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This video was recorded on Jan. 26, 2022.
Motley Fool analyst Tim Beyers analyzes not only its impressive second-quarter results but the overall health of Microsoft's (MSFT 1.92%) business and how much room to run the gaming division has. He also discusses Mattel's (MAT -1.14%) renewed partnership with Disney (DIS 0.77%), and what investors need to understand about F5's place in the cloud industry. Plus, Motley Fool analyst Olivia Zitkus and Motley Fool contributor Keith Speights discuss how Pfizer (PFE 2.32%), Moderna (MRNA 0.02%), and Abbott Laboratories (ABT -1.16%) are investing the money they've earned from COVID-19-related sales, and whether one is doing a better job of it than the others.
Chris Hill: Today on Motley Fool Money, a reminder that not all cloud stocks are the same and that betting against tech behemoths is not for the faint of heart. That and more coming up right now. I'm Chris Hill, joined by Motley Fool Senior Analyst, Tim Beyers. Thanks for being here.
Tim Beyers: Thanks for having me, Chris.
Chris Hill: We've also got a closer look at the healthcare industry and a renewed partnership for two well-known consumer brands. But let's start with Microsoft, and we have a video channel for members of Motley Fool services. If you're a member any of our services, you have access to all video content everyday. One of the shows on the video channel is called beat and raise. That's what this was from Microsoft. Another beat and raise quarter, second quarter profits were higher than expected, the revenue to the raised guidance. The revenue was just under $52 billion, Tim.
Tim Beyers: I know. There's really only one word to describe this. That would be bananas. Let's hit just some of the highlights here. So overall revenue, just hitting it from the very top line, $51.7 billion. Billion with a B. increased 20 percent. Please recognize that this is a $2.2 trillion companies. How hard is it to grow to 50 plus billion dollars and actually grow that 20 percent? Just like do the math on that. You added, what, $10 billion, a little more than $10 billion year-over-year. Just looking at it now. Total revenue, let's call it $51.728 billion year-over-year. That's up from 43.076. I guess, not quite 10 billion, but $8 billion. That's a lot of money. There are companies that wait a lifetime to grow that big. Some of the numbers here, Chris, were truly outstanding. I'll highlight just a couple of them. But the overall cloud business unit, which is their commercial cloud, but also the Azure public cloud computing business, which had been growing at right around 50 percent, grew 46 percent again this year. That is astounding, 46 percent. Yes, that's slowing slightly, but boy, is it not slowing much. Let me pause it there, but there's a lot more to dig into here because there was growth across all of Microsoft's business units here. Chris.
Chris Hill: I want to get to the gaming in just a minute because a lot of people, you and I included, were eager to hear from Satya Nadella about last week's acquisition of Activision Blizzard. But aside from the gaming, what stood out to you?
Tim Beyers: Well, what stood out to me is that this is very consistent growth. When growth is consistent, it tells you something. Let me tell you what I mean. Total revenue up 20 percent, operating income of $22.2 billion, that increased 24 percent, total net income. Take out all the taxes, take out all the interest, everything else. That was 18.8 billion, that increased 21 percent. The diluted earnings per share was up to $2.48. That increased 22 percent. When you see that symmetry, Chris, not to overuse a Ron Gross phrase, but that literally is firing on all cylinders because it means the businesses in symmetry. It's not like, well, we bought back a whole bunch of shares, so our earnings per share is through the roof, but our revenue growth wasn't that big. No. This is a business that is selling consistently, doing very well, managing its expenses very well and so it's growing across the board. That is extremely healthy. This is an arguable statement, but I'll make it. Microsoft is the healthiest business on the US stock markets today. I think you could argue that, Chris.
Chris Hill: Healthy from the standpoint of their cash reserves because while you were talking about, look, they're not buying back a ton of stock. It reminded me of the fact of just how good Nadella and his team are with capital allocation, which is something we talk about from time to time. Whatever stock you own, whatever industry you're investing in, you can look at Microsoft and Nadella and his leadership and think to yourself. Are the CEOs of the companies I own, are they as good at capital allocation? Because in some ways that's the scary thing about this quarter, that they are doing it without what some people would call financial engineering. They're not buying back a ton of stock. They're not cranking up a huge dividend to reward shareholders. They are as effective with their acquisition strategy and executing it in the eight years he's been CEO as pretty much any company I can see.
Tim Beyers: What I mean by healthy here is we're not just talking about cash and not just talking about that execution. It's that they have a wide variety of businesses, all of the places. When we get to gaming, we'll talk about this a little bit more, but just to highlight some things that are historically businesses really have stopped thinking about, maybe should think about in terms of Microsoft. Let's just, for example, say the Windows OEM business. The Windows OEM business and Windows commercial licenses, that was up 13 percent. That's not nothing. When you're talking about a very large business unit and a very old business unit that's still growing in double digits. Dynamics 365, which is the business intelligence tools. It's more of a commercial enterprise type of software sale, but it's a very popular tool and that's up over 40 percent, Chris. So server products, things like SQL server, that's up 29 percent. What I'm talking about when I say healthy, is that there's a wide range of very balanced growth throughout the company and that's unusual for a company of Microsoft size. Usually something dominates, there's a unit that dominates everything else. Then other things are being shepherded up through that. Microsoft does have one. We could call that gaming, but boy, is there some upside there.
Chris Hill: Let's get to the gaming because Nadella made it very clear for anyone who was wondering. I'm not sure how much you could wonder after last week. He said, "Look, we're doubling down [laughs] on gaming." You think about the cash that they have to deploy into that segment. Obviously, it will take some time for Activision Blizzard for that acquisition to close. But again, it's a little bit scary when you think that Nadella looks at Microsoft's gaming division, and thinks, we can be doing a lot better here and we are going to.
Tim Beyers: When you look at the financials, what's interesting here is the second slowest growth segment that Microsoft reported was Xbox gaming and content. That was up 10 percent. Surface was only up eight percent. By the way, is it remarkable that we could say, it was only up eight percent? [laughs]
Tim Beyers: I guess, all right. But terrible.
Chris Hill: People working in Activision are walking around Microsoft headquarters, hanging their heads in shame.
Tim Beyers: Yeah, that it's only eight percent, but 10 percent, so that's what Xbox was up. But just some comments. This is from what Satya Nadella said. The big bets we've made across content community in Cloud over the past few years are paying off, and we saw record engagement as well as revenue in Game Pass, so this is the Cloud portion. Game Pass is, you go in, and you get your Xbox Game Pass. You have access to a lot of games, and you also have access to Xbox Cloud gaming. There are 25 million subscribers. That's across PC and console, and the beauty of Microsoft's gaming division, Chris, is that there's a lot of PC gaming, and there's a lot of console gaming and what can serve both? The Azure Cloud. The Azure cloud can serve both very skillfully. They already have 25-million going into this. They are going to make big bets on bringing Activision Blizzard into that. They say we're investing to make it easier for people to play great games wherever, whenever, and however, they want. That to me signals, Chris, that get ready, there's going to be a lot more coming from the Xbox Cloud gaming segment, especially with all of that Activision content.
Chris Hill: Mattel's partnership with Disney started in 1955 when Mattel sponsored Disney's television show, the Mickey Mouse club. The partnership continued until 2016 when Hasbro outbid Mattel for the rights to Disney's Princess lineup of toys. Today, Mattel won those rights back. They have the rights to Disney's Frozen franchise and other princess brands. The financial terms were not disclosed, but the deal starts in 2023, and when you look at shares of Mattel on the rise, even without knowing the financial terms, we see the power of brand. We see the power of the Disney brand and what that partnership means in this industry.
Tim Beyers: There's two things to take from this. Boy, talk about people hanging their heads. There might be some people at Hasbro hanging their heads today. Not great, not great. But Hasbro does have other good franchises. Remember, they're just losing the princess lines here, but that's still very meaningful, and the fact that it's done something for Mattel should tell you something. That Mattel has not done nearly as well in terms of its own brands here. It'll be very interesting to see and very interesting to see what kind of toy lineups and how creative they get around merchandising here. I don't know if it's more important, Chris, but it's equally as important.
Whenever you look at the licensing data, the number one licensor in the world for years. I haven't checked this recently. I should've checked it this morning, but for years when the 2021 data is out, we should check this. Usually, License magazine has this. Disney is far and away the biggest licenser of merchandise in the world, and they command a premium. As good as this deal is for Mattel, Chris, I'm betting it is a sweet, sweet deal for Disney, and it says something that they can apportion off. When Hasbro won the original Disney license, they won the Disney license. They didn't win the Princess license. They won the Disney license. If somebody needs to correct me on that, please do. But if I recall correctly, that was the Disney license. The fact that this gets apportioned off is fascinating to me, Chris.
Chris Hill: Well, and it is worth remembering that at the time that Disney paid $4 billion for Marvel. You look at what they paid for Pixar, for Lucasfilm, and all of the Star Wars stuff. There were people, particularly in the Marvel deal, who were saying, boy, they're really overpaying here.
Tim Beyers: Not me.
Chris Hill: I know you weren't one of them, but there were people saying they're overpaying, and as you just reminded us, they're so good at this move. They're so good at not just content creation, creating the movies and television shows, and experiences in the parks. They're so good at that, but they are so good at the licensing business, so the ability to leverage out future dollars off of what they're paying in the moment to acquire this intellectual property. Maybe, someday people will stop doubting their ability to do this.
Tim Beyers: I doubt it. Let me give you one other thought on it. Bear in mind I'm a Disney shareholder, so I'm pretty biased on this one. I've been a Disney shareholder for a very long period of time. The reason you should never doubt Disney, among other things, is that they have a history of doing a really good job of taking small things and making something of them. Let me give you another example. Look at the way Disney Plus has done very small things, taken really small parts of the universe, and done something with it. The Mandalorian. Who knew? We can take one character, Boba Fett, and we can turn that into a major franchise. There was a short series and literally, Chris, it was a short run of comics that the writer Matt Fraction did reinventing the character Hawkeye, and it was a great run. It was really interesting. It'll be fascinating if they ever, in that show, get to the pizza dog storyline, which was crazy and really fascinating, but it would be interesting if they ever got to that, but that's another thing. Take this small little thing and turn it into something, and now, what do they got? Another minor character, this little thing called Moon Knight, and you got Oscar Isaac starring in that. So Disney takes really small things and turn them into things that are bigger and more interesting so that's why they can take something like the Princess line and just sell those rights to Mattel and probably get a pretty big bag of cash for it.
Chris Hill: Real quick. Before I let you go, I got to ask you about F5 because you were saying this morning this is not the typical Cloud business.
Tim Beyers: No, it's not.
Chris Hill: Their first-quarter results were overshadowed when they cut their full-year guidance. They also cut guidance for the current quarter. Shares are down more than 10 percent today but compared to what we've seen from a lot of other businesses that are, if not straight-up cloud businesses, at least Cloud adjacent. F5 seems like it's holding its own.
Tim Beyers: I mean, it's been a winner. This is an old rule breaker. This is one that I gave up on too quickly many, many years ago. Long before it was Cloud transitioning, or as you put it, Cloud adjacent. F5 is one of those companies that the earnings report revenue was up 10 percent year-over-year. This is an old company, so that shouldn't be surprising, but there are a lot of these companies, Chris, I don't love the term cloud-native, but it's a thing, and cloud-native means this is a company that was born in the cloud, all of its services are cloud, it's always been cloud. It never had to be something else and become cloud. F5 is the latter. It was something else. It had to become cloud, and it is still something else. The reason that guidance is low is because it's important to remember there's a lot of tech companies that are getting thrashed, and I'm getting asked a lot of questions like how do you know which one is a cloud company that has a better long-term outlook and like it has a lot more steam behind it?
The F5, for all its recent performance, Chris, is the cloud company I'm concerned about because it's a transitional company and it still sells a lot of hardware and a lot of its hardware is the original big, IP line of hardware products, which were originally load balancers. What a load balancer is, Chris, it's you're crossing guard. It's your traffic cop. It's hey, you come, you stay. It manages the load on a network, which is important. But in the world of tech, it's a little more commodity. You can do a lot of that in software. F5 is trying to do more of that in software. But I get nervous about companies like this. Supply chain issues hurt F5 this quarter, could hurt in the future. They're subject to different things than the other cloud-native companies are. In answer to the question of what kind of cloud company is going to survive this and thrive? The answer is, I think the ones that are a little more cloud-native are ones you should look at. So that's more like Snowflake, MongoDB, and companies like that and less hardware companies that are trying to be Cloud companies which is more like F5.
Chris Hill: Tim Beyers, always great talking to you. Thanks for being here.
Tim Beyers: Thanks, man. Appreciate it.
Chris Hill: Collectively, Abbott Laboratories, Moderna, and Pfizer have generated tens of billions of dollars in sales related to COVID-19. How are they investing that money? Is one doing a better job than the others? For more, Here's Olivia Zitkus.
Olivia Zitkus: Hello Fools. I'm on with Keith Speights, a healthcare analyst, here at the Motley Fool. Keith, it is great to be with you. Thanks for being here.
Keith Speights: Great to be with you too Olivia.
Olivia Zitkus: I have Keith here today, because he's been following COVID-19 stocks very closely, really since we've dubbed them. COVID-19 stocks. Keith today, I don't want to talk so much about the intricacies of vaccines and boosters or treatments, but rather what the companies who sell these products are doing with the windfall of cash they've received from their sales. I'm particularly curious about how Pfizer, Moderna, and Abbott Laboratories, are spending their money on research and development, and building up their pipelines. I will briefly set the stage, in its recent quarter, Pfizer's revenue from commodity and boosters was responsible for $11.1 billion of $24.1 billion in overall revenue, Moderna's revenue from Spikevax and it's boosters was 5 billion, right now that vaccine is it's only revenue source, and Abbott Labs revenue from its testing business is driving more than half its organic sales growth. In the recent quarter, Abbott's COVID testing related sales totaled about $1.9 billion, led by BinaxNOW, Panbio, and the ID NOW rapid testing platform. That's of about $10.9 billion in total revenue. Now, all three of these companies are using their new found COVID-related revenue, to find pipeline projects and RND. But investors are rightfully curious about who's spending most wisely and who's prospects are brightest. So, Keith, let's start with the big question. What areas of RND are just beckoning to be funded with this cash.
Keith Speights: Olivia, I think it's helpful to look at the research and development areas that these three companies are already prioritizing. Pfizer is the biggest of the bunch in and has the most cash to invest. If you look at Pfizer's pipeline, they're investing heavily on oncology. Pfizer has roughly 30 programs. That's around one third of its entire pipeline focused on cancer. Of course, cancer remains one of the leading causes of death worldwide, despite the significant progress that has been made in recent years. It's also potentially lucrative area for Pfizer to target and Pfizer is already a big player in this market with several blockbuster cancer drugs. Pfizer is also investing heavily and surprisingly, in vaccine research. Pfizer has 17 vaccine programs in its pipeline. I'm especially interested in the company's messenger RNA efforts. Pfizer has an experimental flu vaccine that's an early stage testing.
That's one to really keep your eyes on. Of course, the company has been working with this partner, buy-on Tech on the COVID-19 vaccine commodity. But Pfizer is looking to go it on its own somewhat in messenger RNA. That'll be an interesting area for investors to keep their eyes on. Pfizer is also investing a lot in inflammation and immunology. The company has 16 pipeline programs. Now, two of those recently won FDA approval. You can back that number out. But Pfizer is also has promising experimental drugs targeting atopic dermatitis, lupus, and a lot more. Pfizer is also looking at beeping up its portfolio in rare diseases, genetic diseases, and the company has several pipeline candidates on that front. Then finally, one area that I think is intriguing, is nonalcoholic steatohepatitis or NASH. This is a liver disease that doesn't have any really effective approved therapies, and it's a big potential market. If a drug maker can come along you have a successful product. So far that hasn't been the case really, but Pfizer has some candidates targeting NASH that I think are interesting to watch.
Olivia Zitkus: Great. Let's turn to Moderna.
Keith Speights: Moderna of course, is a big player in messenger RNA vaccines, and that's the main area to watch with Moderna. The company has a pipeline that focuses exclusively on mRNA. The company's lead candidate outside of COVID-19, is a cytomegalovirus, or CMV vaccine. There aren't any approved CMV vaccine right now. This is an interesting candidate to watch. Moderna is also developing a combination COVID flu and RSV vaccine. The company says, it could be ready and a best-case scenario anyway with this vaccine by the winter of 2023. A combination vaccine like this could have a lot of potential if it's successful. If it's both safe and effective. That's definitely one to watch. Moderna is also developing some personalized cancer vaccines using its mRNA technology. The company has a pre-clinical HIV vaccine, one with one program targeting HIV potentially soon advancing into clinical testing. Moderna has a lot of mRNA vaccines in the hopper. But it's also focusing on mRNA therapies, and it's targeting how auto-immune disorders, cancer, and rare diseases there.
Olivia Zitkus: How about Abbott Labs?
Keith Speights: I think the intriguing area to watch with Abbott, is its investments in developing consumer bio wearables. Abbott is developing several consumer bio wearables that track glucose for diabetics, tracking ketones, which are chemicals made in the liver and they're important for diabetes monitoring, tracking lactate. These are high levels that can be caused by dehydration or anemia or even leukemia or be symptoms of that, and it could have devices like when they track alcohol levels. Abbott is also focusing on Connected Health technology, including remote heart monitoring. So Abbott has a lot of intriguing development efforts underway on the medical device side.
Olivia Zitkus: That's a great friend down Keith, and I hate to ask for you to pick a favorite, but as an investor, are you more excited about one of these three companies over the others based on their pipelines?
Keith Speights: I will say Olivia, I'm excited about the development efforts for all three of these companies. I think they have a lot of good things in the works. Abbott is really one of the best run and most innovative companies around, Moderna has an absolutely huge opportunity over the long run with it's mRNA technology. As an investor though, I think that Pfizer is probably the most attractive all around right now. Pfizer is poised to continue making billions of dollars, with its COVID-19 vaccine. Company also has a highly effective COVID pill that will also undoubtedly be a huge moneymaker. Pfizer already has contracts to supply doses that will make it billions of dollars from this COVID pill called, Paxlovid. Pfizer also has several strong products in its lineup including blood thinner Eliquis and rare heart disease drug called vyndagel. Company has an incredibly robust pipeline across all of the areas we've already talked about oncology rare disease, vaccines, inflammation, and immunology, and it doesn't hurt that Pfizer also offers a solid dividend. The yield right now is around three percent. Investors who are looking for really solid growth prospects for such a huge company, as well as an attractive dividend, Pfizer is a great one to take a look at.
Olivia Zitkus: Yeah, Moderna and Pfizer in particular are a pretty different status in their lifecycle. It's interesting that we often talk about them in tandem, because of COVID, right? For Moderna, research and development expenses were $521 million for the three months ended September 30th of last year, compared to 344 million for the same period in the year prior, that's a 51 percent increase. But Pfizer, a longer tenured, large-cap healthcare company, also upped RND spending 50 percent to $3.4 billion. Just a mammoth increase in spending for a company that's already doing well. It had drugs on the market for a really long time. That brings me to my final question. These are big, profitable businesses. If we turn toward valuation, who has the most room for a run-up in share price?
Keith Speights: That's a good question Olivia, if you look at the stock chart, Moderna's shares are down more than 60 percent from the highs last year. This stock has really been bitten down quite a bit. However, there is a strong case to be made that Moderna's valuation really became too frothy last year, and it's now getting close to more of a reasonable and fair valuation. Both Abbott and Pfizer are around 10 percent below their highs, maybe a little more than that now. Between these two though, I think Pfizer appears to be the better bargain right now. This pharma stock trades at only around 9.5 times expected earnings. There are two big questions for Pfizer though. Number 1, what's the demand going to be for COVID vaccines and therapies beyond 2022-2023?
We don't know the answer to that question just yet. The second big question for Pfizer is, how will the company fair with the patent cliff that it faces in the second half of this decade? Pfizer has several of its top-selling drugs that lose patent exclusivity, starting in 2026-2027 timeframe. I do think though that Pfizer's pipeline and acquisition strategy will help it address the second issue relatively well. I think Pfizer is going to be able to handle losing patent exclusivity for some of this top drugs because it has a strong pipeline, and it has quite a few newer drugs that will be really gaining momentum over the next several years. Then on the first question about whether or not the demand is going to be there for COVID vaccines and therapies over the next several years, I think if new variance emerge, or COVID continues to be problematic, even as it transitions from pandemic to endemic, Pfizer's stock could still have plenty of rental run at its current valuation. I think the start was pretty attracted.
Olivia Zitkus: Fabulous Keith, it is always a pleasure talking with you. Thanks so much for sharing your insights with us.
Keith Speights: Thanks, Olivia.
Chris Hill: Quick reminder for anyone looking for a little help on their investing journey. We have a free investing starter kit, covers everything from how to set up a brokerage account, to forward ones case, to buying your first stock, and it includes 15 stocks and five ETFs, that are selected by our investing team at it's free. Just go to fool.com/starterkit. That's fool.com/starterkit. That's all for today. But coming up tomorrow, Emily Flippen and Asit Sharma will have a deep dive on a business trying to make the process of transferring money around the globe even easier. 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. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.