Deep Dive
Shownotes Transcript
Dylan Lewis: The cloud spend ain't slowing down. Motley Fool Money starts now. I'm Dylan Lewis, and I'm joined over the airwaves by Motley Fool analyst Nick Sciple. Nick, thanks for joining me today. Nick Sciple: 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 consumer demand concerns that we've been hearing about in the headlines all year long. 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. The market cheering that. Shares up almost 10% after the report. What did you see in the results?
Yeah. Analysts really drilling in on cloud results and really strong output from 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. An expected performance from Azure 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 No. 1 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. That capex 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 of the year remain what we outlined in January. We are not slowing down the spend. We continue to see the opportunity there." I know that's something a lot of people were waiting with bated breath for, wondering, "Is AI spend going to slow down? Is the macro picture going to interfere with these plans?" 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 listen to commentary from Microsoft's management, demand continues to outstrip supply. They said, demand for AI services is growing faster. They can bring data center capacity online, and the company expects to have AI capacity constraints
beginning in June of this year. 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 disappointment. You could say 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. 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 were up about 5% or 6% after they reported. 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 Meta's results, revenue up 16% ahead of estimates from analysts, net income up 35%. Really, the big standout, if you drive below the top line, is engagement and advertising efficiency. A lot of that is driven by their investments in AI.
continues to be the dominant social media platform worldwide. You see that on how many folks are active on the platform. Family, daily active people reached $3.43 billion for the reported quarter. That's like 60% of the world's total internet
population. Again, continuing to grow, that's 6% more daily active people year over year. Ad impressions up 5% year over year. Average price per ad increased 10% year over year. That's the fourth consecutive quarter of double-digit growth when it comes to price per ad. It's
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 had 30% more advertisers use AI creative tools in the first quarter. And improved ads, recommendations, models for reels is 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, you look at these meta trends,
It's a platform that was already dominant in advertising. 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, reduced 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, no surprise. We saw a little bit of a fall-off 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 Sheehan and Timu 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 likely to go up.
significantly. And Meta did say that that has 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.
Mark Zuckerberg was quick to note, 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, one. More engaging experiences, another. Business messaging, meta-AI, and AI devices. Any of those that you want to zoom in on, Nick?
Well, 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'd call out Meta Ray-Ban glasses. Sales have tripled year over year. They fully rolled out live translation on the Meta Ray-Ban glasses in all markets. 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 Ray-Ban 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. It is another hat in the ring for people who are already using Gemini, already using OpenAI, some of these other chatbot tools.
What do you think we'll see from Meta here? It's going to be interesting. They called out on the earnings call that Meta AI already has over a billion monthly active users, if you include the users on Messenger, Instagram, Facebook, WhatsApp, where it's really directly built into the chat tool.
If you glance at those numbers, one billion monthly active users puts it in the same ballpark with ChatGPT, where the public numbers say they've got 400 million weekly active users. Probably similar. That said, different use case of this Meta AI app, certainly integrated into these other platforms than what you had seen from ChatGPT. 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
to others. But I don't think, as I said earlier with AI glasses, the text-based chatbot 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. I don't think this is the end of the road for where Meta is headed in AI.
I think it's interesting to have them in there. As a standalone app, it will force them to think a little bit about the business model and the economic realities of AI chatbots. 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, right? Where you're searching for a thing online and we can make a perfect piece of ad copy to kind of nudge you towards purchasing things. You could see how maybe ads could be integrated into that platform over time as folks use these things in a more robust way for shopping and less about just generalized products.
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 they are capacity constrained when it comes to data centers, but they're not running a commercial AI platform where they're 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, I'm
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 not always 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 existentially for Meta and how important it is for the long-term thesis?
I think it's super important for Meta. 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.
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 chat bot. 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. You put those two things together, it looks to me like Zuckerberg wants to make Meta AI, Meta Glasses, kind of like Iron Man's Jarvis, 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 their 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 announcements from the company. He also said on the call that they have some new launches coming this year with Essilor Luxottica, that's the parent company of Ray-Ban. So, the existing form factor for Meta AI glasses that we know today may not be the state-of-the-art of the technology here at the end of the year. So, I think for their existing business, it 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 of big tech companies that are yet to report. We'll hear from Apple and Amazon later this week. But looking at Microsoft, shares spiked about 10% following earnings, as I said before. They are now the best performer in the Mag 7 so far in 2025. They're also the only company in the Mag 7 year to date that is currently in the green. 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, that's absolutely true. In 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 point to a question around Microsoft, it's their positioning in AI. They're partnered with OpenAI, which is great. OpenAI is currently the leader with their chat GPT model. But they've gone over the past year plus 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, OpenAI has begun signing data center deals with SoftBank and Oracle and starting to distance itself from Microsoft. If you look at the earlier reviews on Microsoft's copilot offering, it's 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 they're
the path that they're on, I think is a lot more clear. Whereas, whereas Microsoft, you know, is in this frenemy relationship with open AI and may have to, may have to go their own, you know, when it comes to their aspirations over the, over the longterm. 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 taking it.
Yeah, I feel like Microsoft and AI are 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 Nadella, I hope, I hope Sam Altman doesn't break his heart. We'll just have to see. Yeah. Nick Seifel, thanks for joining me today. Thanks, Dylan. Great to see you. Hey, Fools, we're taking a quick break for a word from our sponsor for today's episode.
Real estate. It's been the cornerstone of wealth building for generations, but it's also often been a major headache for investors with 3M maintenance calls, tenant disputes, and property taxes.
Enter Fundrise's flagship fund, a $1.1 billion real estate portfolio with more than 4,000 single-family homes in the Sunbelt communities, 3.3 million square feet of in-demand industrial facilities, all professionally managed by an experienced team. The flagship fund taps into some of real estate's most attractive qualities, long-term appreciation potential, a hedge against inflation, and diversification beyond the stock market. Check, check, and check. All without the complex paperwork, massive down payments, and soul-sucking landlord duties. We
Visit Fundrise.com to explore the portfolio, check out historical returns, and see just how much easier investing in real estate can be. Carefully consider the investment objectives, risks, charges, and expenses of the Fundrise Flagship Fund before investing. This and other information can be found in the fund's prospectus at Fundrise.com. This is a paid advertisement.
Coming up on the show, analyst Yasser El-Shimi 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.
I want to turn to the man in charge, David Zaslav. So what spurred this conversation, Yasser, was that Michael Wolff recently wrote up a 15-page profile of Zaslav in New York Magazine. The word mogul is used a lot to describe Zas, 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,
Well, Mogul is definitely Zaslav's aspirational self. He's a controversial personality in Hollywood, no doubt about it. He is 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 project of the bad girl movie that never saw the light of day because he decided to effectively take a tax write-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 the entertainment industry from kind of an artistic perspective.
Having said that, I mean, David Zaslav 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 Brothers Discovery, where they are focusing a lot more on efficiency. He is not shy from...
going with kind of, let's say, non-mainstream productions, right? So all you have to see is like, open your Mac's app and you'll find all kinds of TV shows that are highly artistic, that are, you know,
The White Lotus, Succession, among others come to mind as 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 distributors.
platforms. Ted Lasso, 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 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 Zaslav is it opens telling the 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 not at the top of the hill of the industry as they once were. 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 pull in that media industry as they once did. Zaslav 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, end quote.
With all that said, what is Zaslav'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 Warner Brothers had he actually not been really drawn into film and to TV and kind of wanting to wade further into that world. And you can even see from the New York Magazine piece that
They're talking about how he bought an old Hollywood mansion that used to belong to the producer of Chinatown, a classic movie. And Zaslav tried to play down, saying that he just appreciated the architectural style of the home. But I think all the whispers are that
but David Zaslav 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 also is trying to salvage that film industry from going into obsolescence, as the article said. He has to take on the likes of 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 something he's been really focusing on with 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, you just double down.
So, another gripe that folks might have with David Zaslav 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
We talked about Zaslav growing max, paying off debt, all of this. In spite of the stock's underperformance, Zaslav 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. 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. All that said, what do you make of this incentive structure and Zaslav's pay package as it exists now? If you were tasked with building a pay package for Warner Bros. Discovery executives, but also for Warner Bros. Discovery shareholders, what would you tie the metrics of success for those executives to?
MARK MIRCHANDANI: OK, so let me start with saying maybe somewhat of 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, he's taken down the leverage of the business from five times the debt to EBITDA to 3.8 right now. Still more 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 EBITDA 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 in the linear TV side of the business, right?
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 hurdles that currently exist.
Yasser El-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. I'm glad to be here. 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 anything based only on what you hear. Advertisements are sponsored content provided for informational purposes only. The Motley Fool and its affiliates do not endorse, recommend, or verify the accuracy or completeness of the statements made within the advertisements.
TMF has not involved in the offer, sale, or solicitation of any securities advertised herein. It makes no representations regarding the suitability or risks associated with any investment opportunity 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 Motley Fool Money team, I'm Dylan Lewis. We'll be back tomorrow.