Motley Fool Hidden Gems Investing - Microsoft-Activision Deal Blocked. Now What?

Episode Date: April 26, 2023

How hard will Microsoft and Activision-Blizzard fight to appeal the decision by UK regulators? (00:21) Bill Barker discusses: - Microsoft's strong 3rd-quarter results being overshadowed - The $3 billion breakup fee Microsoft is now likely to have to pay - Chipotle shares hitting a new all-time high after 1st-quarter profits were much higher than Wall Street was expecting (15:48) As businesses look to cut costs, what does that mean for cloud spending? Tim Beyers and Tim White take a closer look at Amazon Web Services. Companies discussed: MSFT, ATVI, SONY, NTDOY, CMG, AMZN, DDOG, ORCL, IBM Host: Chris Hill Guests: Bill Barker, Tim Beyers, Tim White Producer: Ricky Mulvey Learn more about your ad choices. Visit megaphone.fm/adchoices

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Because we have your number. Chris Hill. Microsoft gets bad news and good news, while Chipotle shareholders get great news with a side of guac. Motley Fool Money starts now. I'm Chris Hill, joining me in studio for the first time in a long time. It's Motley Fool Senior Analyst Bill Barker. Good to see you. Good to be back. We're going to start with Microsoft today, because Microsoft is dominating the business news for a couple of reasons. We're going to get to the first one, which is a, I'm going to say, glowing third quarter report. Profits and revenue were higher than expected. Shares of Microsoft up nearly 8% and hitting a new 52-week high.

You and I were talking about this earlier this morning. This is, and Alphabet was the same. one of those conference calls where AI mentioned a lot. In terms of the quarter itself, what stood out to you for Microsoft? Well, Azure up 27% year over year. That's continuing to tick down as quarters go by, up from the 50% range it was thriving on back in 2021. But still, for something as big as this to still be growing 27% year over year is, I think, one of the big keys to the market reaction today. In terms of all of the talk around AI, I know we're in early days, but it seems like there's this general sentiment that Microsoft's doing a better job than Alphabet is.

Is that fair? Is that warranted? Or, as part of this, we just expect more from that realm out of Alphabet, because Google Search has been so good for so long, and Bing has been, well, Bing. Well, you've got people saying that Google has years of lead in AI, and they just haven't productized it. that they've got the top minds and they were on this before others and that they have been slow in bringing it to market, which they have been in comparison, certainly, to Microsoft.

Bard came out with a whimper rather than a bang. They've already sunk so much into this that my suspicion is, and a lot of other people's suspicion is, that they actually are going to be hitting it out of the park at some point, but they wanted to do it right. And that led them to, some people, accusing them of a Kodak moment. Yeah, I've seen that. What is that in reference to? Okay, so that's in reference to Kodak. Well, no, that part I get. But what is the Kodak moment? Was it just Kodak not realizing that, hey, this digital film thing is going to take off, and the processing of film is going to zero? Yes. But even more specific than that, of being in the forefront in digital photography before others were, and holding back on getting

behind it because it was going to cannibalize their existing and very profitable silver halide film business. They could have been the leader, but they chose out of caution toward their ongoing profits to not be. That was the death of the company, ultimately. The other reason Microsoft is in the news today is because the U.K. competition and markets authority is blocking Microsoft's $69 billion acquisition of Activision Blizzard. I'm quoting here from the CMA statement, allowing Microsoft to take such a strong position in the cloud gaming market, just as it begins to grow rapidly, would risk undermining the innovation that is crucial to the development of these opportunities. You had Sony and Nintendo among those who were

lining up, urging the CMA to block this deal. The reaction from investors was to essentially reward Microsoft. Congratulations, you're not going to have to spend $69 billion so the stock is up a little bit more as a result of that. Shares of Activision blizzard down 11% this morning. Where do you want to begin with this? Because I'm sort of tempted to begin with the immediate aftermath of both Microsoft and Activision Blizzard saying, we're going to fight this. And I'm wondering, how hard are you going to fight this? It doesn't matter how hard they're going to fight this. They're not going to come out on top. The history of the railing body in the UK is to not change anything on appeal here. So, they know that. They have to posture,

and in terms of the breakup fee that Activision is going to get, they have to play out the string on this one. But, I mean, Sony is up today because, look, there was some negative effect that this likely would have had on the Sonys and Nintendos of the world, which is why they were fighting it. And their argument won the day. And the market today is, you know, rewarding Sony for no other reason than the outcome of this case. In terms of the stock, do you think the, let's just call it punishment of Activision Blizzard shares is a bit much? I mean, if this is truly going the way of, you're not going to win on appeal. And because of that, sometime in mid-July, Microsoft is going to cut you a check for $3 billion, which goes straight to their

balance sheet. I'm wondering how much of an opportunity exists for Activision Blizzard, because it's not like this is a business that is flailing about. Yes, they wanted to be acquired by Microsoft. But on its own, particularly with an additional $3 billion, it seems like a good business. It is a good business. I don't know what the price of Activision was when Microsoft first made the offer to buy for $69 billion. Market's got Activision is worth $60, $61 billion, absent that purchase. And also, likely, the reality that nobody else is going to be able to buy Activision in such a deal, because then they would be in the same crosshairs of the regulations. So, part of what Activision doesn't have today that it had yesterday was

the possibility of being bought by Microsoft, or if not Microsoft, somebody else, and all that's taken off the table. So, that's a buyout premium that's gone. Activision's lineup of games is going to continue to thrive and going to continue to be at the center of cloud gaming. But the stock's worth about the same as it was five years ago. If you're Microsoft, obviously, you wanted the deal to go through. You say you're going to appeal this, but you're probably smart enough to realize that's not going to happen. Where do you think they go from here? Clearly, they were willing to spend upwards of $70 billion for Activision Blizzard. Do you think making an acquisition in gaming

is worth pursuing immediately, or do you let the dust settle from this one? I don't know. Microsoft's got like 20 other things going on that are as big or bigger than the Xbox stuff. So, I think they'll allocate capital accordingly and not throw it at the next thing that is Activision, but a little bit smaller, so maybe we can get away with that. Xbox is going to thrive by being on the same side of the equation that it's been on up to now, and that's profitable. They'll be a partner of Activision rather than an owner. Chipotle's first quarter profits were much higher than expected. Revenue, slightly higher as well. Same-store sales growth for Chipotle was nearly 11%.

percent. And the stock is up 14 percent this morning and hitting a new all-time high today. Brian Nickel and his team have been among the best, if not the very best, at raising prices over the past 18 months. And I think when you look at the stock, there's the proof. Yeah. So, that 11 percent is 7 percent on the size of the check, which is basically inflation, the degree to which they raise prices and pass that along, and 4% traffic. So, that's good. They're not completely reliant on future top-line growth through inflation continuing. They've proven that they can take price, as they say in the business, rather than raise price, which is the English that everybody else uses. I don't know,

Does take price sound like it's less? No, I prefer raise price. Yeah, I'm just adopting their language for the moment. So, they've got more people coming in. The task now, since they have put out that they hope not to be raising prices, again, not promising, because they see some inflation potential in the second half of the year, particularly with avocados. We'll get to that in a second, maybe. And they've got more people coming in. And that is the focus right now, is to continue that part of the equation. It's one of the reasons I like Brian Niccol as the CEO. He's a clear communicator. He's been very clear about how they've been raising prices over the past year and a half.

And as you said, indicated, they're going to hit the pause button on that. Which, to bring it back to the same-store sales, if they're actually going to do that, even if it's just for a few months, then they really need to figure out ways to boost traffic. If they're not going to be relying on higher prices to boost that average ticket, then they're going to have to do a better job than 4% increases in traffic over the next three to six months, aren't they? Going in there lately? Been eating at Chipotle? No, I haven't. Why not? You're not part of this equation. I'm not part of this equation. You used to like Chipotle. I still like Chipotle. I just haven't been there in a while. Why do you think

that is? Other options. Yeah. So, one of the things that's getting people in, and apparently it's not working with you now we've discovered that, is the sort of limited time only things that they put on the menu, which you may want to go and try. Oh, this is the chicken al pastor? Yeah. It's been a big hit. A big hit, something like the most successful... It's a limited-time-only thing. Get over there. So, it's like the McRib, but... But classier. But classier. All right, let's just move on. When you look at this stock, it's at an all-time high. This is a stock that has never really been cheap on a valuation basis. But I am

wondering if, in fact, this is one of those times where it's like, no, really, the stock's at an all-time high. Couple that with the comments from Nickel. He's not pointing to any sort of weakness. They're continuing to invest in their locations. They're going to open another somewhere in the neighborhood of 230 locations. At least, that's their goal for this year. They are pricing in those investments, which makes me wonder, how optimistic should people be about, call it, the next 12 months for the stock? I don't know. Who knows what the price of a stock is going to be in 12 months? Shouldn't you know? No. No, you should admit that you won't

know that. But the health of the business, short-term, intermediate-term, and long-term all looks good. OK, so maybe there's a recession somewhere on the horizon. Certainly, that's speculated about all the time. Hasn't arrived yet. If it shows up and a few more people are out of work, then a few more people are going to be saving money by not going to Chipotle as often, and that could interrupt the extremely impressive growth trajectory that they're enjoying at the moment. But I think the target is 7,000 total restaurants is the longer-term goal. That's going to take, I don't know, five to eight years, something like that. Everything is smooth sailing at the moment. What was the thing about avocados?

Is their input cost for avocados coming down, and that's helping to boost their margins? It has come down over the explosives, avocados, eggs, a couple of the things that were capturing headlines for the inflation in those categories. That has improved their margins a bit. But on the conference call, they indicated that that might reverse itself in the second half. You don't really know. So, now may be the time to hoard avocados if you're out there. So, no one should expect Chipotle to lower the cost of guacamole? No, no, no. It's never coming down from here. That's not happening. What are you talking about?

We'll see if there actually is a recession, if they actually need to start. They've done a great job with their app. And as you said, they did a great job with this limited edition item. So, it's not going to stun me if a set of circumstances leads to Chipotle is offering deals on guacamole. Untaking price, you're thinking. Because we don't want to say lowering prices? No, they might give you a little less guacamole. Shrinkflation. Shrinkflation. Or they might give you a little more, Like if they're trying to move guacamole, as the price of the avocados comes down, they might give you a little bit extra. That might be about as much as the untaking of price

would go, though. You're still going to be paying the extra for it at the level you are now. That might get me in the door. They need you. They don't need me. Their stock's hitting an all-time high, and I haven't been there in I don't know how long. Look at how much you could eat. Well, yeah. Bill Barker. Bill Barker. Thank you. Good to have you back. Good to be here.

Businesses are digging through their sofa cushions looking for savings, and that's a problem for cloud spending. Tim Beyers and Tim White take a closer look at Amazon Web Services. Welcome to This Week in Tech on Motley Fool Money. I'm Tim Beyers. He's Tim White. Tim, let's talk about cloud spending. Let's talk about Amazon Web Services, because we had the shareholder letter from Amazon, and in it, they talked about over $80 billion in AWS run rate spend, boy, is that a lot. I mean, this is one of Amazon's biggest businesses. It's one of its most profitable businesses. What do you think this means for Amazon that they are so dependent on AWS? I think that the fact that Andy Jassy, the current CEO, came from that business means

that he's fully well aware of how profitable that business is and is trying to bring a similar, maybe not exactly the same, but similar level of profitability to the rest of Amazon businesses. And that means a lot of cuts, a lot of cost cutting, I think. I fully agree. And they've signaled that, right? But they also signaled that there might be some softness, some weakness as we move forward with the AWS business into the second half of the year. And that feels like something we're seeing a lot more of. I think most businesses, especially tech businesses, are pretty hesitant to commit to the end of this year. As far as being big, a lot of businesses are delaying spending,

holding back on things. And every business is starting to go through the couch cushions and looking for spending cuts, which is part of the normal cycle of how these things go. We have these boom and bust cycles where growth is the most important thing, and then suddenly cost-cutting is the most important thing. But I think a lot of businesses are suddenly realizing that they have a bunch of Amazon Web Services spend that's going out the door that they don't need to be spending. Do you think this is, I mean, I know this is a little bit of a hand grenade question here, but is this one of the inherent weaknesses of the cloud model, particularly at the infrastructure level? I mean, are we starting to discover, in other words, that basic cloud services like AWS

are a commodity product and let the price wars kick on? I hope that's true, because I think it benefits everybody. Benefits us as a company. Yeah, if prices come down across cloud infrastructure, I think that helps a lot of companies other than the major cloud providers. But at the same time, I think that every one of them, Azure, AWS, and Google Cloud, and even Oracle Cloud, are working hard at building products that are unique to them and add unique value. And they are trying to help their customers spend wisely. But I think it's a little bit of a Janus kind of thing, where they've got one face that says, yeah, we'll help you control your cloud spend. On the other hand, they're like, oh, by the way, we've been charging you for this

thing you haven't been using for two years, and it costs $2 million. Right, right, right. And there are companies who actually have introduced tools. This is one that a favorite company of mine, Datadog, introduced about 18 months ago. The observability said, let us help you observe your cloud spend so you can control it. I don't think that's a surprise to them that that's one of the more popular products that Datadog offers. Right. In terms of Amazon, I think that No one's going to stop their cloud migrations, but I think companies are going to start looking really hard at exactly what workloads are best in the cloud, which ones might be better elsewhere. We talked about IBM's results showing there's still growth in the mainframe business,

so I think some workloads are still on the mainframe and probably aren't going anywhere anytime soon. I think that none of that's changing, but I do think that, especially for the rest of this year, there is going to be a slowdown and a pullback on that spending. I think it's probably healthy for companies to try to get a hold of their spending. So what do you do if you're Andy Jassy then? I mean, one of the things we talked about is where can you get differentiation in a product suite that, for the most part, is becoming a bit more commoditized, like as goes AWS, also goes Google Cloud, also goes Azure, like pick your poison.

How does AWS get a little more differentiation here? If I was able to just suddenly take over as Andy Jassy for one day, I would focus on one thing in particular, and that is, as we've often said in the discussions you and I have had, developer experience. The better your documentation can be, the more tutorials, the more questions and answers, the more support that's available to folks using your products, the more stickiness there will be. So as soon as someone else goes and tries to use Oracle Cloud and is immediately stuck

and they can find no help on the internet for what their problem is, they might be excited to go back to AWS if your documentation is better, which I would offer today, it probably is not. I would say the same, Tim. I would also say that one of the things that you and I have talked about, which is one of the real misunderstood advantages of tech infrastructure companies in particular, is once a developer sets up a habit, sets up a routine, and they have workflows that actually genuinely work, and it's all set up, and it's well-documented, those developers,

no matter how good the other tool is, they're going to resist switching until it's really painful not to. I think that's true. On the other hand, I have seen it happen in huge waves, where as soon as something is compellingly better, even if they're used to something else, there will be a giant migration running over to there, like people getting off of Angular 1, which was a JavaScript framework. It was a miracle at the time when it came out, but as soon as other frameworks came out, people were running away from it as soon as they possibly could, just because the alternatives were compelling. Right. There are these tipping points. So, do you think there is room then for these companies,

many of whom we've talked about on This Week in Tech, that are cloud-independent? Is it a better time for them because they are cloud-independent? Or do we expect that Amazon is going to do its best to lock customers in and will succeed at that? Well, as you and I have often said, history doesn't exactly repute itself, but it certainly echoes. And so, if we look at the early 2000s with what was happening with IBM and Oracle and Microsoft, they were clutching as hard as they could to hold on to people and to prevent people from going to open source solutions. And so, I suspect that's probably what's going to happen here. I had a prediction several years ago that the next wave of open source revolution was coming.

I think that that probably will happen in terms of cloud infrastructure. It's lovely to have something that works really well that's closed source. It's much better to have something that works well that is open source. And so I think as those alternatives become more viable, you'll see people start to use them. I mean, I think we're starting to see a lot of growth in particularly companies in the platform tier. So I already mentioned Datadog, a company whose products exist across different clouds. there does seem to be a real allure to having at least a collection of some tools that can live anywhere your infrastructure resides. Speaking of history echoing here, Tim,

I mean, we've seen that before as well. We've seen best-of-breed tools have their moment, and then other times, whole platforms have their moment. This does feel like we're in a whole platform moment for the moment. Sorry. But I wonder if Best of Breed is going to have its moment here in the next couple of years. What do you think? Well, I do think that it is awfully nerve-wracking to have the same company that's billing you for something also be in charge of helping you understand where you are spending money. It is nice to have an independent auditor. And so I think that that will be true regardless of how all this plays out. I remember working with a product called HP OpenView, which was a tool that you see across your whole network and what was happening.

And one of the things that that tool did was help you control spending on Sun OS licenses, right? For servers that were having low utilization that you were paying a big yearly license fee for. So, I do think that that is always going to be a thing where controlling costs across vendors and also auditing a vendor that may or may not be giving you the full store is always going to be an important product. Yeah. IBM did something similar with Tivoli, right? I think that was very, very similar. Yeah. I mean, so, everything old is new again. Let's end on this. Let's park on this. if AWS finds itself in a price war, are they the company best positioned to vacuum up the Lions

portion of market share here, seeing as they're already the market leader? Or is this disruptive to them? I think they're the best positioned to be able to not care about price. That said, the other players are also well-positioned to not care about price. I mean, Microsoft and Google have deep pockets. So, I really think that it could be anyone. At the same time, I also think that they are eyeing each other closely and realizing that nobody really wants to get into a price war here. Right. It does feel a little bit like airlines. Airlines back in the 80s and 90s, Like everybody was afraid of the airline that was going to start a price war. But once you started, it was really hard to get out of it.

So I, I agree with that. All right. Well, for, uh, for Tim White, I'm Tim Byers. That is this week in tech on Motley Fool money. We will see you again next time. Remember the show is on Motley Fool live on Fridays from noon to one Eastern time. We'll see you soon and Fool on. As always, people on the program may have interests in the stocks they talk about, and

The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.