It’s the time, of the season, for earnings. While I’ll spare you a Cloudy rendition of the Zombies song, this week we take a look at how companies did during the second quarter and get a whole lot of surprises.
The time of year where companies make long term sacrifices to meet short term goals. A time where analysts ask vague questions, get vague responses, and somehow leap to unexplainable results. Stock prices shoot to the moon, or fall to the ground.
This go around was filled with the same old, and some big surprises.
Not Surprising Fact #1
Tech companies make a lot of money
Microsoft recently passed the $100bn in revenue threshold, Google is also there and before you know it, Facebook will be there. Speaking of $100bn, Microsoft and Google both have over $100bn in cash. To give you context, the total amount of Bitcoins in circulation is about $140bn. Facebook reported a measly $43bn of cash on hand and if we use the same metric of “ability to buy an entire crypto network”, they are just short of buying Ethereum.
Not Surprising Fact #2
These companies make most of their money selling digital ads and renting out compute space.
“Renting out compute space”, or more technically known as “Cloud Computing” continues to see crazy increases. Microsoft said its public cloud, otherwise known as Azure, was up 89% Y/Y. AWS revenue grew almost 50% to $6.1bn in Q1, giving it an annual run rate of around $15bn. IBM also announced encouraging cloud results, with as-a-service growth up 25%.
One of the reasons Amazon was finally able to return some sort of profit is because its advertising business was up almost 100% Y/Y and is on pace to be between $4-5 bn a year. LinkedIn ad revenue grew 37%, Twitter ad revenue grew 23%, and even BING, yes, BING, who people only navigate to by accident grew, 17%.
Which leads us to “Surprising Fact #1″
It’s hard for tech companies to make money on anything but selling ads and renting compute space
Almost all the mentioned companies are extremely reliant on selling ads or cloud computing for profits. Most of the conversation around where growth from Facebook will come was around ad load or serving ads in Messenger, WhatsApp or Instagram. Once wall street analysts were done asking Facebook about ads, they then asked if Facebook was thinking of starting a CLOUD SERVICE. While Zucks dismissed the idea, of all the possible business opportunities that Facebook has, Wall Street could only come up with “Why don’t you become a cloud provider?”
Other companies are facing similar pressure. While Google’s “Other Bets” section has been growing over the past few years, it only took them billions and billions of dollars in acquisitions and capital expenditures to move the needle. Now, Google is trying to interrupt Amazon by teaming up with Walmart and offering autonomous rides to Walmart to pick up groceries. The retail section of Amazon is significantly less profitable than the cloud computing section, so you know companies are really out of ideas so they look to low margin businesses.
Finally, once again, and literally the title of this Reuters article, Amazon Earnings Skyrocket on Cloud Computing and Advertising.
Surprising fact #2
Facebook and Twitter have lots of problems.
Facebook lost $119bn of market capitalization on Thursday and that loss is not only the largest one day swing by market capitalization in history, but the amount lost is larger than 457 companies in the SP 500. There was a whole lot of bad news for Facebook including slower revenue growth, a slight decline of users in Europe, rising capital expenditures and a shift to “Stories” which the company gets lower revenue from. It’s hard to say what the source of declines are and Facebook blamed a combination of GDPR and currency fluctuations. Plenty of research has come out about how companies have not changed their spend due to Cambridge Analytica, so maybe Facebook is not the darling it once was.
Twitter is equally a mess. While advertising revenue increased and the total number of users increased, monthly active users decreased by about 1-2% worldwide and in North America. Management also said they removed tens of millions of fake accounts, but said this had little impact on the decline in monthly active users. So, you remove lots of fake accounts, but then end up with more accounts, but aren’t really growing…yea, people were confused.
So, where does AI come into all of this?
Companies certainly mentioned the fact that they are focused on AI. Google focused on how AI is helping to make applications like Google Maps, Translate and Email better and Zucks talked about how AI is helping Facebook monitor and remove graphic content from the platform. However, few companies disclosed revenue figures from AI or have tried to quantify the impact that AI is having on their business and at this point it seems quite low.
At the end of the day the shift to the cloud and selling digital ads is causing an unprecedented shift in wealth that gives numerous companies and overwhelming chance of surpassing the trillion dollar threshold. Then, when companies actually start monetizing AI advancements, in everything from self driving cars to automation, this could most likely push the same cast of characters towards the $2 trillion dollar mark.
Up, up and away