1 00:00:00,040 --> 00:00:02,120 Is Google falling behind in cloud? 2 00:00:02,160 --> 00:00:04,720 That is the question we're going to be addressing today. 3 00:00:04,800 --> 00:00:06,760 There is a battle over the cloud market. 4 00:00:07,000 --> 00:00:10,640 That cloud market is divided into 3 main companies, one of 5 00:00:10,640 --> 00:00:14,640 them being Amazon with AWS, the other being a Microsoft with 6 00:00:14,680 --> 00:00:18,440 Azure and and then in 3rd place we have Google Cloud and we got 7 00:00:18,440 --> 00:00:21,560 the earnings report most recently of two specific 8 00:00:21,560 --> 00:00:25,520 companies, Microsoft and Google. As you can see right now 9 00:00:25,520 --> 00:00:27,920 Microsoft is trading in the green because the company 10 00:00:27,920 --> 00:00:31,120 reported much better than expected earnings per share in 11 00:00:31,120 --> 00:00:33,280 revenue. They also are growing in major 12 00:00:33,280 --> 00:00:36,080 key parts of their company. And then most importantly their 13 00:00:36,080 --> 00:00:38,080 Azure business is doing really well. 14 00:00:38,080 --> 00:00:40,480 Google reported at the same time and they had a different 15 00:00:40,480 --> 00:00:42,280 outcome. Google's showing that they're 16 00:00:42,280 --> 00:00:45,960 slowing down in cloud slower than Microsoft Azure and this is 17 00:00:45,960 --> 00:00:47,760 causing investors a lot of concern. 18 00:00:47,760 --> 00:00:50,480 We're going to be going over these two main earnings reports, 19 00:00:50,480 --> 00:00:52,680 but we're also going to be glancing at Metas. 20 00:00:52,880 --> 00:00:55,080 We'll be seeing how this company's doing and we have some 21 00:00:55,080 --> 00:00:58,120 other companies to look at as well, Vt reported earnings and 22 00:00:58,120 --> 00:01:00,120 Canadian Pacific. So we have a lot to get into in 23 00:01:00,120 --> 00:01:01,800 this episode. Let's go ahead and jump right 24 00:01:01,800 --> 00:01:03,360 in. Now before we start off into 25 00:01:03,360 --> 00:01:05,880 addressing this question with Google, I want to take a look at 26 00:01:05,880 --> 00:01:08,680 My Portfolio. It's traded down a lot over the 27 00:01:08,680 --> 00:01:11,200 past month. Now it's kept up with the 28 00:01:11,200 --> 00:01:13,560 market, so it hasn't been doing especially bad. 29 00:01:13,560 --> 00:01:17,880 But it's traded down $14,000 or a little bit less than 3% over 30 00:01:17,880 --> 00:01:20,560 the past one month, and today's no different. 31 00:01:20,840 --> 00:01:24,320 Today we're down another half a percent, while the market's down 32 00:01:24,440 --> 00:01:28,120 quite a bit more. Right now, the S&P 500 is 33 00:01:28,120 --> 00:01:34,000 currently down 1 1/2% and the NASDAQ is down 2.47%. 34 00:01:34,440 --> 00:01:36,960 That's a huge red day on the NASDAQ. 35 00:01:36,960 --> 00:01:40,200 It's being dragged down primarily by Google, also by 36 00:01:40,200 --> 00:01:43,760 Amazon, and now by Meta as well. There's a lot of fear in the 37 00:01:43,760 --> 00:01:45,640 market over the past couple of weeks. 38 00:01:45,640 --> 00:01:47,400 This is something you just have to get used to when you're 39 00:01:47,400 --> 00:01:49,760 investing. It's not a big deal, and the 40 00:01:49,760 --> 00:01:51,720 important thing we should be looking at is the intrinsic 41 00:01:51,720 --> 00:01:55,320 value of our companies. The intrinsic value is gauged by 42 00:01:55,320 --> 00:01:57,800 the actual fundamentals and metrics of the company. 43 00:01:58,080 --> 00:02:01,640 I track the intrinsic value using Qualtrim, which shows you 44 00:02:01,640 --> 00:02:04,880 clearly the fundamentals and the developments of the actual 45 00:02:04,880 --> 00:02:07,240 business. The cash flows over time with 46 00:02:07,240 --> 00:02:10,759 companies like Microsoft, companies like Google and Apple 47 00:02:10,880 --> 00:02:13,040 and Amazon. Most of these companies are 48 00:02:13,040 --> 00:02:15,640 growing intrinsically quarter after quarter. 49 00:02:15,960 --> 00:02:19,280 Microsoft in their most recent earnings report had a record 50 00:02:19,280 --> 00:02:22,400 high earnings per share. So again, when I look at days 51 00:02:22,400 --> 00:02:25,840 like today where everything's in the red, I'm not concerned about 52 00:02:25,840 --> 00:02:27,800 that. What I'm looking at is my 53 00:02:27,800 --> 00:02:30,360 businesses and how they're doing, and my businesses are 54 00:02:30,360 --> 00:02:32,320 doing great. If you want to see me track this 55 00:02:32,320 --> 00:02:35,960 over time and see how my returns turn out, how this portfolio 56 00:02:35,960 --> 00:02:38,560 does, you can follow along for free by subscribing to the 57 00:02:38,560 --> 00:02:41,280 channel. In summary, Microsoft's earnings 58 00:02:41,280 --> 00:02:45,240 report was above and beyond anybody's real wildest 59 00:02:45,240 --> 00:02:48,400 expectations. Their report was so phenomenally 60 00:02:48,400 --> 00:02:52,320 good, it almost sounds fake. It sounds like it's made-up, but 61 00:02:52,320 --> 00:02:53,880 it's not. Let's go ahead and take a look 62 00:02:53,880 --> 00:02:56,360 at some of the numbers here. This is what Microsoft's revenue 63 00:02:56,360 --> 00:02:59,360 looks like over time. We have the Bill Gates era of 64 00:02:59,360 --> 00:03:02,520 creating the company. We have the Steve Ballmer era 65 00:03:02,520 --> 00:03:05,760 where the company was doing OK but not having any exceptional 66 00:03:05,760 --> 00:03:07,640 results. And then we have the Satya 67 00:03:07,640 --> 00:03:11,400 Nadella era, which is probably the best for shareholders, where 68 00:03:11,400 --> 00:03:13,920 he transferred the company to a subscription basis. 69 00:03:14,360 --> 00:03:17,480 He made it so it was integrated and ubiquitous with everything, 70 00:03:17,720 --> 00:03:21,160 and he focused primarily on integrating everything in the 71 00:03:21,160 --> 00:03:23,840 cloud. The cloud at Microsoft is called 72 00:03:23,840 --> 00:03:26,240 Azure. Microsoft's latest report showed 73 00:03:26,240 --> 00:03:31,240 a revenue growth rate of 12.76 percent, 12% on a constant 74 00:03:31,240 --> 00:03:34,840 currency basis. That's really good. 12% revenue 75 00:03:34,840 --> 00:03:38,000 growth for a company of this size, or a company of any size 76 00:03:38,000 --> 00:03:41,520 for that matter, is great. Even small businesses or 77 00:03:41,520 --> 00:03:45,240 so-called growth companies have a difficult time growing at 12%. 78 00:03:45,240 --> 00:03:47,920 So we move from the top line to the earnings of the company. 79 00:03:48,400 --> 00:03:51,560 Again, there was the era where Microsoft was mostly flat with 80 00:03:51,560 --> 00:03:53,920 its EPS. And then Satya Nadella got 81 00:03:53,920 --> 00:03:57,160 control of the company and he spurred rapid growth. 82 00:03:57,440 --> 00:04:00,600 If we zoom in over the past 10 years, for example, this latest 83 00:04:00,600 --> 00:04:04,680 earnings per share growth was 27% year over year, which is 84 00:04:04,680 --> 00:04:06,960 really good. That was a really fast earnings 85 00:04:06,960 --> 00:04:09,200 per share growth. Now last year it was a little 86 00:04:09,200 --> 00:04:11,560 bit lower. So there's some small 87 00:04:11,560 --> 00:04:15,320 cyclicality, but still we're seeing intrinsic value 88 00:04:15,320 --> 00:04:18,959 increasing over time as this company's growing its top line 89 00:04:18,959 --> 00:04:22,040 revenue, as the company's growing its earnings per share, 90 00:04:22,280 --> 00:04:25,080 we can assume that the intrinsic value of the company's going up 91 00:04:25,080 --> 00:04:26,720 as well. When we look at any of the other 92 00:04:26,720 --> 00:04:28,520 metrics, they also look fantastic. 93 00:04:28,520 --> 00:04:30,960 They're raising a lot of cash for the acquisition. 94 00:04:31,200 --> 00:04:33,000 The balance sheet still looks very strong. 95 00:04:33,080 --> 00:04:35,960 Over the past 10 years, they've consistently raised the dividend 96 00:04:35,960 --> 00:04:39,680 around 15 to 20% per year. I expect them to do the same in 97 00:04:39,680 --> 00:04:42,720 the future. The ratios also look very good. 98 00:04:42,960 --> 00:04:45,360 If we zoom in on the margins here, we'll look at the gross 99 00:04:45,360 --> 00:04:48,680 margins. Right here is the 70% mark. 100 00:04:48,960 --> 00:04:51,720 This is the all important mark for Microsoft. 101 00:04:52,000 --> 00:04:56,000 They love keeping their margins at 70% and this latest quarter 102 00:04:56,200 --> 00:05:00,760 they got it above 70%. So they're growing revenue while 103 00:05:00,760 --> 00:05:03,480 keeping margins high. They're growing their earnings 104 00:05:03,480 --> 00:05:06,520 per share and on top of that, they're growing the most 105 00:05:06,520 --> 00:05:08,600 important segments of their business. 106 00:05:08,880 --> 00:05:11,400 I'll throw up a chart here that shows you all the various 107 00:05:11,400 --> 00:05:14,480 business segments of Microsoft and the various growth rates. 108 00:05:14,840 --> 00:05:18,160 The most recent quarter is off to the right at the very top, 109 00:05:18,400 --> 00:05:22,520 the most anticipated, the most important segment is that all 110 00:05:22,520 --> 00:05:26,920 important cloud business, Azure, the Azure and other cloud 111 00:05:26,920 --> 00:05:31,880 services grew at a rate of 29 percent. 29% growth is very 112 00:05:31,880 --> 00:05:33,720 fast. That was a RE acceleration from 113 00:05:33,720 --> 00:05:38,200 26% the most recent quarter. So Microsoft is re accelerating 114 00:05:38,200 --> 00:05:41,160 growth, speeding it up. In the cloud business, there's 115 00:05:41,160 --> 00:05:44,320 really no debate. Microsoft is becoming worth more 116 00:05:44,320 --> 00:05:46,680 over time. Intrinsically speaking, the 117 00:05:46,680 --> 00:05:49,320 company has gained in its intrinsic value. 118 00:05:49,760 --> 00:05:52,440 Now the gains in the holding are $12,000. 119 00:05:52,440 --> 00:05:54,680 So this also has been a terrific performer. 120 00:05:54,960 --> 00:05:56,760 It's a stock I'm very happy to hold. 121 00:05:57,120 --> 00:06:00,040 In my opinion, Microsoft has been one of the easiest 122 00:06:00,040 --> 00:06:02,400 investments in the market. When you look at the 123 00:06:02,400 --> 00:06:04,680 fundamentals, it tells a story in and of itself. 124 00:06:05,200 --> 00:06:08,160 And then the valuation is also very undemanding. 125 00:06:08,280 --> 00:06:13,600 Where it traded at $220 last year, I think Microsoft is worth 126 00:06:13,640 --> 00:06:16,960 around $350.00, and I've thought that for a while. 127 00:06:17,280 --> 00:06:19,440 We're very close to it. In fact, it could get there 128 00:06:19,440 --> 00:06:22,240 relatively soon. But I'm not buying Microsoft 129 00:06:22,240 --> 00:06:24,800 today. I was buying this company when 130 00:06:24,800 --> 00:06:27,800 it traded down to $220 a year ago. 131 00:06:28,160 --> 00:06:30,200 That's where I bought the majority of my holding. 132 00:06:30,760 --> 00:06:33,480 So all of this has been great and I think it will continue to 133 00:06:33,480 --> 00:06:35,880 go up in the future. For me, right now, Microsoft is 134 00:06:35,880 --> 00:06:38,200 a hold. So if Microsoft, everything went 135 00:06:38,200 --> 00:06:41,160 about as well as you could possibly dream of, that's not 136 00:06:41,160 --> 00:06:44,200 the case for Google. Google, at the same time as 137 00:06:44,200 --> 00:06:48,520 Microsoft showed a glaring weakness, and that weakness is 138 00:06:48,520 --> 00:06:51,240 being very much punished by the market. 139 00:06:51,680 --> 00:06:55,840 It's down nearly 10% today, which is a massive drop, 140 00:06:55,840 --> 00:06:58,200 especially for a company as good as Google. 141 00:06:58,280 --> 00:07:01,160 So Google's earnings per share showed a great recovery. 142 00:07:01,280 --> 00:07:05,880 Their cash balance is even increasing above $119 billion, 143 00:07:05,880 --> 00:07:08,440 which is an insane amount of cash to hold. 144 00:07:08,720 --> 00:07:10,640 They have one of the best balance sheets in the market. 145 00:07:10,920 --> 00:07:13,320 Their free cash flow looked terrific this last quarter, 146 00:07:13,560 --> 00:07:16,160 generating $22 billion in free cash flow. 147 00:07:16,160 --> 00:07:19,320 Now when we look at the stock based comp, that does eat up a 148 00:07:19,320 --> 00:07:22,360 decent portion of it. So when we net that out, it's 149 00:07:22,360 --> 00:07:25,880 around $16.8 billion free cash flow. 150 00:07:26,160 --> 00:07:28,640 This is the real amount of cash that the investor gets. 151 00:07:29,040 --> 00:07:32,840 But this is still not bad. Generating nearly $17 billion of 152 00:07:32,840 --> 00:07:35,320 adjusted free cash flow is very strong. 153 00:07:35,560 --> 00:07:39,280 And on top of that, the top line growth was just shy of Microsoft 154 00:07:39,520 --> 00:07:44,120 growing at 11% instead of 12%. So in terms of the report, 155 00:07:44,120 --> 00:07:46,480 everything on the Surface looked pretty good. 156 00:07:46,800 --> 00:07:51,120 Why is the stock down 10%? Well, all of this comes down to 157 00:07:51,120 --> 00:07:54,080 the important growth path of Google, which is Google Cloud. 158 00:07:54,080 --> 00:07:56,720 So let's go ahead and talk about the cloud market here, why it's 159 00:07:56,720 --> 00:08:00,720 so important and why this report was so devastating to Google. 160 00:08:01,200 --> 00:08:04,560 Let's go ahead and 1st show the cloud market by market share. 161 00:08:05,120 --> 00:08:08,360 Now there's a number of players. There's Tencent Cloud and Oracle 162 00:08:08,360 --> 00:08:11,640 and Salesforce and IBM that control all this small 163 00:08:11,640 --> 00:08:15,000 fractional market share. But in reality, there's only 164 00:08:15,000 --> 00:08:17,480 three players. You can basically get rid of the 165 00:08:17,480 --> 00:08:19,480 other ones. They don't control a meaningful 166 00:08:19,480 --> 00:08:23,600 enough market share. This is a very top heavy market, 167 00:08:23,960 --> 00:08:27,320 meaning that the big winners on top will continue to be the big 168 00:08:27,320 --> 00:08:29,360 winners. And naturally more and more 169 00:08:29,360 --> 00:08:31,800 companies gravitate towards those big winners. 170 00:08:32,039 --> 00:08:34,080 Why is this industry so top heavy? 171 00:08:34,360 --> 00:08:39,600 Because once a developer learns how to code on AWS, or how to 172 00:08:39,600 --> 00:08:43,799 code on Azure, or how to code on Google Cloud, they don't want to 173 00:08:43,799 --> 00:08:47,200 relearn how to do things on a separate cloud platform. 174 00:08:47,520 --> 00:08:49,200 So there's a knowledge base effect. 175 00:08:49,480 --> 00:08:53,600 The more people that use AWS, it means the more likely they're 176 00:08:53,600 --> 00:08:56,760 going to use AWS in the future and the more likely they're 177 00:08:56,760 --> 00:08:58,520 going to use AWS in a future job. 178 00:08:58,880 --> 00:09:02,120 So in terms of knowledge set, it's more beneficial for 179 00:09:02,120 --> 00:09:06,400 developers to learn Amazon's AWS than it is to learn Tencent 180 00:09:06,400 --> 00:09:10,600 Cloud or IBM Cloud. There's more jobs available with 181 00:09:10,720 --> 00:09:15,120 AWS than there are IBM Cloud, so the knowledge base is a huge 182 00:09:15,120 --> 00:09:17,440 part of why this industry is so top heavy. 183 00:09:17,760 --> 00:09:20,680 On top of knowledge base, the companies that are at the very 184 00:09:20,680 --> 00:09:25,240 top, Azure, AWS and Google Cloud, have by far the most 185 00:09:25,240 --> 00:09:29,080 tooling, the most resources. They have all of the best tools 186 00:09:29,080 --> 00:09:31,640 to be able to grow your business and they have the most 187 00:09:31,640 --> 00:09:35,200 distributed servers. So they have everything aligned 188 00:09:35,200 --> 00:09:37,640 to make this industry very top heavy. 189 00:09:37,760 --> 00:09:40,520 Now the reason that this industry in this category of 190 00:09:40,520 --> 00:09:44,440 cloud is so important and so sought after is because it has 191 00:09:44,480 --> 00:09:48,800 incredibly reliable revenue streams, it has high margins and 192 00:09:48,800 --> 00:09:51,040 it has a very long duration of life. 193 00:09:51,400 --> 00:09:54,520 Companies that sign up for cloud products typically use them for 194 00:09:54,520 --> 00:09:58,720 year after year after year. So this is like the Holy Grail 195 00:09:58,720 --> 00:10:02,040 of a business model. It has long duration, high 196 00:10:02,040 --> 00:10:04,600 profits, and good customer lock in. 197 00:10:05,000 --> 00:10:08,960 This is the most important growth path for all three of 198 00:10:08,960 --> 00:10:13,600 these companies, for AWS with Amazon, and for Microsoft, and 199 00:10:13,600 --> 00:10:17,360 especially for Google. Right now, Google doesn't have a 200 00:10:17,360 --> 00:10:19,040 significant amount of growth paths. 201 00:10:19,440 --> 00:10:22,800 They have most of their revenue highly concentrated into Google 202 00:10:22,800 --> 00:10:24,560 Search. They're trying to do some 203 00:10:24,560 --> 00:10:27,760 experimentation with driverless vehicles. 204 00:10:27,760 --> 00:10:30,080 They're trying to do some experimentation with AI. 205 00:10:30,400 --> 00:10:31,880 They have YouTube, which is growing. 206 00:10:32,120 --> 00:10:35,040 But outside of that, the most significant promising growth 207 00:10:35,040 --> 00:10:38,120 path is the cloud business, which is highly attractive. 208 00:10:38,840 --> 00:10:42,440 Now what we saw in this last report with Microsoft and Google 209 00:10:42,560 --> 00:10:47,280 is that Microsoft speed up growth of Azure to 29% year over 210 00:10:47,280 --> 00:10:49,080 year. Google Cloud, on the other hand, 211 00:10:49,080 --> 00:10:51,920 had growth decelerate. Let's go ahead and take a look. 212 00:10:52,000 --> 00:10:54,480 Here is the revenue breakdown by Google. 213 00:10:55,040 --> 00:10:57,120 They have the Google search. This did well. 214 00:10:57,200 --> 00:10:59,480 YouTube is re accelerating growth which looked really 215 00:10:59,480 --> 00:11:00,960 strong. It's going back into the double 216 00:11:00,960 --> 00:11:03,440 digits. Google services overall looked 217 00:11:03,440 --> 00:11:05,560 very strong. So the company's in good shape. 218 00:11:05,920 --> 00:11:08,800 But then we have that all important Google cloud. 219 00:11:09,240 --> 00:11:14,760 Google cloud had growth of only 22%. 220 00:11:14,840 --> 00:11:18,120 Now keep in mind again, Microsoft just reported growth 221 00:11:18,120 --> 00:11:22,120 in Azure of 29%. You see the problem here. 222 00:11:22,320 --> 00:11:26,360 Google Cloud is roughly half the size of Microsoft Azure. 223 00:11:26,680 --> 00:11:29,880 Half the size and it's growing slower. 224 00:11:30,360 --> 00:11:34,920 Azure's taking market share from Google Cloud as Google Cloud is 225 00:11:34,920 --> 00:11:38,640 half the size. That is not a good story no 226 00:11:38,640 --> 00:11:42,280 matter what way you try to cut that or slice it, or you try to 227 00:11:42,360 --> 00:11:45,200 change the narrative. It's not good when your smaller 228 00:11:45,200 --> 00:11:47,840 product is growing at a slower speed. 229 00:11:48,360 --> 00:11:51,040 If you're smaller, you should naturally be outgrowing the 230 00:11:51,040 --> 00:11:53,280 bigger players to try to take market share. 231 00:11:53,680 --> 00:11:55,320 But we're seeing just the opposite. 232 00:11:55,680 --> 00:12:00,760 What I believe this is proving is how top heavy this industry 233 00:12:00,760 --> 00:12:03,080 is. The big gains seem to be going 234 00:12:03,080 --> 00:12:07,200 to AWS and Azure and that is a problem for Google. 235 00:12:07,200 --> 00:12:10,160 Now, a lot of investors in Google that have focused on this 236 00:12:10,160 --> 00:12:14,040 company and made it a huge part of their portfolio are a little 237 00:12:14,040 --> 00:12:16,640 bit surprised about this report. They're saying that this is a 238 00:12:16,640 --> 00:12:19,320 big overreaction, the market's getting it wrong, and Google's 239 00:12:19,320 --> 00:12:22,560 doing just fine. Gene Munster is one of them. 240 00:12:22,640 --> 00:12:25,960 He explains why he thinks that Microsoft is pulling ahead and 241 00:12:25,960 --> 00:12:29,280 why he thinks this is ultimately an overreaction by Google 242 00:12:29,280 --> 00:12:31,560 investors. Google, I think investors should 243 00:12:31,560 --> 00:12:35,280 just take a deep breath. We've put a lot of pressure on 244 00:12:35,280 --> 00:12:38,680 that Google cloud number, the deceleration. 245 00:12:38,680 --> 00:12:41,800 Understand that that's caught people's attention from 28% to 246 00:12:41,800 --> 00:12:43,240 23. Well, Azure. 247 00:12:43,640 --> 00:12:48,240 Had that step up and growth from 26 to 29%, but the deep breath 248 00:12:48,240 --> 00:12:51,440 piece of this is just looking at the aggregate of what is in 249 00:12:51,440 --> 00:12:53,720 front of Google over the next decade. 250 00:12:54,040 --> 00:12:57,960 They essentially have are losing share in cloud right now in part 251 00:12:57,960 --> 00:13:02,440 because of Microsoft is optimizing Open AI on Azure and 252 00:13:02,440 --> 00:13:06,040 so they are gaining usage because of that. 253 00:13:06,480 --> 00:13:11,280 Google's answer to Open AI is their new Gemini platform that 254 00:13:11,320 --> 00:13:14,800 is Sundar was talking about on the call here the past 35 255 00:13:14,800 --> 00:13:17,520 minutes. And that's their new essential. 256 00:13:17,520 --> 00:13:20,640 That's their answer to Open AI. Jane believes that part of the 257 00:13:20,640 --> 00:13:24,640 reason Google's falling behind is because Microsoft beat them 258 00:13:24,640 --> 00:13:29,160 to the AI game, integrating AI into Azure ahead of Google. 259 00:13:29,400 --> 00:13:31,800 And Google's right behind them? They're going to catch up with 260 00:13:31,800 --> 00:13:33,120 Gemini. They're going to integrate it 261 00:13:33,120 --> 00:13:36,880 into Google Cloud and they're going to then surpass growth of 262 00:13:36,880 --> 00:13:39,560 Microsoft Azure. I think that that might be part 263 00:13:39,560 --> 00:13:43,240 of it, maybe a small part, but I think there's a bigger reason 264 00:13:43,240 --> 00:13:47,000 that Azure continues to pull ahead of Google Cloud. 265 00:13:47,160 --> 00:13:50,480 Again, I can't understate the importance of developer 266 00:13:50,480 --> 00:13:53,840 knowledge base. Developers like using tools that 267 00:13:53,840 --> 00:13:56,520 they're familiar with. They like learning the tools 268 00:13:56,600 --> 00:13:59,520 that are the most often used and the most amount of jobs. 269 00:13:59,880 --> 00:14:01,960 So if you're a developer and you're wanting to learn one of 270 00:14:01,960 --> 00:14:05,560 these platforms, you're naturally going to pick Amazon's 271 00:14:05,800 --> 00:14:08,920 AWS or Microsoft Azure over Google Cloud because they 272 00:14:08,920 --> 00:14:12,440 already have more market share. And the fact that you do that 273 00:14:12,640 --> 00:14:16,320 makes it so that more companies are going to pick those services 274 00:14:16,320 --> 00:14:19,840 as well because their developers already know how to use them. 275 00:14:20,240 --> 00:14:24,080 It takes a lot of extra mental load, a lot of extra time and 276 00:14:24,080 --> 00:14:27,480 learning to learn an entirely new cloud service for your 277 00:14:27,480 --> 00:14:30,040 company. So I think that does play a 278 00:14:30,040 --> 00:14:33,720 massive role in why AWS is so frequently chosen for new 279 00:14:33,720 --> 00:14:37,280 companies and new different platforms to integrate onto 280 00:14:37,280 --> 00:14:39,920 their cloud. Developers already know how to 281 00:14:39,920 --> 00:14:42,160 use their products. I believe that's part of the 282 00:14:42,160 --> 00:14:45,840 reason why companies like Adobe have done so well for so long, 283 00:14:45,840 --> 00:14:47,640 despite there being many alternatives. 284 00:14:48,040 --> 00:14:51,240 Every single photographer already knows how to use Adobe 285 00:14:51,240 --> 00:14:54,040 products, so they don't want to use the mental load to switch 286 00:14:54,040 --> 00:14:57,040 over to something different. Now, outside of that knowledge 287 00:14:57,040 --> 00:15:00,720 base, there's another reason that I think Azure is pulling 288 00:15:00,720 --> 00:15:05,360 ahead of Google Cloud, and that is because Microsoft is wrapping 289 00:15:05,360 --> 00:15:08,640 Azure and integrating it into every part of their already 290 00:15:08,800 --> 00:15:11,880 massive corporate software suite. 291 00:15:12,040 --> 00:15:15,360 Microsoft sells so many critical pieces of software to Fortune 292 00:15:15,360 --> 00:15:18,560 500 companies. They have Microsoft Dynamics 293 00:15:18,560 --> 00:15:21,840 Office 365 with all the accounting software Office 294 00:15:21,840 --> 00:15:24,440 commercial. They have Microsoft Teams, and 295 00:15:24,440 --> 00:15:27,000 on and on and on. All of these products 296 00:15:27,160 --> 00:15:31,120 automatically integrate into Azure, so Microsoft already has 297 00:15:31,120 --> 00:15:35,160 this inherent advantage of making Microsoft Azure already 298 00:15:35,160 --> 00:15:37,640 integrated into all of their Office products. 299 00:15:37,760 --> 00:15:42,400 It's much easier to integrate on Microsoft's products into Azure 300 00:15:42,600 --> 00:15:45,160 than it is to integrate on Microsoft's products into Google 301 00:15:45,160 --> 00:15:47,960 Cloud or AWS. So there's multiple reasons we 302 00:15:47,960 --> 00:15:52,320 can point out of why Azure's growing so fast at 29%. 303 00:15:52,800 --> 00:15:55,160 We can point out that they're a little bit ahead in AI. 304 00:15:55,200 --> 00:15:57,000 They got to that before Google Cloud. 305 00:15:57,280 --> 00:15:58,640 That was one smart thing they did. 306 00:15:58,840 --> 00:16:01,520 But I think the bigger reasons is because of the knowledge base 307 00:16:01,520 --> 00:16:03,360 of developers that know how to use Azure. 308 00:16:03,680 --> 00:16:07,720 And most importantly, the easy integration of Microsoft tools 309 00:16:07,720 --> 00:16:11,480 into Azure gives them an inherent advantage over Google 310 00:16:11,480 --> 00:16:15,440 Cloud and AWS. Ultimately, these companies are 311 00:16:15,440 --> 00:16:18,360 all competing for this all important market share and the 312 00:16:18,360 --> 00:16:21,640 one that is the least advantage is Google Cloud. 313 00:16:21,640 --> 00:16:24,000 The reason that they are the least advantage is because they 314 00:16:24,000 --> 00:16:26,720 have the smallest knowledge base of developers that know how to 315 00:16:26,720 --> 00:16:29,160 use Google Cloud. So they're the least likely to 316 00:16:29,160 --> 00:16:32,720 naturally be picked by a development team and they also 317 00:16:32,720 --> 00:16:34,480 have the least amount of integration. 318 00:16:34,680 --> 00:16:37,600 They don't have as many tools to integrate like Microsoft does. 319 00:16:37,840 --> 00:16:42,600 Most companies will choose either AWS or Azure over Google 320 00:16:42,600 --> 00:16:44,720 Cloud. The way that Google Cloud is 321 00:16:44,720 --> 00:16:50,440 trying to compete is with AI and even then AWS and Azure are 322 00:16:50,440 --> 00:16:51,960 giving them a run for their money. 323 00:16:52,080 --> 00:16:55,080 Now does this mean as investors in Google, that we should become 324 00:16:55,080 --> 00:16:57,880 bearish on the company or become overly concerned? 325 00:16:58,320 --> 00:17:00,920 Of course not. The Google Cloud performance was 326 00:17:00,920 --> 00:17:02,920 underwhelming. It's showing weakness 327 00:17:02,920 --> 00:17:06,440 comparatively speaking to Azure, and I think it's also going to 328 00:17:06,440 --> 00:17:11,000 trail behind a WSAWS has such a bigger market share than Google 329 00:17:11,000 --> 00:17:14,119 Cloud, but regardless, the business still is growing and 330 00:17:14,119 --> 00:17:17,839 it's going to be profitable. Google Cloud will become a 331 00:17:17,839 --> 00:17:21,760 highly profitable growth path for Google even despite being in 332 00:17:21,760 --> 00:17:24,640 3rd place. And being in 3rd place in the 333 00:17:24,640 --> 00:17:26,880 cloud market is still not a bad thing. 334 00:17:27,160 --> 00:17:30,360 And overall Google's valuation is a bit undemanding. 335 00:17:30,400 --> 00:17:33,640 It trades at a decent free cash flow yield, a decent PE ratio, 336 00:17:33,960 --> 00:17:35,440 and the company's a great company. 337 00:17:35,920 --> 00:17:38,720 So I believe that part of the sell off is a little bit 338 00:17:38,720 --> 00:17:40,880 warranted. Investors may be too excited 339 00:17:40,880 --> 00:17:44,120 about Google Cloud, but other than that, I think the company's 340 00:17:44,120 --> 00:17:46,520 still in great shape and it's still a great investment. 341 00:17:46,520 --> 00:17:49,120 Now moving on, we also have Meta which also reported today. 342 00:17:49,120 --> 00:17:52,640 The stock was down 4% on the day, but then they reported 343 00:17:52,640 --> 00:17:57,520 earnings and the stock is up around 4 1/2, almost 5% on the 344 00:17:57,520 --> 00:18:00,000 day. So basically cancelled out 345 00:18:00,000 --> 00:18:03,800 today's trade, which is good. The stock is basically flat on 346 00:18:03,800 --> 00:18:06,800 the day now. Meta's earnings report was a 347 00:18:06,800 --> 00:18:08,920 good one. This is one of the best earnings 348 00:18:08,920 --> 00:18:10,920 report that Meta has had in a long time. 349 00:18:11,280 --> 00:18:13,640 Incrementally, everything is moving back in the right 350 00:18:13,640 --> 00:18:17,560 direction as Mark Zuckerberg is focused on efficiency. 351 00:18:17,680 --> 00:18:19,920 That keyword that investors love to hear. 352 00:18:20,000 --> 00:18:22,520 Most of the key metrics are moving in the right direction. 353 00:18:22,520 --> 00:18:26,360 They're seeing seven 8% increases in activity on their 354 00:18:26,360 --> 00:18:29,040 family Facebook apps, ad revenues moving in the right 355 00:18:29,040 --> 00:18:31,560 direction. The revenue overall increased by 356 00:18:31,560 --> 00:18:34,920 23% year over year which is massive increase. 357 00:18:34,920 --> 00:18:37,880 Meta is now the faster growing of the big tech companies. 358 00:18:37,880 --> 00:18:40,080 That's good that they re accelerated growth after it 359 00:18:40,080 --> 00:18:42,680 going flat last year. And then on top of that they did 360 00:18:42,680 --> 00:18:44,240 something that they've been struggling with. 361 00:18:44,360 --> 00:18:48,800 They're cutting expenses, they had a decrease in expense of 7% 362 00:18:48,800 --> 00:18:50,960 year over year. So the business is growing in 363 00:18:50,960 --> 00:18:52,520 size and becoming more efficient. 364 00:18:52,520 --> 00:18:54,920 At the same time, we can calculate the cash flow of the 365 00:18:54,920 --> 00:18:58,000 company by taking the net cash from operating activity, looking 366 00:18:58,000 --> 00:19:01,520 at the share based compensation and and looking at the CapEx 367 00:19:01,520 --> 00:19:03,960 which is the purchase of property and equipment. 368 00:19:03,960 --> 00:19:08,720 When you net all of this out, Meta generated $10,362,000,000 369 00:19:08,720 --> 00:19:13,760 in free cash flow after stock based comp which is really high. 370 00:19:13,760 --> 00:19:16,280 If we look at the free cash flow netting out the stock based 371 00:19:16,280 --> 00:19:20,480 comp, this is what it looks like in 2021 to 2022. 372 00:19:20,840 --> 00:19:24,520 This is right when Mark Zuckerberg was focused on the 373 00:19:24,520 --> 00:19:27,200 Metaverse, an exciting new product, and he didn't seem to 374 00:19:27,200 --> 00:19:30,800 be focused at all on efficiency or how the business's actual 375 00:19:30,800 --> 00:19:34,160 cash flows looked, and Wall Street did not like that it 376 00:19:34,160 --> 00:19:37,760 caused the stock to sell off as the cash flows went down. 377 00:19:38,200 --> 00:19:41,880 Now, right at the bottom here, Mark Zuckerberg made a massive 378 00:19:41,880 --> 00:19:44,120 pivot. He came out with this big letter 379 00:19:44,120 --> 00:19:46,920 saying that he's focused on efficiency and that really 380 00:19:46,920 --> 00:19:50,320 marked the bottom of the stock as well as the bottom of the 381 00:19:50,320 --> 00:19:52,520 cash flows. On a stock based compensation 382 00:19:52,520 --> 00:19:56,680 adjusted basis in Q3 of 2022, the cash flows were actually 383 00:19:56,680 --> 00:19:58,840 negative. Meta was losing money and 384 00:19:58,840 --> 00:20:02,000 diluting investors, but it turned around quickly. 385 00:20:02,120 --> 00:20:06,360 IN2022Q4 it went back into the positive and it's incrementally 386 00:20:06,360 --> 00:20:10,080 stepped up every single quarter. Now this latest quarter again is 387 00:20:10,080 --> 00:20:13,600 right over $10 billion. So when Caltrum updates the 388 00:20:13,600 --> 00:20:17,600 numbers here, the latest quarter will be right here, almost an 389 00:20:17,600 --> 00:20:21,560 all time high of true cash flow from meta matching where they 390 00:20:21,560 --> 00:20:25,120 were back in 2021. And you can notice how the stock 391 00:20:25,120 --> 00:20:27,840 price also seems to follow the cash flow. 392 00:20:28,200 --> 00:20:30,880 You can see how this is aligned. This is when they hit their peak 393 00:20:30,880 --> 00:20:33,760 in cash flow. The cash flows went down, then 394 00:20:33,760 --> 00:20:36,240 they went back up and so was the stock price. 395 00:20:36,320 --> 00:20:39,960 So the stock price in this case is accurately following the cash 396 00:20:39,960 --> 00:20:43,080 flows of the company. Meta is focusing on profits, 397 00:20:43,080 --> 00:20:46,160 focusing on efficiency. They're doing a fantastic job 398 00:20:46,160 --> 00:20:49,160 growing reels and competing with YouTube, and they're seeing the 399 00:20:49,160 --> 00:20:51,720 rewards come in. The stock is up right now around 400 00:20:51,720 --> 00:20:54,600 3 1/2%, so it's down just a tad on the day. 401 00:20:54,600 --> 00:20:57,040 But overall, this is a fantastic report. 402 00:20:57,040 --> 00:20:58,760 Investors should be happy with this. 403 00:20:59,200 --> 00:21:01,000 I expect meta to hold on to their gains. 404 00:21:01,080 --> 00:21:03,640 Now Next up we have Vici, which has been going through a bit of 405 00:21:03,640 --> 00:21:05,640 a sell off. The company's traded down from 406 00:21:05,640 --> 00:21:09,720 $33 per share down to 27. I'm still in the green on this 407 00:21:09,720 --> 00:21:10,720 one. It's still been a great 408 00:21:10,720 --> 00:21:13,880 investment, but it's interesting to see how much Vici's traded 409 00:21:13,880 --> 00:21:17,240 down because fundamentally speaking, everything has been 410 00:21:17,240 --> 00:21:19,000 positive. It's been moving in the right 411 00:21:19,000 --> 00:21:21,120 direction. The earnings report highlights a 412 00:21:21,120 --> 00:21:23,200 lot of fundamental developments for Vici. 413 00:21:23,520 --> 00:21:25,640 They grew the revenue which is expected. 414 00:21:25,680 --> 00:21:28,520 We'll look at the dilution adjusted growth in a minute, but 415 00:21:28,520 --> 00:21:32,000 they also completed the first sale leaseback transaction in a 416 00:21:32,000 --> 00:21:36,000 family entertainment sector of Bolero and Vici's leasing 38 of 417 00:21:36,000 --> 00:21:38,520 their locations. Along with this transaction, 418 00:21:38,520 --> 00:21:43,280 Vici gets over a 7% cap rate. So they got very favorable terms 419 00:21:43,280 --> 00:21:45,800 with this transaction. They also completed the 420 00:21:45,800 --> 00:21:48,680 acquisition of Century Casinos for gaming properties in 421 00:21:48,680 --> 00:21:50,800 Alberta, Canada. We've known about that deal for 422 00:21:50,800 --> 00:21:52,600 a while. They announced the expansion of 423 00:21:52,600 --> 00:21:55,360 the partnership in the Canyon Ranch and they're increasing 424 00:21:55,360 --> 00:21:59,200 their full year 2023 guidance. Ed Potoniak, the CEO of the 425 00:21:59,200 --> 00:22:02,120 company, says Vici's third quarter financial performance 426 00:22:02,360 --> 00:22:05,320 reflects sustained and sustainable commitment to 427 00:22:05,320 --> 00:22:08,960 accretive growth and capital deployment through acquisitions 428 00:22:08,960 --> 00:22:10,920 and strategic financing activity. 429 00:22:11,280 --> 00:22:13,920 Accretive growth means that they're not just growing for the 430 00:22:13,920 --> 00:22:16,720 sake of growing, they're growing profitably. 431 00:22:16,960 --> 00:22:19,520 They're creating value as they grow, which is incredibly 432 00:22:19,520 --> 00:22:22,680 important for any company, but especially for Reit's which in 433 00:22:22,680 --> 00:22:26,320 many cases they can get in the habit of growing just to grow. 434 00:22:26,760 --> 00:22:29,960 Now the way that they show that they're growing accretively is 435 00:22:29,960 --> 00:22:33,160 they say that they've had 20% revenue growth. 436 00:22:33,680 --> 00:22:36,400 In the case of Reed's, revenue growth really isn't the most 437 00:22:36,400 --> 00:22:38,880 important thing because you need to know whether or not it was 438 00:22:38,880 --> 00:22:42,720 accretive or dilutive. In this case, it was accretive. 439 00:22:43,000 --> 00:22:48,240 They had nearly 11% AFFO per share growth year over year. 440 00:22:49,040 --> 00:22:53,080 The AFFO is the adjusted funds from operations and then you 441 00:22:53,080 --> 00:22:57,000 divide that on a per share basis to make sure each share you own 442 00:22:57,120 --> 00:23:00,200 is growing profitably and they're doing that. 443 00:23:00,400 --> 00:23:05,440 Every share of Ichi has 11% more cash flow power than it did one 444 00:23:05,440 --> 00:23:08,240 year ago. So the CEO of the company is 445 00:23:08,240 --> 00:23:12,240 making sure that every share you buy of this company is growing 446 00:23:12,240 --> 00:23:16,440 profitably year after year. An 11% growth for REITs in this 447 00:23:16,440 --> 00:23:18,640 market is still very fast growth. 448 00:23:18,640 --> 00:23:22,000 That's faster than most REITs like Realty Income Corp or 449 00:23:22,000 --> 00:23:25,600 American Tower Corporation or basically any other REIT you can 450 00:23:25,600 --> 00:23:28,720 list off. This is solid growth from this 451 00:23:28,720 --> 00:23:32,760 company and overall, this is the best metric you look at to track 452 00:23:32,760 --> 00:23:36,200 the intrinsic value of a read. Now they recently just announced 453 00:23:36,200 --> 00:23:38,520 a big acquisition. They say subsequent to the 454 00:23:38,520 --> 00:23:41,720 quarter end, we entered into a new experiential sector with 455 00:23:41,720 --> 00:23:45,520 Bolero, the market leader in reinvigorating the programming 456 00:23:45,520 --> 00:23:47,720 and economics of the bowling experience through their 457 00:23:47,720 --> 00:23:50,480 innovative consolidation and growth model. 458 00:23:50,480 --> 00:23:53,480 In this partnership, we acquired 38 Bolero properties and 459 00:23:53,480 --> 00:23:56,120 concurrently bolstered our embedded growth pipeline by 460 00:23:56,120 --> 00:23:59,680 obtaining the right, the first offer to acquire current or 461 00:23:59,680 --> 00:24:02,600 future Bolero real estate in the coming years through sale 462 00:24:02,600 --> 00:24:05,560 leaseback transactions. So they basically say that so 463 00:24:05,560 --> 00:24:09,480 far they bought 38 properties and they also bought the right 464 00:24:09,560 --> 00:24:13,240 to acquire future properties before anyone else, so they get 465 00:24:13,240 --> 00:24:16,400 the first bid on it. We also expanded our presence in 466 00:24:16,400 --> 00:24:19,440 11 new States and added another publicly traded tenant to our 467 00:24:19,440 --> 00:24:22,560 roster. Vici's differentiation stems 468 00:24:22,680 --> 00:24:25,480 from our commitment to partnership with operators who 469 00:24:25,480 --> 00:24:30,080 define a respective experiential category as Bolero has done so 470 00:24:30,080 --> 00:24:33,960 in bowling experience. So if we look at Bolero, this 471 00:24:33,960 --> 00:24:37,520 company that's a new tenant, Avicii is not the biggest 472 00:24:37,520 --> 00:24:40,120 tenant, but it's another good one for Vici to have in their 473 00:24:40,120 --> 00:24:42,520 portfolio. It further diversifies their 474 00:24:42,520 --> 00:24:45,240 portfolio. It's very accretive with above a 475 00:24:45,240 --> 00:24:49,280 7% cap rate and Bolero's profitable. 476 00:24:49,600 --> 00:24:52,920 Now a lot of companies like Bolero that were specs that came 477 00:24:52,920 --> 00:24:56,800 out of 2020, they've all either gone away or they're deeply 478 00:24:56,800 --> 00:24:59,560 unprofitable. Bolero's one of the exceptions 479 00:24:59,560 --> 00:25:02,640 that's making good money and I've listened to interviews with 480 00:25:02,640 --> 00:25:05,840 the CEO of Bolero. He's really dedicated to growing 481 00:25:05,840 --> 00:25:08,960 this company. It is a founder operated company 482 00:25:09,000 --> 00:25:11,360 and I believe that Vici made the right move in partnering with 483 00:25:11,360 --> 00:25:14,440 this experiential company. Right now, I believe Vici's 484 00:25:14,440 --> 00:25:16,880 undervalued. I think the company is set up 485 00:25:16,880 --> 00:25:18,440 for a lot of growth in the future. 486 00:25:18,760 --> 00:25:21,160 They have an extremely strong tenant roster. 487 00:25:21,360 --> 00:25:24,960 They have very strong leases. They're not over leveraged and I 488 00:25:24,960 --> 00:25:27,760 believe they're going to sail through a recession. 489 00:25:28,080 --> 00:25:30,800 So even the big recession prediction is not something that 490 00:25:30,800 --> 00:25:33,880 I'm concerned about right now. I think the price point is 491 00:25:33,880 --> 00:25:36,680 favorable for this company as these are out of favor and I 492 00:25:36,680 --> 00:25:39,680 plan on holding my large Avicii position Now last but not least, 493 00:25:39,680 --> 00:25:42,800 we have Canadian Pacific. This is 1/2 size position in My 494 00:25:42,800 --> 00:25:44,600 Portfolio. So I do have an investment in 495 00:25:44,600 --> 00:25:46,200 this company. And overall, I have to be 496 00:25:46,200 --> 00:25:48,440 honest, this report was a little meh. 497 00:25:48,960 --> 00:25:50,880 It wasn't that exciting either way. 498 00:25:50,880 --> 00:25:53,520 In fact, I think it was probably a little bit underwhelming. 499 00:25:53,920 --> 00:25:56,880 The CEO starts off by saying that they've encountered 500 00:25:56,880 --> 00:26:00,520 challenges this quarter due to softer macro environment and 501 00:26:00,520 --> 00:26:04,360 external labour disruptions. So they're listing off problems 502 00:26:04,360 --> 00:26:06,480 here and challenges. That's never a good sign when 503 00:26:06,480 --> 00:26:08,600 that's how the CEO starts off their letter. 504 00:26:08,960 --> 00:26:12,960 There's also on the report not much earnings per share growth. 505 00:26:13,040 --> 00:26:15,680 They have to deal with that merger, so there's some dilution 506 00:26:15,680 --> 00:26:18,200 there. Overall, it was just a a 507 00:26:18,200 --> 00:26:21,760 basically flat quarter, not much to show this quarter and they 508 00:26:21,760 --> 00:26:25,320 again list off more challenges. Economic headwinds and other 509 00:26:25,320 --> 00:26:29,240 near term challenges including the Port of Vancouver strike had 510 00:26:29,240 --> 00:26:31,640 weighed in on the volumes more than we anticipated. 511 00:26:31,880 --> 00:26:35,000 Therefore we are adjusting our near term guidance accordingly. 512 00:26:35,040 --> 00:26:37,640 It's never good to see companies primarily focusing on these 513 00:26:37,640 --> 00:26:39,920 challenges. It's a lot more fun to see them 514 00:26:39,920 --> 00:26:43,280 in the situation of Microsoft or Meta where things are just going 515 00:26:43,280 --> 00:26:45,480 explosively well. But don't be fooled. 516 00:26:45,480 --> 00:26:49,040 Canadian Pacific is an incredibly strong company with a 517 00:26:49,040 --> 00:26:51,920 massive barriers to entry and it's going to take a lot more 518 00:26:51,920 --> 00:26:55,400 than some strikes or some disruptions with macro to make 519 00:26:55,400 --> 00:26:59,040 this company a poor investment. As of right now, if this stock 520 00:26:59,040 --> 00:27:02,480 continues to trade down or trade flat, I'm going to increase my 521 00:27:02,480 --> 00:27:04,720 stake in the company. So there's my thoughts overall 522 00:27:04,720 --> 00:27:06,560 in these earnings reports. We just made it through a 523 00:27:06,560 --> 00:27:09,000 difficult day. But overall, when I look at the 524 00:27:09,000 --> 00:27:12,120 actual fundamentals of these companies, I mostly see them 525 00:27:12,120 --> 00:27:14,640 moving in the right direction. I don't think these companies 526 00:27:14,640 --> 00:27:17,160 are doing poorly. That's all for this episode. 527 00:27:17,160 --> 00:27:19,080 I hope you enjoyed it and I'll see you in the next one.