Motley Fool Money - The Best Company in Big Tech?

Episode Date: May 1, 2025

Microsoft just got the market focused on business results again. (00:21) Nick Sciple and Dylan Lewis discuss: - Microsoft posting double digit growth across five segments and continuing to put cap ex to work on AI and the cloud. - Meta’s advertising present and AI future. - Why Microsoft is leading big tech and has the best near-term outlook for the Mag 7 stocks. (17:33) Yasser el-Shimy and Mary Long continue their conversation about Warner Brothers Discovery and shine a spotlight on David Zaslav – the man tasked with leading the media conglomerate into the future. Companies discussed: MSFT, META, AAPL, AMZN, WBD Host: Dylan Lewis Guests: Tim Beyers, Mary Long, Ryan Henderson Producer: Mary Long Engineers: Dan Boyd, Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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The cloud spend ain't slowing down. Mottletful money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Muttlypool analyst Nick Cyple. Nick, thanks for joining me today. Great to be back here with you, Dylan. We have been living largely in a market dominated by macro vibes, and Microsoft and Meta reminding Wall Street that earnings power exists with their reports this week. That's right. We're seeing why big tech are the big dogs on the stock market and seemingly immune to all the macroeconomic and kind of consumer demand concerns that we've been hearing about in the headlines all year long, and you see that in the performance of the shares this morning and pulling the rest of the stock market along with them.

Yeah, Microsoft posting up some pretty strong results. Revenue up about 13%, net income up even more than that. And the market cheering that shares up almost 10% after the report. What did you see in the results? Yeah, so, I mean, analysts really drilling in on cloud results and really strong, output for Microsoft in that respect. Cloud revenue up 20%. If you drill within that, Azure revenue up 33%. 16 points of that growth associated with AI, but management called out. They're really stronger than expected performance from Azure. It came from non-AI services, things like accelerated cloud migrations, which are still going on. I know AI is catching everything, but the cloud

is still a thing. Microsoft, really everywhere you look, Xbox, even at the box office this year, I've had some success. Minecraft is the number one most successful movie. so far here in 2025. If you had to look for one negative, it is cloud margins, which are under pressure because of that continued AI spend. But really, this is a big tech giant that continues to be a steamroller that keeps on rolling. And they continue to spend, right? That KAPX number not coming down anytime soon, even with the macro picture, being what it is, Microsoft's leadership team, saying, hey, plans for the second half the year remain what we outlined in January. We are not slowing down the spend, we continue to see the opportunity there. And I know that's something a lot of people

were kind of waiting with baited breath for wondering, is AI spend going to slow down? Is the macro picture going to interfere with these plans? It doesn't seem like that's the case. That's right. You saw lots of headlines leading up to this report, questioning AI spend, what is the return on investment, suggesting that big tech may be pulling back, but if you'll listen to commentary from Microsoft's management, demand continues to outstrip supply. They said, Demand for AI services are growing faster. They can bring data center capacity online, and the company expects to have AI capacity constraints beginning in June of this year. And that's despite spending more than $16 billion on CapEx in this quarter and plans to spend as much as $80 billion

this year. Demand continues to outstrip supply. And certainly, management thinks they're getting good return on investment. One of the things I was really struck by getting outside of the cloud and just looking at the overall business was there are five different segments for Microsoft. that are posting double-digit revenue growth. They are seeing acceleration in some categories like Microsoft 365. They're seeing a little bit of a pickup when it comes to search and news advertising. This is a big business. Some of these are smaller segments, but I dare say that this might be a firing on all cylinders quarter, Nick? Yeah, hard to see anywhere where there's really, you know, disappointment. I mean, you could say,

you know, some, a little bit of deceleration in commercial cloud revenue. But when you're going from mid-teens growth to low double-digit growth, that's still pretty good. And if you look at guidance, still expecting to have strong growth in the quarter to come. Guidance for Azure is expected at 34 to 35% growth in constant currency. That's right in line with that 35% constant currency growth. They put up this quarter operating margin still expected to increase. And management also called out that if you think about a business that's transitioning, Microsoft being one of these businesses transitioning to AI, AI business margins reportedly better

now than when Microsoft was at a similar stage from that on-premise to cloud shift. So really, a business that's showing success across all metrics and guidance calls for more of that to come. Staying with the big tech names, Market also very happy to see numbers out from meta. I think shares are up about 5% or 6% after they reported. And it seems like a similar story to what we saw from Google Parent Alphabet last week, at least for the time being, ad spend looking backwards, remains strong. the results that we're posting look good. They're noting there's the possibility of some softness

in the outlook, though. Yeah, if you look at Meadows' results, revenue up 16% ahead of estimates from analysts, net income up 35%. And really, the big standout if you drive below the top line is engagement and advertising efficiency, and a lot of that is driven by their investments in AI. Meta continues to be the dominant social media platform worldwide, and you see that on how many folks are active on the platform. Family daily active people reach $3.43 billion for the reported quarter. That's like 60% of the world's total internet population. And again, continuing to grow. That's 6% more daily active people year over year. Ad impressions up 5% year over year. Average price for ad increased 10% year over year. That's the fourth consecutive quarter of

double-digit growth when it comes to price per ad. And a lot of that is being driven by AI. AI recommendations drove time spent gains on Facebook up 7%, Instagram up 6%, and threads up 30%. You're also seeing more advertisers use AI tools to put more inventory on the platform. You have 30% more advertisers use AI creative tools in the first quarter and improved ads, recommendations, models for reals. It's increasing conversion rates on that platform. And they continue to say that conversion is outpacing impressions. And if you look long term, Mark Zuckerberg said their long term goal is to basically make it

where any business can give us the objective they're trying to achieve, like selling something, or reaching a new customer, and they can just do the rest. AI can just do the rest for you that he thinks if they can deliver on that vision. And over the coming years, that increased productivity from AI is going to make advertising an even larger share of global GDP than it is today. And so I think, you know, if you look at these meta results, it's a platform that was already dominant in advertising, and I think these AI investments are making them that much stronger today, and they're going to be even stronger in the years to come.

I do want to hit some of the AI stuff because we have some other new stuff there, But just sticking with the ad business for a second, we are seeing the way that tariffs, reduce consumer demand, can start to flow through to all of the other businesses that are reliant on it. Generally, we think of meta as this incredibly strong, big business. It is going to be subject to whether consumers are buying stuff and whether advertisers see that consumers are buying stuff and are advertising to them. So, you know, no surprise.

We saw a little bit of a falloff with political spend. Management mentioned that on the call. but they did note, we're also probably going to see a little bit of weakness from some Chinese retailers if the tariff situation holds up. That's right. And that was some big worries that folks had called out leading into the earnings report. Folks like Shien and Timo had been big spenders on Meta and other online platforms. And with these large reciprocal tariffs put in place in April, the cost of those products on those platforms, you know, likely to go up significantly. And Meta did say that that is

impacted their business in the current quarter. That said, if you look at revenue guidance for the quarter ahead, in line with expectations, and that suggests that efficiency gains elsewhere, their ability to increase productivity of advertising for their other advertisers are more than making up for that lost revenue. And that was a good sign to see part of why the stock is up. So, Mark Zuckerberg was quick to note, you know, improved advertising, definitely one of the major opportunities that they see when it comes to artificial intelligence. But there are other ones. He's got five that he sees in particular. Advertising won. More engaging experiences and other business messaging, meta-a-I, and AI devices. Any of those that you

want to zoom in on, Nick? Well, I mean, certainly Zuckerberg has placed his chips on AI devices. He felt he got burned in the past by Apple controlling the ecosystem on the iPhone and wants to make significant investments there and really own this new platform. He has said on the last earnings call that this is the year where we're going to prove whether AI glasses can be successful or not, they did call out meta-rayband glasses. Sales have tripled year over a year. They fully rolled out live translation on the meta-ray-band glasses in all markets. So that's, again, adding functionality to the platform. We'll talk in a second about the new meta-AI app, but that's directly integrated with these glasses. So I think you can kind of see where the company is beginning to go immediately

today. The impact of AI is making the core advertising platform stronger. But in the future, you can see where the company is trying to evolve. And I think that's worth paying attention to. I think I'm a near-term skeptic on the Rayban glasses. I think I am more easily convinced that the meta-AI ambitions might turn into something for the business. This is their new standalone AI-assistant app, something that they are launching in addition to giving us this earnings report this week. And it is another hat in the ring for people who are already using Gemini, already using OpenAI. Some of the other chatbot tools. What do you think we'll see from meta here?

You know, it is going to be interesting because they called out on the earnings call that MetaI already has over a billion monthly active users. If you include the users on Messenger, Instagram, Facebook, WhatsApp, where it's really directly built in to the chat tool. You know, if you glance at those numbers, one billion monthly active users kind of puts it in the same ballpark with chat GPT where the public numbers say they've got 400 million weekly active users, you know, probably similar. That said, different use case of this kind of meta-AI app, certainly integrated into these other platforms than what you had seen from chat-GPT. With the standalone app, we'll get a little bit more apples-to-apples comparison on how people use the meta-AI app compared to others.

But I don't think, as I said earlier, with AI glasses, I don't think the text-based chat bot is what Zuckerberg sees as the end state for AI. I think he sees it as where we are today, but where things are headed towards, and he's emphasized this a lot, is voice-based. chat, integrating with some of these other devices that they're working on selling. So I don't think this is the end of the road for where Meta is headed in AI. I think it's kind of interesting to have them in there because as a standalone app, it will force them to think a little bit about the business model and the economic realities of AI chatbots. And we have seen companies like OpenAI say, we are doing the subscription model.

There's a free version, and then there's a premium subscription. Alphabet historically has been a business that has been ads-based. Their Gemini app is also a subscription model. Meta needs no introduction. It is an ad-based business that is stepping into a spot where, for the most part, consumers expect subscription models. I have to imagine that that's where they would lean, but there also may be some more creativity here now that we have someone

who has not been reliant on the subscription model for where most of their revenues come from. Yeah, I mean, maybe you see the next generation of sponsored content. where you're searching for a thing online and we can make a perfect, you know, piece of, piece of ad copy to kind of nudge you towards purchasing things. You could see how maybe ads can be integrated into that platform, you know, over time as folks use these things in a more robust way for shopping and less with, you know, less about just generalized chat purposes. But listen, I think meta is positioning themselves to be among the leaders in AI. What's interesting is they also called out that their capacity constrained when it comes to

data centers, but they're not running a commercial AI platform, where they're going to selling services to other folks like a white label chat GPT or anything like that. Meta is using incredible amounts of AI resources just for its core business. And I think long-term, they are positioned to be a leader, even though today they're not the one that's front and center, what you think about when you think about AI. One of the things I've always appreciated about Mark Zuckerberg is he's able to communicate the vision very well. You might know, agree with the vision in the case of some of the metaverse ambitions. But when it came to monetizing the portfolio of apps they had originally, there's a clear process to the way that they do that.

Similar thing here with artificial intelligence and with what the company's ambitions are. We have five opportunities from them. Where would you put AI kind of existentially for meta in how important it is for the long-term thesis? I think it's super important for meta. I mean, for the core, If you just put aside the reality labs business, the AI glasses, AI directly drives the growth of the core ads business to the extent that AI can let them lower the barrier to entry for creating ads and make those ads more efficacious and more targeted. It'll make meta's core advertising business, which is already the best in the world, that much stronger and grow the core business. But then if you look outside of that to the reality labs business, again, you can kind of see where this is headed. in addition to offering the chatbot. This is also the app where you upload your AI glasses and start to communicate with those things.

Also, Zuckerberg has repeatedly said their AI models are voice optimized, so you put those two things together. It looks to me like Zuckerberg wants to make meta-a-i, meta-glasses, kind of like Iron Man's Jarvis, right? Or what Apple always promised Siri could be, but never actually delivered. If he can deliver that in a compelling form factor, I think that can make AI, meta-AI, the place they're people go first, right? If it's integrated in a super useful way and help those meta-AI glasses become the next computing platform, Zuckerberg has said, this is the year where AI glasses go mainstream. It's really make it or break it for the company this year. So expect more acquisitions, or more, excuse me, more announcements from the company. He also said on the call that they have

some new launches coming this year with Esselaura Luxottica. That's the parent company of RayBand. So the existing form factor for meta-AI glasses that we know today may not be. be the state of the art of the technology here at the end of the year. So I think for their existing business, can drive efficiency, make the company that much stronger. And then long term, for where Zuckerberg thinks the company is headed. I mean, he's wearing these glasses on every interview he goes on now. You can kind of see where things are playing out there as well.

We still have a couple big tech companies that are yet to report. We'll hear from Apple and Amazon later this week. But looking at Microsoft, share spiked about 10% following earnings, as I said before. They are now the best performer in the Mag 7. far in 2025. They're also the only company in the Mag 7 year-to-date that is currently in the green. And don't look now, but they don't have the antitrust issues that Alphabet has. They don't have the FTC looking at them the way that Meta does at the moment. They do not seem as subject to consumer spending and advertising as Amazon, Meta, and Apple. Is Microsoft

the big tech company that has the best outlook right now? I think in the near term here in 2025, I think that's absolutely true. And the long-term, Maybe you could raise some other questions. But as an enterprise software company, Microsoft is arguably the most insulated from tariff and economic uncertainty because its products are mission critical, and customers aren't likely to drop them under any economic circumstance. In fact, the company called out that they help their customers become more efficient during economic downturn.

So maybe there's even more demand for these types of software products that can make your company more efficient. Long term, if you had to kind of point to a question around Microsoft, it's their positioning in AI, right? They're partnered with Open AI, which is great. Open AI is currently the leader with their chat GPT model, but they've gone over the past year plus from, from close friends to looking more and more like frenemies. Microsoft reportedly has begun developing its own internal models and is testing some of those of competitors like XAI and other AI companies out there. Meanwhile, Open AI has begun signing Data Center deals with SoftBank and Oracle and starting to distance itself from Microsoft. If you look at the earlier views on, on Microsoft's co-pilot offering has been criticized, as expensive, and not that useful. And I think if you contrast that with the kind of positioning that I lined up for meta, where they're not quite as hyped today, I do think the path that they're on, I think, is a lot more clear, whereas Microsoft is in this frenemy relationship with Open AI

and may have to go their own, you know, when it comes to their AI aspirations over the long term. But as we said here today, Microsoft is the business that no matter what happens with tariffs, I think they're just going to keep on tick. Yeah, I feel like Microsoft. soft and AI or like that couple that gets together in the first season of a sitcom where you're like, this is either going to go really well and they're going to have the whole run of the series or they're going to be broken up by about season two or season three and we're going to start seeing them with other people. That's right. That's right. So I mean, I just, you know, for Satya and

I hope, I hope Sam Altman doesn't break his heart. We'll just have to see. Yeah, Nick Seifle, thanks for joining me today. Thanks, Dylan. Great to see you. If you're early in your career and looking for insight, inspiration, and honest advice, listen to the capital ideas. podcast. Hear from Capital Group professionals about leaning into the differences that make you unique, making decisions that last, and what it means to lead with purpose. The Capital Ideas Podcast from Capital Group, available wherever you listen, published by Capital Client Group, Inc. Coming up on the show, analyst Yasser Elshimi and Mary Long continue their conversation about Warner

Brothers Discovery and shine a spotlight on David Zazlov, the man tasked with leading the media conglomerate into the future. I want to turn to the man in charge, David Zazlov. So what spurred this conversation, Yasser, was that Michael Wolf recently wrote up a 15-page profile of Zazlov in New York magazine. The word Mughal is used a lot to describe Zaz, or maybe more so to describe what he wants to be and who he wants to be perceived as. I'll leave it there for the time being. Just to kick us off with this part, what impressions did you have as you worked through this article? Well, Mughal is definitely Zaslav's aspirational self.

He's a controversial personality in Hollywood, no doubt about it. He's perceived by many artists as kind of a slash and burn executive, who's there to kind of only focus on the bottom line, cut projects when they don't fit his view on how to maximize profits and cash flow. And most famously, I believe there was this projects of the bad girl movie that never saw the light of day because he decided to. effectively take a tax right off on it by just tanking it after it had been shot and edited and everything. It was ready for release. So that has not endeared him to a lot of people in Hollywood and a lot of, you know, the also artistic, journalistic community in and around Hollywood that cares about film and cares about entertainment industry from kind of an artistic perspective. Having said that, I mean, David Zazlov was a very successful CEO of Discovery,

and he had turned Discovery into one of the most profitable businesses in the entertainment industry when he was at the helm. He has tried to effectively bring that same kind of logic into Warner Bros. Discovery, where they are focusing a lot more on efficiency. He is not shy from going with kind of. of, let's say, non-mainstream productions, right? So all you have to see is like open your Macs app, and you'll find all kinds of TV shows that are highly artistic, that are, you know, the White Lotus succession,

you know, among others come to mind as kind of prime examples of that line of thinking. But also, he is not afraid to yank a project when he sees it as not having promise of being successful. And he's also not shy away from licensing HBO content or other Warner Brothers content to other distributors and other platforms. Ted Lassau, for example, a head show on Apple TV. That is a Warner Brothers production.

And he effectively did it for another platform. So he doesn't shy away from that. He also doesn't shy away from licensing older content into other platforms like Netflix, where you can watch six feet under right now and so on. So he does care about the bottom line. that doesn't necessarily make him, you know, the grim reaper for all artists in Hollywood, but he's definitely viewed with a lot of controversy. One of the most fascinating and comical anecdotes from this profile of Zazlov,

it opens telling this story about a recurring Zoom meeting that happens at like 10 a.m. every Friday among a handful of 80-something-year-old, one-time media industry bigwigs that are now perhaps they're not at the top of the hill of the industry as they once were. And so it's interesting. This recurring conversation is all about the future of media, but it's from people who no longer really have the same poll in that media industry as they once did. And Zazlov at 72 is the youngest person on this call. And it's one of the things that this article keeps hitting is that Zavlov seems to believe that it is his calling to save the media industry and to bring it into the future. He is, quote, a man charged with leading the media business into the future navigating the business out of its cultural, generational, and technological obsolescence.

With all that said, what is Zazlov's vision for the future of media? What does he see it as being and why does he believe that he's the man for the job? I think he loves the industry. There's no way around that that comes through in all of his interviews and all the work that he has done. There was, you know, no need for him to take on the massive challenge that is merging with Borner Brothers. Had he actually not been really drawn into film and to TV and kind of wanting to. to wait further into that world. And you can even see from the New York magazine piece that, you know,

they're talking about how he bought, you know, an old Hollywood mansion that used to belong to the producer of Chinatown, a classic movie. And, you know, Zazlov tried to play down saying that he just appreciated the architectural style of the home. But, you know, I think all the whispers are that David Zazlov is a bit of a romantic when it comes to the film industry. And so his vision for the future of media, I think he definitely, while he has that romantic side to him, I think he is, he also is trying to salvage that film industry from

going into obsolescence, as the article said, by, you know, he has to take on the likes of, you know, Alphabet and Amazon and Apple. It's no longer just competing with Fox and other studios, Universal and others. He now has to compete with the tech titans of the world. And to do that, he has to make his studio as efficient as possible to create content that will be popular, either financially or through kind of a cult-like following. And I mentioned all the artistic shows on HBO as an example. But he definitely sees franchising as a huge part of that vision, that he wants to recreate the magic that maybe Disney once had with the. Marvel's universe. And maybe he can do that with the DC Comics universe. That's, you know,

something that's been really focusing on with, you know, movies obviously like the Joker, TV shows like the Penguin, but also newer iterations of Superman and Batman and so on. He's also going for a Harry Potter, a new Harry Potter series coming in next year. So he really thinks that franchising is going to be the future. And definitely when you can find a hit, He's just doubled down. So another gripe that folks might have with David Zazlov is that, while he has certainly made a lot of money during his tenure as CEO of Warner Brothers Discovery, the stock has not performed terribly well, and that's perhaps an understatement.

So post-merger, Warner Brothers Discovery started trading at $25 a share, valuing the company at $60 billion. Now it's closer to $9 a share. So with a market cap, that's about a third of its IPO value. We talked about Zazlov, growing Mac. paying off debt, all of this. In spite of the stock's underperformance, Zazlov himself has brought home in 2024, his pay package was worth $51.9 million. It was up 4% from what it was the year before. Interestingly, his pay package is tied to the generation of free cash flow rather

than to the stock price. So theoretically, that encourages him to do what he's been doing, to pay down that hefty debt load. But it also encourages these production cuts that we've talked about that get a lot of pushback from the people that are actually making the films in the studio. Right. All that said, what do you make of this incentive structure and Zazlov's pay package as it exists now? If you were tasked with building a pay package for Warner Brothers Discovery executives, but also for Warner Brothers Discovery shareholders, what would you tie the metrics of success for those executives to?

Okay. So let me start with saying maybe somewhat if a minority position. here, which is to say that I actually think that the pay package makes some sense for now, at least the incentive behind the pay package. I'm not going to comment on the exact numbers of how much he's paid. But in terms of the incentive structure that's in place, to generate cash flow being the barometer of rewarding his success or his tenure, I think makes sense. And the reason, of course, being that the company just was born with a massive debt load that needed to be repaid almost immediately. And so to generate cash flow is to be able to manage that debt load and to

pay it down year after year. And he has done a fantastic job at that. I mean, as I said, you know, he's taken down the leverage of the business from five times debt to Ibeda to 3.8 right now. Still more, you know, to go. But he has been getting it done. And so from that perspective, I think it makes sense. Moving forward, perhaps, as maybe that net debt to Ibeda, you know, margin ratio comes closer to two times. Once that happens, then you want to perhaps incentivize other aspects of the business, including growth in both the studio and streaming divisions.

I think that it's going to be extremely hard, if not impossible, to arrest the decline and the linear TV side of the business. So the best he can do there is to just. manage that decline so that it's not a free fall. And I think he's been doing that to a good extent. But yes, so just focus on the growth on the studio and streaming division once you've cleared the debt hurdles that currently exist. Yes, for Al-Shimi, thanks so much for the time. Always appreciate having you on the show. And thanks for shining a light onto not just this interesting company, but this interesting executive as well. Glad to be here.

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to be presented. Investors should conduct their own due diligence and consult with legal tax and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from advertisements. For the Motleyful Money team, I'm Dylan Lewis. We'll be back tomorrow.