Is Google falling behind in cloud?
That is the question we're going to be addressing today.
There is a battle over the cloud market.
That cloud market is divided into 3 main companies, one of
them being Amazon with AWS, the other being a Microsoft with
Azure and and then in 3rd place we have Google Cloud and we got
the earnings report most recently of two specific
companies, Microsoft and Google. As you can see right now
Microsoft is trading in the green because the company
reported much better than expected earnings per share in
revenue. They also are growing in major
key parts of their company. And then most importantly their
Azure business is doing really well.
Google reported at the same time and they had a different
outcome. Google's showing that they're
slowing down in cloud slower than Microsoft Azure and this is
causing investors a lot of concern.
We're going to be going over these two main earnings reports,
but we're also going to be glancing at Metas.
We'll be seeing how this company's doing and we have some
other companies to look at as well, Vt reported earnings and
Canadian Pacific. So we have a lot to get into in
this episode. Let's go ahead and jump right
in. Now before we start off into
addressing this question with Google, I want to take a look at
My Portfolio. It's traded down a lot over the
past month. Now it's kept up with the
market, so it hasn't been doing especially bad.
But it's traded down $14,000 or a little bit less than 3% over
the past one month, and today's no different.
Today we're down another half a percent, while the market's down
quite a bit more. Right now, the S&P 500 is
currently down 1 1/2% and the NASDAQ is down 2.47%.
That's a huge red day on the NASDAQ.
It's being dragged down primarily by Google, also by
Amazon, and now by Meta as well. There's a lot of fear in the
market over the past couple of weeks.
This is something you just have to get used to when you're
investing. It's not a big deal, and the
important thing we should be looking at is the intrinsic
value of our companies. The intrinsic value is gauged by
the actual fundamentals and metrics of the company.
I track the intrinsic value using Qualtrim, which shows you
clearly the fundamentals and the developments of the actual
business. The cash flows over time with
companies like Microsoft, companies like Google and Apple
and Amazon. Most of these companies are
growing intrinsically quarter after quarter.
Microsoft in their most recent earnings report had a record
high earnings per share. So again, when I look at days
like today where everything's in the red, I'm not concerned about
that. What I'm looking at is my
businesses and how they're doing, and my businesses are
doing great. If you want to see me track this
over time and see how my returns turn out, how this portfolio
does, you can follow along for free by subscribing to the
channel. In summary, Microsoft's earnings
report was above and beyond anybody's real wildest
expectations. Their report was so phenomenally
good, it almost sounds fake. It sounds like it's made-up, but
it's not. Let's go ahead and take a look
at some of the numbers here. This is what Microsoft's revenue
looks like over time. We have the Bill Gates era of
creating the company. We have the Steve Ballmer era
where the company was doing OK but not having any exceptional
results. And then we have the Satya
Nadella era, which is probably the best for shareholders, where
he transferred the company to a subscription basis.
He made it so it was integrated and ubiquitous with everything,
and he focused primarily on integrating everything in the
cloud. The cloud at Microsoft is called
Azure. Microsoft's latest report showed
a revenue growth rate of 12.76 percent, 12% on a constant
currency basis. That's really good. 12% revenue
growth for a company of this size, or a company of any size
for that matter, is great. Even small businesses or
so-called growth companies have a difficult time growing at 12%.
So we move from the top line to the earnings of the company.
Again, there was the era where Microsoft was mostly flat with
its EPS. And then Satya Nadella got
control of the company and he spurred rapid growth.
If we zoom in over the past 10 years, for example, this latest
earnings per share growth was 27% year over year, which is
really good. That was a really fast earnings
per share growth. Now last year it was a little
bit lower. So there's some small
cyclicality, but still we're seeing intrinsic value
increasing over time as this company's growing its top line
revenue, as the company's growing its earnings per share,
we can assume that the intrinsic value of the company's going up
as well. When we look at any of the other
metrics, they also look fantastic.
They're raising a lot of cash for the acquisition.
The balance sheet still looks very strong.
Over the past 10 years, they've consistently raised the dividend
around 15 to 20% per year. I expect them to do the same in
the future. The ratios also look very good.
If we zoom in on the margins here, we'll look at the gross
margins. Right here is the 70% mark.
This is the all important mark for Microsoft.
They love keeping their margins at 70% and this latest quarter
they got it above 70%. So they're growing revenue while
keeping margins high. They're growing their earnings
per share and on top of that, they're growing the most
important segments of their business.
I'll throw up a chart here that shows you all the various
business segments of Microsoft and the various growth rates.
The most recent quarter is off to the right at the very top,
the most anticipated, the most important segment is that all
important cloud business, Azure, the Azure and other cloud
services grew at a rate of 29 percent. 29% growth is very
fast. That was a RE acceleration from
26% the most recent quarter. So Microsoft is re accelerating
growth, speeding it up. In the cloud business, there's
really no debate. Microsoft is becoming worth more
over time. Intrinsically speaking, the
company has gained in its intrinsic value.
Now the gains in the holding are $12,000.
So this also has been a terrific performer.
It's a stock I'm very happy to hold.
In my opinion, Microsoft has been one of the easiest
investments in the market. When you look at the
fundamentals, it tells a story in and of itself.
And then the valuation is also very undemanding.
Where it traded at $220 last year, I think Microsoft is worth
around $350.00, and I've thought that for a while.
We're very close to it. In fact, it could get there
relatively soon. But I'm not buying Microsoft
today. I was buying this company when
it traded down to $220 a year ago.
That's where I bought the majority of my holding.
So all of this has been great and I think it will continue to
go up in the future. For me, right now, Microsoft is
a hold. So if Microsoft, everything went
about as well as you could possibly dream of, that's not
the case for Google. Google, at the same time as
Microsoft showed a glaring weakness, and that weakness is
being very much punished by the market.
It's down nearly 10% today, which is a massive drop,
especially for a company as good as Google.
So Google's earnings per share showed a great recovery.
Their cash balance is even increasing above $119 billion,
which is an insane amount of cash to hold.
They have one of the best balance sheets in the market.
Their free cash flow looked terrific this last quarter,
generating $22 billion in free cash flow.
Now when we look at the stock based comp, that does eat up a
decent portion of it. So when we net that out, it's
around $16.8 billion free cash flow.
This is the real amount of cash that the investor gets.
But this is still not bad. Generating nearly $17 billion of
adjusted free cash flow is very strong.
And on top of that, the top line growth was just shy of Microsoft
growing at 11% instead of 12%. So in terms of the report,
everything on the Surface looked pretty good.
Why is the stock down 10%? Well, all of this comes down to
the important growth path of Google, which is Google Cloud.
So let's go ahead and talk about the cloud market here, why it's
so important and why this report was so devastating to Google.
Let's go ahead and 1st show the cloud market by market share.
Now there's a number of players. There's Tencent Cloud and Oracle
and Salesforce and IBM that control all this small
fractional market share. But in reality, there's only
three players. You can basically get rid of the
other ones. They don't control a meaningful
enough market share. This is a very top heavy market,
meaning that the big winners on top will continue to be the big
winners. And naturally more and more
companies gravitate towards those big winners.
Why is this industry so top heavy?
Because once a developer learns how to code on AWS, or how to
code on Azure, or how to code on Google Cloud, they don't want to
relearn how to do things on a separate cloud platform.
So there's a knowledge base effect.
The more people that use AWS, it means the more likely they're
going to use AWS in the future and the more likely they're
going to use AWS in a future job.
So in terms of knowledge set, it's more beneficial for
developers to learn Amazon's AWS than it is to learn Tencent
Cloud or IBM Cloud. There's more jobs available with
AWS than there are IBM Cloud, so the knowledge base is a huge
part of why this industry is so top heavy.
On top of knowledge base, the companies that are at the very
top, Azure, AWS and Google Cloud, have by far the most
tooling, the most resources. They have all of the best tools
to be able to grow your business and they have the most
distributed servers. So they have everything aligned
to make this industry very top heavy.
Now the reason that this industry in this category of
cloud is so important and so sought after is because it has
incredibly reliable revenue streams, it has high margins and
it has a very long duration of life.
Companies that sign up for cloud products typically use them for
year after year after year. So this is like the Holy Grail
of a business model. It has long duration, high
profits, and good customer lock in.
This is the most important growth path for all three of
these companies, for AWS with Amazon, and for Microsoft, and
especially for Google. Right now, Google doesn't have a
significant amount of growth paths.
They have most of their revenue highly concentrated into Google
Search. They're trying to do some
experimentation with driverless vehicles.
They're trying to do some experimentation with AI.
They have YouTube, which is growing.
But outside of that, the most significant promising growth
path is the cloud business, which is highly attractive.
Now what we saw in this last report with Microsoft and Google
is that Microsoft speed up growth of Azure to 29% year over
year. Google Cloud, on the other hand,
had growth decelerate. Let's go ahead and take a look.
Here is the revenue breakdown by Google.
They have the Google search. This did well.
YouTube is re accelerating growth which looked really
strong. It's going back into the double
digits. Google services overall looked
very strong. So the company's in good shape.
But then we have that all important Google cloud.
Google cloud had growth of only 22%.
Now keep in mind again, Microsoft just reported growth
in Azure of 29%. You see the problem here.
Google Cloud is roughly half the size of Microsoft Azure.
Half the size and it's growing slower.
Azure's taking market share from Google Cloud as Google Cloud is
half the size. That is not a good story no
matter what way you try to cut that or slice it, or you try to
change the narrative. It's not good when your smaller
product is growing at a slower speed.
If you're smaller, you should naturally be outgrowing the
bigger players to try to take market share.
But we're seeing just the opposite.
What I believe this is proving is how top heavy this industry
is. The big gains seem to be going
to AWS and Azure and that is a problem for Google.
Now, a lot of investors in Google that have focused on this
company and made it a huge part of their portfolio are a little
bit surprised about this report. They're saying that this is a
big overreaction, the market's getting it wrong, and Google's
doing just fine. Gene Munster is one of them.
He explains why he thinks that Microsoft is pulling ahead and
why he thinks this is ultimately an overreaction by Google
investors. Google, I think investors should
just take a deep breath. We've put a lot of pressure on
that Google cloud number, the deceleration.
Understand that that's caught people's attention from 28% to
23. Well, Azure.
Had that step up and growth from 26 to 29%, but the deep breath
piece of this is just looking at the aggregate of what is in
front of Google over the next decade.
They essentially have are losing share in cloud right now in part
because of Microsoft is optimizing Open AI on Azure and
so they are gaining usage because of that.
Google's answer to Open AI is their new Gemini platform that
is Sundar was talking about on the call here the past 35
minutes. And that's their new essential.
That's their answer to Open AI. Jane believes that part of the
reason Google's falling behind is because Microsoft beat them
to the AI game, integrating AI into Azure ahead of Google.
And Google's right behind them? They're going to catch up with
Gemini. They're going to integrate it
into Google Cloud and they're going to then surpass growth of
Microsoft Azure. I think that that might be part
of it, maybe a small part, but I think there's a bigger reason
that Azure continues to pull ahead of Google Cloud.
Again, I can't understate the importance of developer
knowledge base. Developers like using tools that
they're familiar with. They like learning the tools
that are the most often used and the most amount of jobs.
So if you're a developer and you're wanting to learn one of
these platforms, you're naturally going to pick Amazon's
AWS or Microsoft Azure over Google Cloud because they
already have more market share. And the fact that you do that
makes it so that more companies are going to pick those services
as well because their developers already know how to use them.
It takes a lot of extra mental load, a lot of extra time and
learning to learn an entirely new cloud service for your
company. So I think that does play a
massive role in why AWS is so frequently chosen for new
companies and new different platforms to integrate onto
their cloud. Developers already know how to
use their products. I believe that's part of the
reason why companies like Adobe have done so well for so long,
despite there being many alternatives.
Every single photographer already knows how to use Adobe
products, so they don't want to use the mental load to switch
over to something different. Now, outside of that knowledge
base, there's another reason that I think Azure is pulling
ahead of Google Cloud, and that is because Microsoft is wrapping
Azure and integrating it into every part of their already
massive corporate software suite.
Microsoft sells so many critical pieces of software to Fortune
500 companies. They have Microsoft Dynamics
Office 365 with all the accounting software Office
commercial. They have Microsoft Teams, and
on and on and on. All of these products
automatically integrate into Azure, so Microsoft already has
this inherent advantage of making Microsoft Azure already
integrated into all of their Office products.
It's much easier to integrate on Microsoft's products into Azure
than it is to integrate on Microsoft's products into Google
Cloud or AWS. So there's multiple reasons we
can point out of why Azure's growing so fast at 29%.
We can point out that they're a little bit ahead in AI.
They got to that before Google Cloud.
That was one smart thing they did.
But I think the bigger reasons is because of the knowledge base
of developers that know how to use Azure.
And most importantly, the easy integration of Microsoft tools
into Azure gives them an inherent advantage over Google
Cloud and AWS. Ultimately, these companies are
all competing for this all important market share and the
one that is the least advantage is Google Cloud.
The reason that they are the least advantage is because they
have the smallest knowledge base of developers that know how to
use Google Cloud. So they're the least likely to
naturally be picked by a development team and they also
have the least amount of integration.
They don't have as many tools to integrate like Microsoft does.
Most companies will choose either AWS or Azure over Google
Cloud. The way that Google Cloud is
trying to compete is with AI and even then AWS and Azure are
giving them a run for their money.
Now does this mean as investors in Google, that we should become
bearish on the company or become overly concerned?
Of course not. The Google Cloud performance was
underwhelming. It's showing weakness
comparatively speaking to Azure, and I think it's also going to
trail behind a WSAWS has such a bigger market share than Google
Cloud, but regardless, the business still is growing and
it's going to be profitable. Google Cloud will become a
highly profitable growth path for Google even despite being in
3rd place. And being in 3rd place in the
cloud market is still not a bad thing.
And overall Google's valuation is a bit undemanding.
It trades at a decent free cash flow yield, a decent PE ratio,
and the company's a great company.
So I believe that part of the sell off is a little bit
warranted. Investors may be too excited
about Google Cloud, but other than that, I think the company's
still in great shape and it's still a great investment.
Now moving on, we also have Meta which also reported today.
The stock was down 4% on the day, but then they reported
earnings and the stock is up around 4 1/2, almost 5% on the
day. So basically cancelled out
today's trade, which is good. The stock is basically flat on
the day now. Meta's earnings report was a
good one. This is one of the best earnings
report that Meta has had in a long time.
Incrementally, everything is moving back in the right
direction as Mark Zuckerberg is focused on efficiency.
That keyword that investors love to hear.
Most of the key metrics are moving in the right direction.
They're seeing seven 8% increases in activity on their
family Facebook apps, ad revenues moving in the right
direction. The revenue overall increased by
23% year over year which is massive increase.
Meta is now the faster growing of the big tech companies.
That's good that they re accelerated growth after it
going flat last year. And then on top of that they did
something that they've been struggling with.
They're cutting expenses, they had a decrease in expense of 7%
year over year. So the business is growing in
size and becoming more efficient.
At the same time, we can calculate the cash flow of the
company by taking the net cash from operating activity, looking
at the share based compensation and and looking at the CapEx
which is the purchase of property and equipment.
When you net all of this out, Meta generated $10,362,000,000
in free cash flow after stock based comp which is really high.
If we look at the free cash flow netting out the stock based
comp, this is what it looks like in 2021 to 2022.
This is right when Mark Zuckerberg was focused on the
Metaverse, an exciting new product, and he didn't seem to
be focused at all on efficiency or how the business's actual
cash flows looked, and Wall Street did not like that it
caused the stock to sell off as the cash flows went down.
Now, right at the bottom here, Mark Zuckerberg made a massive
pivot. He came out with this big letter
saying that he's focused on efficiency and that really
marked the bottom of the stock as well as the bottom of the
cash flows. On a stock based compensation
adjusted basis in Q3 of 2022, the cash flows were actually
negative. Meta was losing money and
diluting investors, but it turned around quickly.
IN2022Q4 it went back into the positive and it's incrementally
stepped up every single quarter. Now this latest quarter again is
right over $10 billion. So when Caltrum updates the
numbers here, the latest quarter will be right here, almost an
all time high of true cash flow from meta matching where they
were back in 2021. And you can notice how the stock
price also seems to follow the cash flow.
You can see how this is aligned. This is when they hit their peak
in cash flow. The cash flows went down, then
they went back up and so was the stock price.
So the stock price in this case is accurately following the cash
flows of the company. Meta is focusing on profits,
focusing on efficiency. They're doing a fantastic job
growing reels and competing with YouTube, and they're seeing the
rewards come in. The stock is up right now around
3 1/2%, so it's down just a tad on the day.
But overall, this is a fantastic report.
Investors should be happy with this.
I expect meta to hold on to their gains.
Now Next up we have Vici, which has been going through a bit of
a sell off. The company's traded down from
$33 per share down to 27. I'm still in the green on this
one. It's still been a great
investment, but it's interesting to see how much Vici's traded
down because fundamentally speaking, everything has been
positive. It's been moving in the right
direction. The earnings report highlights a
lot of fundamental developments for Vici.
They grew the revenue which is expected.
We'll look at the dilution adjusted growth in a minute, but
they also completed the first sale leaseback transaction in a
family entertainment sector of Bolero and Vici's leasing 38 of
their locations. Along with this transaction,
Vici gets over a 7% cap rate. So they got very favorable terms
with this transaction. They also completed the
acquisition of Century Casinos for gaming properties in
Alberta, Canada. We've known about that deal for
a while. They announced the expansion of
the partnership in the Canyon Ranch and they're increasing
their full year 2023 guidance. Ed Potoniak, the CEO of the
company, says Vici's third quarter financial performance
reflects sustained and sustainable commitment to
accretive growth and capital deployment through acquisitions
and strategic financing activity.
Accretive growth means that they're not just growing for the
sake of growing, they're growing profitably.
They're creating value as they grow, which is incredibly
important for any company, but especially for Reit's which in
many cases they can get in the habit of growing just to grow.
Now the way that they show that they're growing accretively is
they say that they've had 20% revenue growth.
In the case of Reed's, revenue growth really isn't the most
important thing because you need to know whether or not it was
accretive or dilutive. In this case, it was accretive.
They had nearly 11% AFFO per share growth year over year.
The AFFO is the adjusted funds from operations and then you
divide that on a per share basis to make sure each share you own
is growing profitably and they're doing that.
Every share of Ichi has 11% more cash flow power than it did one
year ago. So the CEO of the company is
making sure that every share you buy of this company is growing
profitably year after year. An 11% growth for REITs in this
market is still very fast growth.
That's faster than most REITs like Realty Income Corp or
American Tower Corporation or basically any other REIT you can
list off. This is solid growth from this
company and overall, this is the best metric you look at to track
the intrinsic value of a read. Now they recently just announced
a big acquisition. They say subsequent to the
quarter end, we entered into a new experiential sector with
Bolero, the market leader in reinvigorating the programming
and economics of the bowling experience through their
innovative consolidation and growth model.
In this partnership, we acquired 38 Bolero properties and
concurrently bolstered our embedded growth pipeline by
obtaining the right, the first offer to acquire current or
future Bolero real estate in the coming years through sale
leaseback transactions. So they basically say that so
far they bought 38 properties and they also bought the right
to acquire future properties before anyone else, so they get
the first bid on it. We also expanded our presence in
11 new States and added another publicly traded tenant to our
roster. Vici's differentiation stems
from our commitment to partnership with operators who
define a respective experiential category as Bolero has done so
in bowling experience. So if we look at Bolero, this
company that's a new tenant, Avicii is not the biggest
tenant, but it's another good one for Vici to have in their
portfolio. It further diversifies their
portfolio. It's very accretive with above a
7% cap rate and Bolero's profitable.
Now a lot of companies like Bolero that were specs that came
out of 2020, they've all either gone away or they're deeply
unprofitable. Bolero's one of the exceptions
that's making good money and I've listened to interviews with
the CEO of Bolero. He's really dedicated to growing
this company. It is a founder operated company
and I believe that Vici made the right move in partnering with
this experiential company. Right now, I believe Vici's
undervalued. I think the company is set up
for a lot of growth in the future.
They have an extremely strong tenant roster.
They have very strong leases. They're not over leveraged and I
believe they're going to sail through a recession.
So even the big recession prediction is not something that
I'm concerned about right now. I think the price point is
favorable for this company as these are out of favor and I
plan on holding my large Avicii position Now last but not least,
we have Canadian Pacific. This is 1/2 size position in My
Portfolio. So I do have an investment in
this company. And overall, I have to be
honest, this report was a little meh.
It wasn't that exciting either way.
In fact, I think it was probably a little bit underwhelming.
The CEO starts off by saying that they've encountered
challenges this quarter due to softer macro environment and
external labour disruptions. So they're listing off problems
here and challenges. That's never a good sign when
that's how the CEO starts off their letter.
There's also on the report not much earnings per share growth.
They have to deal with that merger, so there's some dilution
there. Overall, it was just a a
basically flat quarter, not much to show this quarter and they
again list off more challenges. Economic headwinds and other
near term challenges including the Port of Vancouver strike had
weighed in on the volumes more than we anticipated.
Therefore we are adjusting our near term guidance accordingly.
It's never good to see companies primarily focusing on these
challenges. It's a lot more fun to see them
in the situation of Microsoft or Meta where things are just going
explosively well. But don't be fooled.
Canadian Pacific is an incredibly strong company with a
massive barriers to entry and it's going to take a lot more
than some strikes or some disruptions with macro to make
this company a poor investment. As of right now, if this stock
continues to trade down or trade flat, I'm going to increase my
stake in the company. So there's my thoughts overall
in these earnings reports. We just made it through a
difficult day. But overall, when I look at the
actual fundamentals of these companies, I mostly see them
moving in the right direction. I don't think these companies
are doing poorly. That's all for this episode.
I hope you enjoyed it and I'll see you in the next one.