognition 20 years ago, but now's the time that this thing is going to take off. And it, you know, in honesty, you know, it really didn't take, it took another 15 years

after the first 20 for Syria and Alexa to come along and really mass market it. I think with all these things like augmented reality, metaverse and stuff like that, these guys like Evan and Zuckerberg, I'm sure they're right on the vision. It's just, is it going to be another two years or is it going to be another eight or ten years? That's really the question. Eric Jackson is with us. He's the president and portfolio manager of EMJ Capital. We've talked meta. We've talked SNAP, a little bit of alphabet.

but we're going to get into some of the bigger enterprising names like Apple. Well, Apple is consumer, but Amazon, Microsoft will touch on Apple, and we'll come back and kick off with Twitter and whether Elon Musk is going to have anything interesting to do with that company's business. So stick around. We'll be back right after this. Hey, everyone. Let me tell you about The Hustle Daily Show, a podcast filled with business, tech news, and original stories to keep you in the loop on what's trending.

More than 2 million professionals read The Hustle's daily email for its irreverent and informative takes on business and tech news. Now, they have a daily podcast called The Hustle Daily Show, where their team of writers break down the biggest business headlines in 15 minutes or less, and explain why you should care about them. So, search for The Hustle Daily Show and your favorite podcast app, like the one you're using right now. And we're back here on Big Technology Podcast with Eric Jackson, the president and portfolio

manager of EMJ Capital based in Toronto, one of the best voices that you can listen to on tech and business. Eric, I mean, the deal is done with Elon. He's already in Twitter headquarters, you know, making a ruckus. Is there anything he can do to that business? I mean, obviously, it's a private company now, but is there anything that he can do to that business to change the struggles that the company's had for all these times? Or is Twitter just Twitter?

I think he definitely can. He's got a great track record, obviously, with a Tesla and, I. SpaceX in particular, he's got a great reputation for attracting the best of the best, especially on the engineering side with talent. I remember hearing like seven years ago that SpaceX was just like cleaning Blue Origins clock when it came to just attracting like serious space talent to that company relative to Bezos's blue origin. So he has that going for him.

we'll see how many, you know, if he cut 75% of the head count or not. But my guess is he will for a couple of reasons. One, obviously, they have a lot. And they haven't been effective thus far through many different management teams. So he probably sees opportunity to upgrade some of those people. But the second big reason is that with what he paid and the price he paid, a lot of the valuation and a lot of the lending tied to that deal is sort of based off of this the EBITDA that Twitter is able to produce its profitability.

And it has been a billion a year for the last few years. But it's also had, I think it's something like $3.5 billion a year in things like general and administration costs and so forth. So basically all the people that are working there. And so it really wouldn't surprise me if like a year from now, he had reduced headcount by three quarters and added in some of his own people to the technical team and to senior management. And suddenly they're not doing a billion in year in profitability, but two to three. And they have a much, much more of a focus. They address some of these kind of like long time issues that have plagued Twitter.

So overall, I'm optimistic. It's pretty, it's everybody loves to complain now that he's paying too much. Back when he made his offer, everyone was complaining for the first week and a half about that it was like 20 bucks below the all-time high or the 52-week high. That is true. Yeah. Times have changed that fast though. But yeah.

So wait, do you predict that he's going to do well? I do. Yeah. Two or three years out from now. I think he's going to make money for his, his investors. Yeah. I think he's going to still have control of this important digital asset. And I think it will have worked out for him.

But he will have to cut a lot of costs out of that business. Yeah. So, okay, we've done the consumer side. We'll save Apple to the end because they're the exception to the rule. Maybe they're doing some stuff that's helped them survive this at the expense of the others, which we'll get into. you, but just looking at Amazon, Microsoft. I mean, one of the really interesting things is that, you know,

one of the stalwarts of tech cloud computing, which you would imagine and just keep going up at the same rate, we haven't seen, you know, the same results there. We've seen some slowdowns. We've also seen Amazon be unable to contain costs, which I want to ask you about. But let's talk about cloud first. My view on cloud is a business will do well in predictable economics times. If you think your company is likely to grow, you're going to invest in cloud infrastructure,

you're going to buy some extra space, and you can plan, buy, implement, and go from there. We're living in this just incredibly uncertain economy where the Fed one day seems like it's going to keep raising rates forever. And the other day, the big narrative is there's going to be a pivot. And then all of a sudden, you know, we're not going to go into recession or we are. Companies can't plan so they can't spend on cloud and sort of sends the entire thing up in the air. I mean, it's similar with advertising. But I'm curious if you think that's what's behind some of the slowdown that we've seen in cloud for companies like Amazon, which, you know, dropped 19% after hours. Now it's down 15%, you know, on the week.

So, curious what you think. Cloud's obviously, like, you know, been a huge secular force over these last few years in tech. But we are seeing this week, I think that the slow. down in Azure and AWS were kind of the two biggest things that popped out to me out of those reports this week from Microsoft and Amazon. We used to be talking like maybe a year ago about 50 percent, you know, year on year growth for those businesses. And now with like the way that they've cut it down, it's, we're talking about something like, you know, 20, mid-20s annualized kind of growth rate. So that's quite a quite a pause.

So I think, you know, there's not a one-size-fits-all with cloud. There are different, you know, all kinds of projects that are occurring in enterprise. And some are seen as sort of must-haves in, especially as we kind of go through these tougher economic times. So I think, you know, Service Now had an earnings report on Thursday, which was bullish. And they, you know, they pointed to the fact that they were, you know, they saw a lot of growth from their productivity tools and customers sort of feeling like they had to invest in these tools even more in these times to kind of make the most of either existing investments or fact that they've done some layoffs in their areas. But there are projects for the sake of

doing projects, which might end up utilizing space on AWS or Azure. I think what we saw in their results is that companies are able to turn some of those projects off that aren't seen as mission critical. And so that can have an effect even on these kind of behemoths out there. So it's, there's not, you know, you have to look on a case by case basis. I mean, I think, again, as we get in kind of the smaller enterprise names, I think, you know, you're going to see some companies do really well out of these earnings and some that just get decimated. because they're sort of seen as like not, not that important businesses. So I think that, you know, Amazon and Microsoft still are strong companies well positioned

for the future. They've got really, you know, many different aspects of their business. But the cloud business is definitely slowing. if you minus out the effect of AWS on Amazon's profitability over the last five years, it's pretty shocking how little money that they've made over these past five years. And they would say, well, we're setting ourselves up for success, we're making these big investments. Of course, they've had to, in some ways, they overinvested. They took on too much of a footprint for different distribution centers and all this kind of stuff.

So they're trying to kind of tweet themselves to fit the market. But cloud is not just as bulletproof as we probably thought six months ago, even. Which is fascinating. And the thing that saved the Amazon business hilariously is advertising, where they actually had an increase. And it's sort of like, well, they're not subject to iOS. So that helps them. Yeah.

I think, you know, and they've got new management or, you know, Amazon does, obviously. So, you know, they, they, um, I remember the days where people were saying, you know, Tim Cook was no Steve Jobs and, uh, you know, they, they sort of blamed him for any sign that the business wasn't growing as quick as they, as they thought it should be. But, uh, such is very competent. So as Andy. Um, I think they're, they're, they're, you know, they're going to get through this. Um, Amazon's come back a lot on, on the Friday. And, you know, its stock was down something like 20% initially after they first reported earnings, but it's nowhere near that now. So it's still a very strong business that made a bunch of investments that are setting

itself up well for years to come. And they have no kind of global competitor. Andy Jassy, I mean, he comes from the AWS side. Do you think he has the ability to cut costs in a way that a Bezos might? I mean, Bezos brought up in this retail world, right? Ruthless. And, you know, you need to be. You don't have margins the same way that a cloud.

business does. Actually, you know, people are like, well, maybe Wall Street, you know, hit them because of these cloud results, but it actually seems their inability to cut costs, right? They were predicting, you know, multi-billion dollar operating margin in the fourth quarter. Now it's going to be zero, you know, according to their guidance. So is Andy Jesse the right person for the job when it comes to living in an era where you have to cut versus you can spend freely where we were before? I think so because he was, he was an Amazon person before he was an AWS person. So I think that they have a- But he was in AWS for a very long time. Yeah, fair, but that company has a very strong

cost-conscious culture. And you don't get to be sort of one of the kind of early members of the founding team and kind of grew up within that and kind of not have that soaked into your loans, even if you have to go out and build like some nascent business that nobody believed in initially and was seen as a sinkhole for costs for several years by Wall Street. So I think that's still in him. And so I think he, you know, he's much better positioned than if they had brought some, you know, other big, big name who'd never been a part of that culture, had no kind of experience with it as an outsider. to be CEO that those kinds of things are very dangerous and I don't think they would work well at a company where the culture is as strong as Amazon. Yeah, you're right. Those leadership principles

at Amazon, I mean, anyone who's listened who's either working at Amazon or who's hung out with someone working at Amazon, I mean, the leadership principles, you know, they hold to them more closely than religion oftentimes or almost all the time. You know, people in Amazon, Amazon marriages evaluate the marriage based off of the leadership principles. They teach them to their kids And they do apply across the business. But yeah, I do wonder if you, you'll have to figure out a way to do this. Otherwise, it's going to be troubling for Amazon. And then let's just move to Apple.

I mean, they seem to rise above it. You know, they've done a nice job kneecapping Facebook's business. Facebook's been one of their main competitors. You know, is Apple doing this well because of shortcuts or is it doing it this well because it's that good? Well, they're complex. You know, they're such a big business. with so many different moving parts, but they, they do everything extremely well. They have,

they make money everywhere. They, they have a culture of, you know, we're going to, we're going to make a lot of money out of this. And they have such, you know, a positive inertia going for them. They're an object in motion that's going to stay in motion. And so they, as I said at the beginning, I do, you know, they're really the last man standing here of all these big tech names. It was astonishing to me to see that on Friday, the stock was up something like 8% on the good, good earnings that they had. That was basically a, they added a Facebook in market cap from the move off of, off of the earnings. So that really kind of gives you a sense of how big they've grown to be.

So what was interesting to me about their quarter was that there was a report a couple of, like a month ago, I think it was, from the information that there were signs that they were cutting back on 14s, iPhone 14s. And people took that as sort of like a read-through that there was going to be a negative quarter for them. Yeah. It was such an incomplete report because it left out that had a report that the iPhone 14 was struggling, but, sorry, it was cutting back production, but nothing about what was happening in the factories where the pro was being made. And there was lots of demand there. Yeah. And those reports always happen and they always get a lot of attention. And usually they're from like something like the NICA news or something like this, for overseas supplier. They got some word from some factory somewhere that something happened. But Apple is just such a. big organization. They have so many factories all over that it's really impossible to tell what's going on just from one person's random comment about what's happening in one factory. And so, you know, the bottom line is that even though iPhone was, you know, iPhone was a slight miss on the quarter, it was still incredibly strong. The guide for the next quarter was still

incredibly strong, especially compared to the other mega-cap tech names. They saw Apple raising prices on a bunch of their services, which, you know, obviously they're doing that from a position of strength. So I think this, and there was a surprise that the gross margins were stronger than what people expected. And so just like a lot of companies have been hurt by inflation on the cost side, actually Apple benefited from sort of deflation, you know, sort of the other side of this on some key components, especially overseas, that that led to this gross margin surprise, even though they had to deal with a stronger dollar

and all this kind of stuff. So I think the bottom line is people looked at the report and they said, this thing is, this company is still doing incredibly well. They have been, you know, this big loyal installed base of customers. There's still a lot of Android customers switching to Apple to get on the platform.

And that doesn't seem like it's going to change anytime soon. So it's just like full steam ahead for the S&S. Apple. It's interesting that you say they're raising prices on services from a position of strength. I thought it was from a position of weakness. You know, the services revenue is slowing. That was one of the things that came out on the earnings report. And I felt, you know, them having to raise rates on Apple TV Plus and music and Apple One and trying to squeeze Facebook on those extra few dollars from booths that happened in app was their attempt to reaccelerate the services growth where it had slowed down because app store purchases were down. You don't have to go. You don't

with that? Well, I guess we could like one person's, you know, um, raising price. Another one. Yeah. From from, from weakness as is another person's like any time there's a price increase like generally an investor has kind of applaud that. Um, and if they wouldn't do that if they didn't think that they were going to be a net net beneficiary from that over time and that enough people were going to stick around with that price increase. So, so I, I see it as yeah, hey, services wasn't as strong. You're right. But there are things, there are levers here we can pull, you know,

and that's going to change in the future. So it just, you know, it gave comfort that there are things that they can do there to continue to see that grow. And as that grows, and presuming that people decide to pay a higher multiple for that versus the hardware part of the business, it should work out in Apple's favor. you know, Eric, hearing you speak about this stuff, it does seem to me that you're, you know, despite not being in any of these big tech stocks, you're a lot more positive than, you know, maybe the market seems to be at this point. So, um, are you, are you feeling optimistic about these companies and what's your outlook, I think moving forward? Yeah. I mean, I think we're in a place where rates have gone up so much in such a relatively short amount of time. We haven't really experienced that. That I, I do. think that things are going to start to grind to a halt in the general economy. And that is something that the Fed is just not going to be able to ignore. And so therefore, we're probably

closer to, you know, rate cuts, you know, being kind of the, you know, the main focus rather than continued rate increases. I don't know if it's going to be next month or, you know, the first part of 2023 or something like May of 20203, but I definitely think we are, you know, by the second half of next year, everybody's going to be talking about the lousy economy, deflation. We got a cut in order to kind of get things stimulated again. And while that's bad in general for all of us for the economy as citizens, and it will be painful for many as they go through unemployment that surely to rise with that. It, it's, you know, that period is generally the beginnings of kind of a new bull market when it comes to stocks. So we've been, you know, it's been

tough to be bullish with stocks over the last year, especially. But, you know, things are shifting and changing. And as I said before, the tech stocks in particular, they're just always going to be a fascination for a lot of investors because they perceive that corner of the market as having the highest growth potential. As so many names have been really brought down to Earth over these last two years, the winners definitely will see some big stock gains to come. So as a stock picker, that gets me excited. So near the bottom? Yeah. Okay. Well, you heard you here first. Thank you, Eric, for being on the show. Really great to speak with you. Man, there was a lot of action with the big tech companies, and I think we managed to cover almost all of it. So thank you very much. Thanks, Alex. Great chatting with you. Thanks to Eric for being here. Thanks to all of you for listening. Thank you, Nate, for editing the audio. Sorry to anyone who heard some drilling going on in the background. Certainly had some drilling in the area today. My apologies and apologies to Nate for having to figure that stuff out. Thank you to LinkedIn for having me as part of your podcast network. Thanks to all you, the listeners.

Just as I mentioned earlier, we have a special midterms preview coming out over the weekend. So stay tuned for that to my favorite political commentators. We'll be on Marshall, Kossloff, and Soccer, and Jetty from the Relignment. Well, that will do it for us here. Thank you again for being here this week. And we'll see you next time on Big Technology Podcast.