Welcome back everyone and thank you for joining.
Microsoft is getting crush. The stock is down 12%.
A ton of software companies are also getting crushed as well.
Whether it's Adobe or Salesforce or Intuit, you name it, if it's
in the software category, odds are it's being sold off.
We have a lot to go over to explain what's going on with
software companies and in particular Microsoft.
After all, it's not a frequent event that you see this company,
one of the most predictable companies, one of the best ones,
one of the most diversified ones, sell off a staggering 12%
in a single day. It's dragging down the entire
market sentiment. It's making investors feel
incredibly bearish. In the meantime, we also have
different stories going on right now, like Meta having a nice
price surge and posting pretty neat earnings.
We'll be looking at what's going on with Meta.
We also have ASML that just posted earlier this week, one of
my big holdings. We'll be going over that as
well. We have MasterCard, one of the
most significant buys that I've made, also posted earnings this
morning and I want to highlight what I think is the most
important take away from Mastercard's earnings.
Then of course, we also have Tesla, everyone's favorite Tesla
that reported their earnings. The numbers were terrible and it
looks like a dying company, yet the stock is only down 2% and
it's one of the most richly valued companies in the market.
So what is going on with Tesla? We're going to break that down
as well and see the new direction and the new light that
Elon Musk is giving. This is going to be one of the
most jam packed episodes. We're going to be going over all
of this in depth to explain what's going on with these
companies and why they're trading the way that they are.
So let's go ahead and jump in now.
We start things off by looking at what I believe is the most
important news of the day, which is Microsoft.
It's not every day that you see Microsoft this company fall 12
to 13% after earnings. In fact, that's virtually
unheard of. That really happens with a
company this diversified and stable and predictable.
When we look at Microsoft, it is dragging down the rest of the
indices. It's also dragging down My
Portfolio. My portfolio's down about 1 to
2% on the day, somewhat in line, maybe a little bit less in the
market, but it is a hit after all, because I do own some
Microsoft. I own the stock in the passive
income portfolio, $70,000 of it. It's still, even after this
trade, down $27,000 in the green.
So it's still well within the green.
When I was buying Microsoft, I was paying around 2:20 for it.
I also own a little bit of the stock in the story fund.
This one is $8800 in the green after the trade down today.
So what happened to 'cause this trade down?
Well, at first glance, Microsoft's numbers look really
good. For example, if we just jump
into Qualtrum here and we pull up any of the numbers, revenue
grew 17%. That looks great.
We have that number called the remaining performance
obligations. You're probably hearing about a
lot the RPO, I call it the cloud backlog because that's
essentially what it is and that's up a lot.
That's up 110%. That does raise some eyebrows.
We'll go into that a little bit later.
We also have the EBITDA climbing dramatically.
In fact, that's a big spike. Look at the EBITDA climb just
this last quarter. We have net income looking like
it's having an extra a strong climb this quarter.
These numbers actually look incorrect.
They're not incorrect. These are the real numbers.
This is the real data. We have the net income growing.
We have the free cash flow. That's also up dramatically.
Look at it this quarter, this massive jump up from the
previous quarter to this one. Why did earnings per share jump
from $3.72 to $5.16? So all these numbers look great.
In fact, some of them look a little too good to be true.
Some of them look like they're growing too fast.
But Even so, Microsoft's overall business looks very strong.
Every number is going up and to the right.
So what gives? Why is the stock down?
Well, as you may have guessed, as you may be suspecting,
there's some things that are inorganic with these numbers.
When they jump that big, Microsoft needs to give an
explanation of what's going on. And the explanation they gave
showed something different about Microsoft, something that
investors didn't really expect and it came down to the earnings
call. When we look at the earnings
call, we have a summary of it here in Qualtrim.
This is a a summarized look at what they highlighted and under
the category open AI relationship and RPO
concentration. Remember, the RPO is the cloud
backlog and concentrations, never a good thing when it comes
to your customers. And this is where we get to the
most important line of the entire earnings report.
Approximately 45% of commercial RPO is from open AI commitments.
Almost half of Microsoft's cloud commitments comes from open AI
alone. When we look at the chart here
again, we can go back to the RPOS.
We have this nice chart. We see that it grew a lot, but
then when you when you cross out 45%, it doesn't look like it's
actually growing. When you strip out the Open AI
contribution to their RPO growth, it goes from right now
the 110% to 28%. So it's still growing, but it's
a far cry from 110%. So immediately when you look at
the numbers and you actually factor in what what Open AI is
doing, they're making up for almost all the growth in their
RPO. This entire number, the growth
portion of it comes almost entirely from Open AI, only 28%
growth without Open AI. OK, But what about these other
numbers because they look good as well.
For example, we have the EBITDA climbing up dramatically in the
last quarter. We have net income up big in the
last quarter. We have the earnings per share
likewise up big in the last quarter, growing 60%.
Well, there is an explanation for all these other numbers
besides the RPO growth. So the explanation is again Open
AI. If we go back to the earnings
call transcript and we look here, it says that the earnings
per share were only $4.14, up 24% excluding the accounting
impact from Open AI. So the diluted earnings per
share number is actually misleading because Open AI got a
higher valuation and part of that higher valuation led to
about $7.1 billion in equity gains from Microsoft.
Now these are paper accounting gains.
This isn't organic earnings per share growth by the company.
When you erase those $7.1 billion, all of a sudden the
numbers here look a little bit more in line.
It'd be more like right there. So with Open AI's impact, the
growth of their earnings per share is about 60% that you see
here. Without Open AI's impact, their
growth is 24%, still good, but again, a far cry from the number
being reported here. And this makes Microsoft and all
the earnings per share numbers look optically cheaper than they
actually are. So all these numbers are
starting to make a little bit more sense.
Now we know that the rapid RPO growth or cloud backlog is a
response of Open AI. We know that the income boost in
the earnings per share in EBITDA or as a response of Open AI, it
seems like a lot of what Microsoft's doing is as a
consequence of Open AI and that's where we get a structural
change in how investors are viewing Microsoft.
For a long time, in fact up until today, investors viewed
Microsoft is an incredibly diversified, predictable, in
fact inevitable company. It was a globally and
geographically and customer based diversified company.
It had everybody using its products everywhere, distributed
across all of planet Earth and Microsoft.
Because of that, global diversification in both
geographies and customers across Fortune 500 companies was always
looked at as a steady, predictable company, one that
was incredibly dependable. When I talked about Microsoft, I
also looked at it that same way. I said that Microsoft over and
over again was geographically and customer diversified,
meaning that not one single entity could harm Microsoft to
any significant degree. And because of that, Microsoft
was treated like a treasury bond, like something that's so
predictable it's basically risk free.
It had a higher credit rating than the US government.
Because of that, Microsoft commanded a premium multiple one
in the mid 30s. Now what has changed is that
investors are looking at this and their whole framing of the
company, the entire structure of it, is being changed.
Now Microsoft looks more like a levered bet on a single entity.
That single entity that's making all their numbers go up into the
right at enormous pace is open AI.
That single entity that's causing their net income to jump
$7 billion in their earnings per share, the one that's affecting
all their capital allocation, the one that's affecting their
major cloud growth is open AI. Now, Microsoft does not look
like a company that is globally diversified and its customer
base, and there's no single entity that can dictate its
outcome. Now it's looking like one that
put a lot of chips on the table into open AI.
Simply put, Microsoft has a lot riding on open AI, and that's
making investors rethink how they view the company and its
risk profile. So investors are not selling
down the stock today simply because of valuation concerns or
because Microsoft is actually doing poorly.
They're selling the stock down today because of a structural
reframing of the company from a heavily diversified inevitable
company to one that now has a more singular risk factor, which
is open AI. And you can see the RE rating
happen live. That's where you get a 12% down
day, a RE rating in a stock as big as Microsoft.
These don't happen frequently because events like this and
knowing that 45% of your cloud business is coming from one
company, that doesn't happen frequently.
Now initially when looking at these numbers and you look at
the RPO going up, you're impressed as a Microsoft
investor, you're like everyone else.
You look at it and you think this is a good thing.
But then when you hear that 45% of it is due to open AI, that
puts a little bit of a more sour note on it because you know that
it's not entirely organic and it's heavily concentrated into
one customer. That's never a good thing in and
of itself. But then you also think, and
this is what I thought about for a minute, where is Open AI
getting the money to commit this much to a cloud backlog to begin
with? After all, Open AI commitments
are in order of $350 billion. Open AI does not make $350
billion in revenue. So where are they getting the
money? Well, of course, this is a
rhetorical question. The money is coming from none
other than Microsoft. Microsoft is the lung of Open
AI. It's what makes them live.
Without Microsoft, Open AI would cease to do business.
They'd have no infrastructure to train on.
They'd have no funding. Microsoft is the one funding
this entire operation because Open AI has nowhere close to pay
for these commitments in and of themselves.
So we have a situation here similar to what we've seen
before, where Microsoft is giving billions of dollars to
Open AI. Open AI is being capitalized by
Microsoft and then returning that capital with commitments to
use Azure cloud growth. Microsoft's turning around and
saying, look at our Azure cloud backlog grow with all these
commitments, but that money is the money that Microsoft just
handed them. They're just handing it back.
So now we have a more complex, nuanced issue.
Not only is Microsoft heavily concentrated into one customer
for its cloud, but that customer is also capitalized by
Microsoft. Without Microsoft, they couldn't
even function or pay for this to begin with.
So not only makes this a significant concentration
problem, it also makes it a circular financing problem.
So we've already identified an issue of customer concentration
1 of wonky metrics because of one specific company, which is
Open AI. And we also have the issue of
circular financing making its way again in Microsoft's
financials. But then we have one more issue
and this is perhaps maybe even the biggest one.
Microsoft's CapEx growth is out of control, especially relative
to the revenue growth. When we look at the revenue
growth of Microsoft, again, it looks decent.
We look at the growth over time. Microsoft is growing very
quickly and it's 16 to 17% as of last quarter.
We have this nice growth over time, but if we look at that
revenue growth relative to their capital expenditure growth, the
CapEx growth is growing three times the speed.
This is what it looks like when we index both of those to zero.
You can see that when you're starting at 0, the revenue
growth is growing at literally 1/3 the speed of the CapEx
growth. This is on a trailing 12 month
basis. Every single quarter, you can
see the most previous quarter shows enormous growth in CapEx
compared to the revenue growth. Microsoft also has an issue
where the capital expenditures are growing three times the
speed of revenue. So when we look at the overall
reason that Microsoft's down 12% today, it's a combination of all
these factors, a structural changing in the way that
investors are viewing Microsoft, the circular financing, the
levered bet on open AI and now the fact that Microsoft's future
revenue is more heavily dependent on a separate company,
open AI. If Open AI is at risk from say
let's say Google, Microsoft's revenues at risk.
Now Google's competing directly against Microsoft when they're
competing against open AI. So this is a more complicating
thing. And then you add in the fact
that the CapEx is growing, you get a stock that's down 12%
overall. Microsoft is not in trouble.
The core financials of the company are fine.
It's not one that you need to panic about, but investors are
pricing the companies based on their relative risk.
And Microsoft structurally has become slightly more risky than
it was previously. So I'm not in a panic for
Microsoft. I'm not going out and selling my
stock today. I'm still going to continue to
hold Microsoft and I believe it's a very good company, but
it's moved into a bit of a different scenario now.
Microsoft is a prove IT company. It's one where they need to
prove that they can grow organically outside of open AI.
They need to show, they need to show non open AI Azure growth
and they need to show that they're not so heavily dependent
on this one company with these circular financing deals.
Microsoft can continue to do that.
Over time, the stock will continue to make gains.
Now moving on to another company that reported earnings that had
the opposite scenario. We have Meta.
Mark Zuckerberg gets the green light from Wall Street to keep
pouring money into AI. Well, that seems a little
strange. How did Meta get the green light
to spend so much money on AI and on CapEx when Microsoft
couldn't? Well, Meta has a lot of good
things going. One of them is that their
revenues growing incredibly fast.
The numbers are in Meta stock is trading up after this earnings
report, as it should. The revenue grew by 24%, massive
revenue growth number. To add on to that, Meta is now
guiding for 30% growth next quarter.
So not only did they crush these earnings, but they're guiding
for even faster acceleration revenue next quarter.
We have the family daily active people which continues to grow
now to 3.58 billion people. They already have such a huge
user base. They don't really even need to
grow that metric, but it's growing anyways.
It's just another positive thing.
When we look at the overall earnings per share, you can see
that they had that one time quarter, the previous quarter
that was super low because of a one time tax hit.
Well, that's worked its way by and what do you know, Meta's
earnings per share grew incredibly fast, proving that
this was only because of a one time tax hit.
And you can see that with the quarterly TTM, even with that
one time tax hit, they're starting to work their way back
up. This will naturally work its way
back up when that moves out of the range.
So this is also incredibly fast organic earnings per share
growth. I made a few charts here to show
how fast Met is growing and it is exceptional.
The line above shows the operating margin of the company.
So you can see that going down and up.
You can see that that affects the profitability of the
company. Then we have the light blue
bars, which is the revenue. Those are the tall ones.
And then you have the dark blue bars, which is the operating
cash flow, the revenues marching up quarter after quarter.
The operating cash flow is marching up quarter after
quarter. This company is growing quickly.
Now, Meta does have a CapEx issue, just like Microsoft.
They're spending increasing amounts every single quarter.
You can see that visualized hair.
This is around $70 billion in trailing 12 months CapEx spend.
An enormous amount of money is being thrown into CapEx, but in
this case, investors are giving Meta an excuse to do this.
They're saying that you can do this and we're happy about it
because you're also getting extremely fast revenue growth
and fast operating cash flow growth and because the CapEx
growth can be pulled back into the core business very easily.
It's not growth that's dependent on one single client or one
outside entity. This is just organic growth from
the company. Another chart that I thought was
interesting to look at here. This goes back about 10 years
with Meta, and you can see the red line there.
That squiggly line is the price of Meta, and then you can see
the free cash flow per share with the blue bars.
Notice how the price almost perfectly matches the free cash
flow per share that is the intrinsic value indicator of the
company. Mark Zuckerberg wants to own his
own destiny. He wants Meta to be less reliant
on externalities like Apple and different companies for their
future growth and potential. He's famously said before that
without all the constraints that Apple gives him, Meta would
likely be twice as profitable than it is today.
That's just the effects of Apple on the company, and you can see
that they're investing fully in their own destiny.
They want to own their own AI model.
They want to have their own super intelligence.
They want to have their whole ecosystem.
They want to have their own hardware.
Meta is going for the entire prize, a company that wants to
have an entire ecosystem, the full value chain from beginning
to end within its entire company.
What I see from Mark Zuckerberg is pretty incredible, and I've
been more and more impressed with Meta.
I'm impressed with the fundamentals.
The mistake that I've made with not owning Meta is simply trying
to be a little too cute with this company, waiting for too
big of dips, always wanting a bit better of a price.
When I look at it now, even though Meta is up 10% on the
day, it's a company that trades at a relatively cheap Ford PE
ratio, a decent healthy free cash flow yield.
The trailing PE looks artificially high because of
that tax hit to their previous quarter.
And when we look at the growth of the company, it's expected to
grow at 30% revenue growth next quarter, which is incredibly
fast. When we look at the share price
of Meta, it's true that it's up 10%, eleven percent on the day.
But if we look at the past one year, Meta is only up 7%.
This hasn't been some company like an ASML or a Google that's
raised up double over the past one year.
So Meta is a company that I still believe is a buy and it's
one that I am strongly considering buying.
I believe that right now this company is still priced
undervalued and I believe that it will continue to have Ford
momentum. The mode of it is significant.
I can't think of anything that really will take this company
and disrupt it and the growth potential is massive considering
their install base and their user base.
So when I look at Meta, this is one that I'm heavily considering
buying over the upcoming days. Now next we get to a stock
that's really done great, which is ASML.
This one is up around 25% just year to date.
We look over the past six months up 100%.
So everybody that's bought this stock is happy with it.
It's been a great one and the performance justifies it.
Now, I assume that ASML would report great earnings, which
they did. They beat on all the important
aspects of it, and the stock still traded down 2 to 3%, as
you'd expect with the company that ran up this much into
earnings, but it's still holding its own.
It's making it so that investors that really had all those great
gains are keeping those gains. Even today, during a blood red
day, ASML is in the green by 1.6%.
When we look at what's going on with this company, the numbers
look great. The revenues growing 15 to 16%
per quarter. The net income is climbing.
The earnings per share is climbing.
The company's on a roll. Not only that, but they're also
buying back shares aggressively. They say they're going to be
doing even more buybacks since ASML is a company that makes so
much money even above their employee costs, including any
stock based compensation. They're so incredibly
profitable. They can pour a lot of that
money directly back into buybacks.
And so anytime the stock drops down or even when it's just
going along, they're always buying back shares, making it so
their earnings per share and free cash flow per share grow
faster. The stock initially popped 10%
after earnings were reported. But management, like they are,
is very conservative and they gave caution.
And they said that even though the AI demand's very strong,
they always want to kind of dampen people's expectations.
So the stock came down a little bit after the earnings call.
But in any case, this company is doing incredibly well.
It's already a big winner this year, and I still see it as a
monopoly that has a lot of growth ahead of it.
For me, this one still maintains a whole position.
Now, another important company that reported earnings today,
and one of my largest positions right underneath Google is
MasterCard. I've recently invested a lot of
money into this company and it's been wavering a little bit
because of all the talk of capping interest rates.
That's caused some investors to become a little bit soured, but
MasterCard just reported their numbers and this was a very high
quality beat across the spectrum.
This was an incredible beat. It's up 3.6% today after the
report. And when we look at the numbers
here, I just want to highlight a couple things.
When we look at first of all the revenue growth of the company,
revenue grew by 18% overall or 15% on a currency neutral basis.
Now this revenue growth is between two different parts of
the company. It's between the value added
services, which is like their non network payment part of the
company that grew by 24%. Then you have the network part
that grew by 12%. So 12% for their core business,
that's the part that most people know about MasterCard, and then
24% for the value added services.
That equates to 18% overall. What this shows is that
MasterCard is decoupling its business from just a payment
network. Overall, this development from
MasterCard continuing to grow their value added services is
exactly what this company needs to do.
Another added benefit of MasterCard moving more towards
services instead of just payment rails is that it further
insulates them from government interference.
The government can come in and make regulations about take
rates and things with payments, but they can't really do the
same thing for all the various services that MasterCard sells.
So they know they're moving towards a more permissionless
type of revenue, one where they can continue to grow and expand
without as much government interference.
And that old business, the one that's built on the rails, well,
the government will meander in that, but they're already
leaving that in the dust. When I look at MasterCard, I
like the transition. I like the growth, I like the
profitability. This is a company that is so
wildly profitable. I like the report a lot, and I
think that MasterCard and Visa are doing great.
Now finally, we get to everyone's favorite, which of
course is Tesla. It's down 2 1/2% today.
The stock price is 420. Now, when we look at Tesla,
there's a lot going on with this company, and it's usually what
you would expect. When we look at the raw numbers,
they don't look great. Revenue is down year over year.
The automotive section of Tesla is down 10%.
The energy section is the bright spot.
So Tesla is becoming more of an energy company and the services
are also growing. So basically they're selling
fewer cars, but they're also making more money on energy and
services. When we look at the vehicles
delivered, we can smooth this out over time.
This gives a clearer picture. Tesla is delivering fewer and
fewer vehicles. The free cash flow is down 30%.
We have the earnings per share, which of course are down as
well. These numbers, of course, look
terrible across the board. They are disastrous numbers.
And in fact, it shows that Tesla's no longer a car company
because it's being trounced as a car company.
Without the tax incentive, Tesla's making less money per
vehicle sold, and so they're trying to sell even fewer
vehicles because they're less profitable.
They've also clearly hit the Max sales delivery numbers that they
possibly can because now they're dealing with intense competition
with China. No longer is Tesla the one
competing without any real competitors in the EV space,
there's now very viable competition.
So these numbers look terrible and this business is dying.
But that's not a problem to the Tesla investor because these
numbers in this very business doesn't represent the future of
Tesla. What we're looking at here is
simply the past phase of Tesla. Step one.
It was the launching pad for what's going to happen in the
future. Elon Musk has made it very clear
that right now is the definitive point of a transition.
This is where we get into the future.
Let's go ahead and just read about it from Elon Musk.
Tesla's mission, first of all, was updated to amazing abundance
centered around AI and robotics, enabling the future of universal
high income. So no longer our car is even
part of the equation. It's AI and robotics.
Management has framed the company as building the
infrastructure for an era where autonomy, energy and robotics
dramatically increase productivity while preserving
the environment. In 2026, it's described as the
start of a new book. Ignore all these numbers.
That's the old stuff. If you're looking at that,
you're myopic. You're looking backwards.
You invest in the future, not in the past.
We're starting a new book for Tesla with this period seen as
the foundation for the next era of the company.
So don't look over there. Don't look at those ugly
numbers. Look over here.
We have great things to point to in the future.
Tesla's scrapping their Model X and Model S, That's real news.
They're doing that next quarter, calling it an honorable
discharge. The Fremont S&X production space
will be converted into an Optimus factory, targeting
1,000,000 Optimus units per year.
In the long term. Now, in the long term, what does
that mean? We don't know, but we assume
it's a long ways out. Tesla will continue to support
SNX owners, but it's clearly shifting resources from legacy
premium models to autonomy and robotics.
Tesla, and especially the leader, Elon Musk, continues to
say these very aggressive timelines for the roll out of
the robotaxi. So far, we haven't seen that,
and some of the timelines have been pushed back.
But investors in Tesla are very hopeful and they're patient in
seeing this roll out because if it happens, the prize would be
theoretically enormous. Now we also have the other big
change. We don't only have the robotaxi,
we have the Optimist. Tesla plans to unveil Optimist
Gen. 3 within a few months. It is described as incredibly
capable general purpose humanoid.
The long term target is 1,000,000 Optimist units per
year from the Fremont factory. Optimus 3 is designed to be very
human, like an appearance in motion, which makes it easier to
deploy in human environments and leverage existing
infrastructure. It supports Tesla's AI strategy
by learning tasks directly from observing humans from
demonstrations, verbal instructions or video.
In an early deployment, a small number of Optimus units have
been performing basic tasks in Tesla factories, but this is
still an R&D. They are not yet materially
contributing to output. So basically they're going
around, but they're not really helping out.
It's like bringing your kid to work day, right?
You're here, you're like trying to introduce them and have them
learn a little bit. But they're, they're not really
speeding up things. They're they're kind of keeping
you slowed down. That's the phase that Tesla's
Optimus is at right now. Now if shutting down two of
their biggest car factories isn't evidence enough that
Tesla's no longer a car company. If investing so much into
robotaxi robotics as well as Optimus isn't proof that they're
just not a car company anymore. They also did another non car
company thing. One of them was to invest
directly in X AI, another one of Elon Musk's ventures.
Tesla announced an investment in X AI as described as part of its
master plan for Tesla. Vehicles already use XA is crock
model. The rationale is to offload or
accelerate some AI work by leveraging XA IS instead of
building everything in house so they see synergy.
That's basically what he's pointing out here.
To provide an orchestra conductor for large fleets.
Managing millions of robo taxis for potential routing, charging,
and maintenance. Coordinating large groups of
optimist robots for complex projects, construction factories
and refineries. Management noted that many Tesla
shareholders have asked for closer alignment with XAI.
So now XAI is no longer this thing that Elon Musk's doing
that Tesla investors don't have any part in.
Now they also have a part in this great product in this great
company. And that is part of the reason
that even with these frankly terrible numbers, and any Tesla
investor will tell you that these numbers aren't good, with
these terrible numbers, the stock is still relatively flat.
It's not really falling a whole lot.
And especially at the high valuation with so much priced
in, terrible numbers typically take companies down.
Revenue deceleration typically DE rates a company or makes it
so the multiples compress. But because Tesla is infusing
the company and changing directions, investors are now
looking ahead to what's to come. If you believe in the vision of
Tesla, it's not a bad bet. If you really think that all
this stuff is going to happen, it's going to happen in a great
timeline. But I still believe the the risk
is there. It's a company that's promising
a lot. Elon Musk has been known to be a
little bit aggressive with his timelines from time to time.
There is a big prize if he's able to execute really well on
the things that he's promising. But for me, I'm a bit too
conservative for this. Tesla's a very large company by
market cap. They're promising a lot in the
future, but I want to see them get a little further along
before I jump into a company like this.
Now that is going to be it. Wrapping up this busy week of
earnings. We'll have more content out in
the future. And if you want to see exclusive
episodes, you can check out the membership at qualtrm.com.
We have well over 12,000 active members.
That's it for now, see in the next one.