The Best Business in all of Big Tech

Happy Sunday!

This week we’re talking Earnings Palooza (Netflix, American Express, ASML, & more) and a breakdown of the Best Businesses in all of Big Tech.

Let’s get to it.

News Roundup

Earnings Palooza Week 1:

• Netflix: Streaming giant Netflix reported 1st quarter earnings after the bell on Thursday, beating expectations but underwhelming on their guidance. Netflix added 9.3 million new subscribers during the quarter, led by strength in its North American and European markets. Netflix also delivered 28% operating margins for the quarter and raised its profitability outlook for the full-year. Netflix’s stock was down 9% this week.

• ASML: ASML, the Dutch company that makes EUV lithography machines used to manufacture advanced semiconductors, saw its shares fall 9% this week after missing revenue estimates for the quarter. Despite the revenue beat, ASML’s CEO Peter Wennink reaffirmed the company’s outlook and stated “We see 2024 as a transition year with continued investments in both capacity ramp and technology, to be ready for the turn in the cycle.”

• TSMC: The world’s largest producer of advanced processors delivered $18.9 billion in revenue and $6.9 billion in net income for the first quarter, with both numbers surpassing expectations. In discussing their outlook CEO C.C. Wei stated “Almost all the AI innovators are working with TSMC to address an insatiable AI-related demand.” TSMC’s stock closed down 11% this week due primarily to the company’s lackluster 2nd quarter guidance.

• Bank of America: The 2nd largest bank in the US reported its 1st quarter earnings on Tuesday which surpassed expectations for both revenue and earnings. Revenue from its consumer banking business declined 5% but strong growth from Wealth Management and Investment Banking helped to offset. BAC stock was up 1% this week.

• American Express: The 3rd largest payments network in the US saw continued growth in its cardholder base reaching 142.2 million total cards in force for the first quarter. The average fee per member continued to grow as well reaching $98 per quarter, up 11.4% from last year. CEO Stephen Squeri said “We continue to attract high-spending, high credit-quality customers to the franchise, with new card acquisitions accelerating sequentially.” American Express stock jumped 3% on the report.

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Big Tech’s Best Businesses

It's no secret that today’s tech giants are wonderful businesses. They have best-in-class products, unparalleled distribution, and virtually unlimited resources.

But thinking of them as individual businesses isn't really accurate. Between Apple, Microsoft, Amazon, Meta, and Alphabet, there are actually more than 100 subsidiaries driving the remarkable results investors see each quarter.

Here’s a breakdown of some of the best businesses from each company:

Microsoft:

• Microsoft Office: The one-stop-shop for workplace productivity tools. This encompasses Word, Excel, Powerpoint, Teams, and more. Once Microsoft Office is engrained within a business's workflows, it's very difficult to switch off of. Additionally, by shifting from a license model to cloud delivery, Microsoft has lowered the costs needed to serve customers.

• Azure: “You should just think of it as the oxygen that the company runs on… it is the backbone of the entire Microsoft.” - Microsoft Chief Marketing Officer, Takeshi Numoto

  Azure is Microsoft’s own public cloud computing business and the 2nd largest cloud operator in the world. While the shift to the cloud may still be in the early innings, there’s clear customer lock-in for the 3 big providers. Once a customer has migrated workloads to a certain cloud provider it’s impractical to switch. The process is expensive, time-consuming, and typically requires downtime for a company’s applications. 

• LinkedIn: Microsoft acquired LinkedIn for $26 billion in 2016. Home to more than 1 billion members, LinkedIn is the world’s largest professional networking site. Since the acquisition, LinkedIn has grown its revenue by 37% annually and generated just over $15 billion last year.

Alphabet:

• Google Search: As the starting point for most people on the internet, Search monetizes its valuable digital real estate by letting companies bid on keywords. That’s why this segment is often referred to as the “Toll road on the world’s information.”

• YouTube: The largest video sharing platform globally. To give some sense of the size of this business:

  • YouTube has more than 2 billion monthly active users.

  • The average user spends 30 minutes to an hour on the platform every day.

  • Youtube receives the 2nd most search queries of any platform globally, behind Google itself.

• Google Cloud Platform (GCP): GCP is the 3rd largest cloud computing business in the world behind AWS and Azure. Like its peers, GCP offers customers a variety of services including computing, data storage, data analytics, and machine learning.

Amazon:

• AWS: The pioneer behind elastic computing and the world's most broadly adopted cloud. During Amazon’s 2022 Q4 conference call, Andy Jassy stated “90% to 95% of the global IT spend remains on-premises… I really do believe in the next 10 to 15 years that most of it will be in the cloud”.

• Seller Central: 3rd-Party sellers come to Amazon for two primary reasons. 1) Unparalleled distribution capabilities and 2) A massive audience to sell to. Amazon’s services that it provides to 3rd-Party sellers include storage, handling, shipping, and professional plans, among others.

• Amazon Advertising: Amazon primarily generates advertising revenue by letting sellers promote their products on the Amazon marketplace. Given the low variable costs associated with this segment, the recent growth in advertising revenue has drastically helped improve Amazon’s retail profitability.

Apple:

• App Store: Though it’s currently under regulatory scrutiny around the world right now, Apple’s App Store is essentially a toll booth on the iOS ecosystem. The app store takes a 30% cut on all in-app purchases through iOS.

• iCloud: iCloud is Apple’s own cloud service that allows iOS users to store and sync data across devices. While this isn’t a huge revenue driver for Apple in the grand scheme of things, this drastically improves customer lock-in and encourages customers to stick with iOS-enabled devices.

• App Store: Though Safari might not be the first thing that comes to mind when you think of the best businesses in the world, it’s actually one of the most profitable segments for Apple. In a recent court case, it was disclosed that Google pays Apple 36% of the advertising revenue it generates from the app, which last year came out to ~$18 billion.

Meta:

• WhatsApp: Facebook acquired WhatsApp in 2014 for $19 billion. Today, it’s the most popular messaging platform in the world with an estimated 2 billion active users. WhatsApp’s revenue streams include embedded shopping, click-to-message ads, in-app payments, and the WhatsApp API for 2-way communication with customers.

• Instagram: Facebook’s purchase of Instagram in 2012 for $1 billion may go down as one of the best acquisitions of all time. In a recent court case with the FTC, Meta’s filings showed that Instagram generated $32 billion in revenue in 2021. That was more than YouTube at the time and that figure has likely grown since. Not bad for a $1 billion acquisition.

• Facebook Blue: As the world of social media evolves, it’s easy to overlook Facebook’s original platform. But Facebook Blue is still a giant (2 billion DAU’s) and continues to grow both users and time spent on the platform.

Meme of The Week

When you go paperless for proxy votes.

After Tiger Woods was snapped seemingly shaking hands with a tree last weekend at The Masters, the environmentally conscious memes started rolling in. Here’s our investor spin on it: