In this episode of MarketFoolery, Chris Hill talks with analyst Abi Malin about some market news. Tesla (NASDAQ:TSLA) shares popped 10% on the company's earnings. How much is short covering, and how much is confidence in Tesla's future? Facebook's (NASDAQ:FB) report wasn't completely flawless, but it wasn't as bad as the stock drop would indicate, either. And Microsoft (NASDAQ:MSFT) is popping to new all-time highs, sending the massive company even higher into the Three Comma Club stratosphere. Abi shares some insight on each of the three companies and their future potential, including which one she thinks is the best buy today for the next 10 years.

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This video was recorded on Jan. 30, 2020.

Chris Hill: It's Thursday, Jan. 30. Welcome to MarketFoolery! I'm Chris Hill. With me in studio, the fearless Abi Malin. Thanks for being here!

Abi Malin: Thanks for having me!

Hill: We've got a couple of the FAANG stocks. We've got Facebook, we got Microsoft. We're going to start with Tesla, though because shares of Tesla up 10%. Fourth quarter profits and revenue came in higher than expected. How much of this is short selling? I know that there is some level of short selling. Why someone would short Tesla is beyond me. But how much of what we're seeing today is short sellers saying, "I'm out"?

Malin: So, what you're mentioning there is that short squeeze, right? Someone shorted this, the stock has gone up significantly, and now they're like, "Oh no, have to get out and cut my losses here." I agree with you. I'm not quite sure why anyone would choose to short this stock. We've seen a history of being, I would say, almost irrational. I don't think the stock trades in a predictable manner relative to performance indications leading to stock price movements. But I think in this case, we're really seeing Tesla hit this key inflection point.

So, earnings positive consistently, and also cash flow positive. So, management does expect that positive gap net income should continue going forward. But they also made this tangential response that there is a temporary exception around the launch and ramp of new products, which seems like it's constantly launching and ramping new products for Tesla. So, something to be aware of.

But I think that cash flow metric is really going to be the key point for this thesis, because, I mean, I think historically, you've seen a lot of analysts doubt Tesla's ability to have enough funding to proceed. And I think that was a fair critique, right? But management does say that they now believe the business has grown to the point of being self-funding. And they now have a cash balance of about $6.3 billion. Cash flow for the quarter was about $1 billion. So, all positive metrics and really, actually quite impactful for Tesla's business going forward.

Hill: Yeah, it was an interesting moment on the call where, essentially, institutional investors were saying, "Are you sure you don't want to raise some money right now? Because you're in a better position financially, and so therefore, you could get more favorable terms." And Musk was basically like, "Nah."

Malin: I mean, I think also, the thing to keep in mind is, this company doesn't necessarily have a management team that is by any means conservative. You laugh. They set very aggressive targets --

Hill: No, that was just a wonderful understatement.

Malin: Right. I mean, they set very aggressive targets and routinely miss them, right? And sort of miss them not just marginally, but pretty catastrophically, I would say. So, I don't know necessarily that their confidence is the end all, be all. But it is certainly a change of pace.

Hill: I want to get to the stock in just a second. But they also mentioned, they're going to have an investor day event in April centered entirely around batteries. Other than the fact that that's going to happen, I didn't see any color on that, I don't know if they shared more on that, what should investors look for in the battery part? Because obviously, this is one of those companies where the thing you can't take your eyes off of is the CEO. And then it's the vehicles. But the battery part of the business could be a huge driver. And I'm curious, when you look at this business, how do you think about the battery part of the business?

Malin: Absolutely. So I think Tesla does have an advantage around their batteries. So, they do have the long range batteries, electric drive trains, and sort of a ubiquitous charging network. So I don't think that advantage is going to last forever, certainly, but in the short to medium-term, where people are making sort of purchasing decisions off of range distance, Tesla certainly has an advantage. They now have 15,000 fast charging stalls worldwide, and 99% of the U.S. population lives within 150 miles of one of them. So that's a pretty powerful network. When you think about the initial barrier to entry for someone buying an electric vehicle, that is really a game-changer.

Hill: The stock is now somewhere in the neighborhood of $640 a share. It has more than doubled over the past year.

Malin: Bonkers. I mean, it's up 50% in the last month.

Hill: I'm not even sure what I want to ask you. I mean, as someone who does not own this stock, this seems like a crazy time to buy this stock, when the market cap is $115 billion, and, as you said, the stock is up 50% in a month.

Malin: Right. I would agree with that. I think, again, it goes back to this being sort of a key inflection point for them. And it is really a thesis changer. I think, long-term, that market cap might not seem so extreme over the next 20 years. But they're talking about scaling from making about 350,000 vehicles annually to millions. And so, without a doubt, it's going to create lumpiness, right? So management says they feel like they're going to be able to comfortably exceed 500,000 next year. I'm not quite sure that I fully believe that. I think there will be opportunistic points if and when management fails to achieve said targets.

Hill: Let's move on to Facebook. Fourth-quarter profits and revenue came in higher than expected. That's fine, but costs are also going up, and margins are getting squeezed. Shares of Facebook are down around 7% today. They made a lot of money this quarter. I'm wondering, first, not that we're short-term investors, but this strikes me as a little bit of an overreaction. Not that I'm surprised that it's selling off. I'm just surprised that it's selling off 7%. Is it an overreaction? Or is the margin picture for Facebook right now warranting this kind of sell-off?

Malin: Right. Andy Cross, chief investment officer, and I were talking about this this morning, and he put it really succinctly, I think, where he said, Facebook is really the curse of its own success. So you saw good growth, matched expectations. Just maybe not as great as the past. And the market is having this reaction. Which, I think, a little bit unfair, I would agree.

I think you have to remember that most of the market is in short-term thinking. So for long-term investors, maybe this is an opportunity. I think short-term, you are going to see some pressure in the short term, right? They mentioned business maturity, which is pretty much nothing you ever want to read from management. Impacts of global privacy regulation, and, quote, "other ad targeting related headlines." So, some concerning things.

And just think about the time in which we're living. It's 2020. It's an election year. Last election, that was a lot of controversy for Facebook, a lot of negative attention. I mean, would like to believe this business is in a better position than it was before, but I think the scrutiny is even higher, so they have a lot to prove this year, for sure.

Hill: I think Mark Zuckerberg has been fairly criticized for some of the things he's said, some of his reactions, particularly when he's across the river up on Capitol Hill. I'm not suggesting the people are criticizing him for what I'm about to say. But, the stock is selling off as a result of it. I don't think you can criticize him for the fact that they're spending more money, because he's been pretty clear over the last couple of years, particularly on conference calls, about using the word investment, and talking about how, "We know we need to do a better job. We are going to invest accordingly." So the fact that costs and expenses in 2019 were about 50% higher than they were in 2018, that really shouldn't come as a big shock to anyone.

Malin: Right. I would agree with that. I also think there's a lot to be optimistic about with Facebook. So they are investing heavily in R&D, specifically around that augmented reality field. And it's very clear that Facebook really wants to be a key player in that space. So right now, it's Facebook and Apple. I think you're going to see opportunities for Facebook, particularly within that gaming space.

I also think there's opportunities around the payment space. So, Libra, which has kind of been a lackluster launch, but I think it's going to take about two to three years to clarify that sort of opportunity. But even non-Libra payment tools across WhatsApp and Instagram, I think those will be pretty impactful going forward. So I think there's a lot to be optimistic about with Facebook.

I just also think that this, in contrast to maybe Tesla's management team, this is a pretty conservative management team, and they tend to be pretty straightforward in how they deliver messages. So, I think the market is maybe overreacting, but perhaps not if you are a short-term investor.

Hill: Microsoft's second quarter profits came in much higher than expected. We talked the other day about Apple and their enormous quarter. Microsoft, $37 billion in revenue in the quarter. And just like shares of Tesla today, shares of Microsoft are hitting an all-time high.

Malin: Absolutely. I mean, it's really fascinating to look at Microsoft, which is a $1.3 trillion company that has somehow found this path to growth that is large enough to significantly change the trajectory for the business. Just in the law of large numbers, doing what Microsoft has done, which was 14% growth in revenue over the past year, that's actually phenomenal, right? That's incredible.

Hill: Yeah. I mean, it seems like pretty recently, we were in the studio talking about, "Wow, Microsoft became a trillion-dollar company. Apple became a trillion-dollar company." Well, now Apple's at $1.4 trillion, Microsoft's at $1.3 trillion. Microsoft shares up about 60% over the last 12 months. I know a lot of what drove Microsoft in the quarter, certainly what's driving the headlines behind their quarter, is their continued growth in cloud, their Azure business doing really well. Is the total addressable market when it comes to cloud computing growing? Because it seems like they're doing well in cloud.

After the bell today, we'll get Amazon's latest results, and we'll see how they're doing. But certainly, AWS, Amazon's cloud business has been doing well. We've seen that from the major tech companies. Is the pond getting bigger? Or is what's happening in cloud what we've seen happen in digital advertising over the last couple of years, where it's basically, all of the growth is being swallowed up by Google and Facebook?

Malin: Fair question. So, IDC estimates that public cloud spending is expected to reach about $500 billion by 2023. And that was up from about $230 billion in 2019. So, the pond is getting bigger. With that being said, Azure is not the No. 1 player. The No. 1 player is Amazon Web Services, with about 48% market share. And Microsoft is believed to be the second with about 15.5% market share.

With that being said, I think the really positive momentum for Microsoft is that Microsoft is growing much faster. So Azure revenue growth was up 62% this year. And when you think about what fundamentally that business is, it's a much more attractive business than the traditional licensing of software. They charge on a use-case basis, which makes sense, right? So, as people continue to use the cloud more and more, they're going to charge more and more.

But the upfront barrier to entry for a lot of these companies is pretty low. So, I mean, Microsoft does work with 90% of the Fortune 500 companies. It's a very flexible platform. It's very accessible. I think Azure is going to be the game-changer for Microsoft long-term.

Hill: And for as big as the company is, for all of its success, it just does not seem to have the image problem on Capitol Hill that Facebook, Amazon, and Alphabet have, which is wonderful if you're Microsoft. It's a little bizarre to think about 20 years ago, when Microsoft was public enemy No. 1 in terms of big tech companies. But they just don't have Uncle Sam breathing down their necks. Nobody's really pounding the table like, "Microsoft's got to be broken up!"

Malin: Absolutely. I think part of it is maybe a lot of the negative scrutiny has been focused around the digital advertising space, and just sort of the very personal impacts that those companies Microsoft doesn't exactly play into that space in the same way. So I think they've sort of missed a lot of the backlash.

Hill: So, let's wrap up with this, because these are three stocks that you own. I don't. Which of the three is the most attractively priced right now? I mean, we've got Tesla and Microsoft hitting new all-time highs today. We have Facebook selling off maybe a little bit more than it should. Does one of these three seem more attractive than the other two just today? Assuming your timeframe is, I'm looking to hold this for 10 years.

Malin: I think looking to hold for 10 years. I would certainly say that Microsoft right now is the most attractive to me. We talked a lot about that Azure growth. I think, when you look at the business from a financial statements perspective, you're going to see margins move significantly as Azure continues to generate a growing portion of overall revenues. Certainly, Microsoft is my one to watch.

Hill: Abi Malin, thanks for being here!

Malin: Thanks for having me!

Hill: As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. The show's mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you on Monday.