The future of technology is being written in front of our eyes. At the forefront of this technological tipping point, three companies are making bold, strategic leaps.
Netflix (NFLX -0.63%) is expanding into the interactive world of gaming, Salesforce (CRM 0.42%) is making a strategic pivot amid a digital revolution, and Amazon (AMZN 3.43%) is committed to leading the AI charge. These three game-changers illustrate a common thread: the relentless pursuit of innovation. Read on to see how this trio of tech behemoths are not only adapting to rapidly changing times but are also reshaping the tech sector, one audacious move at a time.
From Los Gatos to San Andreas: Netflix goes hard with video games
Anders Bylund (Netflix): The leading media-streaming specialist has already reshaped the entertainment industry twice. After dominating video rental chains like Blockbuster and Movie Gallery out of existence, the company pulled digital streaming up by the bootstraps and remains a pace-setter more than a decade later.
But Netflix won't stop there. Now armed with a reliable multi-billion-dollar stream of free cash flows, the company has more freedom to reinvent its industry than ever before. Next on the list, Netflix is taking a serious swing in the video game sector.
Now, most of Netflix's video games aren't terribly impressive. The first few titles were simple and repetitive, and I don't think they inspired people to sign up for an all-games-included Netflix subscription. Even now, with more than 80 mobile games in the books, most of Netflix's new offerings seem fairly forgettable. Farming Simulator 23 and Football Manager 2024 Mobile may be solid examples of their respective niches. Titles built on Netflix's in-house content catalog such as Shadow and Bone: Enter the Fold or Stranger Things: 1984 are smart cross-promotion moves, but not slam-dunk customer magnets.
Well, that's changing as we speak. From December 14, Netflix members will be able to play a trilogy of Rockstar Games' Grand Theft Auto games on their mobile devices. Sure, you can pay up to play Grand Theft Auto III, Grand Theft Auto: Vice City, and Grand Theft Auto: San Andreas in the leading mobile app stores, but Netflix will include these titles for free, without ads, and with no pay-to-win features in its games.
Now, the Grand Theft Auto introduction would have been more forceful if the included titles were newer fare such as GTA IV and GTA V, but Take-Two Interactive (TTWO 0.72%) subsidiary Rockstar hasn't produced mobile versions of those games yet. Still, Netflix is swinging for the fences with some proven winners here, while also expanding its supported gaming platforms to web browsers and smart TV sets in a promising trial. It won't surprise me if Rockstar Games comes up with a mobile version of Grand Theft Auto VI, published exclusively through Netflix.
The gaming project has been going on for a couple of years now and Netflix is investing serious money in video game productions nowadays. It shouldn't be long before the company flips those games from a free feature to a separate, money-making service. Netflix was always a game-changing innovator and I can't wait to see what long-range ideas the company has for the next era of video games.
A big pivot from one of the biggest software enterprises
Nicholas Rossolillo (Salesforce): There's no denying that Salesforce got overly ambitious during the pandemic. When growth was surging and it seemed everything in the world was going digital, the enterprise software giant overhired and expenses soared. It culminated with one of the largest software acquisitions ever when Salesforce purchased workplace messaging app Slack for about $28 billion.
As a result, in 2022 especially, free cash flow growth flatlined, and GAAP net income dipped into the negative for a time -- briefly ending the company's longtime history of steady and profitable expansion.
Data by YCharts.
But amid a big slowdown for the software industry in 2023, Salesforce has quickly pivoted and is reminding investors of its ability to pull on that profit lever when it's asked to do so. Revenue is only expected to grow 11% year-over-year, a sluggish pace compared to the 20%-plus pace Salesforce had been averaging for many years. But co-founder and CEO Marc Benioff is more than making up for that with rapid profit margin expansion.
During its Q3 update (for the three months ended in October 2023), Salesforce once again raised its guidance for operating margins, now expected to be 14.5% for the current year (compared to guidance of 13.3% before). Operating cash flow (OCF), which closely aligns to free cash flow (calculated by subtracting property and equipment spend), OCF is now expected to be up 30% to 33% this year, compared to guidance for 22% to 23% growth before. Free cash flow margins are also fast-approaching the 30% mark as well, a very healthy level.
Benioff has promised Salesforce isn't done, and that growing at a profitable rate will remain the priority going forward. After the recent quarterly earnings update, Salesforce now trades for about 25 times next year's expected earnings per share, with upside if the company can keep underpromising and overdelivering like it has been. As the next bull market heats up, I remain a happy Salesforce shareholder, and believe there's plenty more growth for this cloud software stock left in the tank.
Both of Amazon's businesses will be turbocharged by AI
Billy Duberstein (Amazon): Given that Amazon is such an economic behemoth, as the leader in both cloud computing and e-commerce, an improving economy with slowing inflation should push its business and stock to new heights in 2024.
Amazon's stock is actually still 22% below its all-time highs set back in 2021, as the rise in interest rates and slowing post-pandemic e-commerce sales bit into results. In addition, it has been thought Amazon may have fallen behind in the all-important artificial intelligence wars. After all, Microsoft (NASDAQ: MSFT) has exclusivity with OpenAI, the company behind ChatGPT and perceived AI leader.
But most of those concerns seem overblown.
As the recent turmoil at OpenAI and Microsoft has shown, cloud customers may want to have more diversified exposure for its AI needs. Moreover, we are still so early in the AI warsthat it's really unclear if OpenAI will lead the industry forever.
Amazon Web Services has pursued a more diverse AI strategy, emphasizing customer choice. On its Bedrock platform, it hosts large language models (LLMs) from various start-ups, including AI21 Labs, Anthropic, Cohere, and Stability AI, along with Meta Platforms' (NASDAQ: META) LLM called Llama and Amazon's own in-house models known as Titan.While Microsoft shelled out a pretty penny for its OpenAI investment, Amazon has been able to attract lots of other AI companies to its platform by virtue of it being the largest cloud computing platform, with the widest customer base. That may be a more capital-efficient way to go about it.
That scale and heft has also given Amazon the financial wherewithal to invest in its own proprietary chips, AI accelerators Trainium and Inferentia and CPU processor Graviton. These in-house models are rented at a lower cost, benefiting customers. But Amazon is also still able to attract leading third-party AI chips as well. In fact, Amazon just announced a partnership with Nvidia (NASDAQ: NVDA) the outright leader in AI GPUs, for a cloud-hosted supercomputer. Amazon will also be the first to host Nvidia's DGX cloud training-as-a-service as well. So, even Amazon pursuing its own chips hasn't deterred Nvidia from wanting to work with the cloud giant.
Amazon has also taken the slowdown in e-commerce over the past two years as an opportunity to retool its delivery platform for greater efficiency. Starting in 2023, Amazon switched from a national delivery model to a regional model in the U.S., consisting of eight regions that contain most of the inventory Amazon believes will be demanded by that region.
As of July, the percentage of packages coming from a destination's region increased to 76%, up from about 62% before regionalization -- and that percentage is likely to climb.
That's a huge efficiency gain, resulting in better profitability in the e-commerce business. And it's how Amazon's North American business flipped from a $2.6 billion operating loss in the first nine months of 2022 to an $8.4 billion operating profit in the first nine months of 2023. Look for those profits to continue to grow from here as Amazon's prediction algorithms get even better with AI.
With its size and data advantage, Amazon's e-commerce business is set to benefit from AI as well. That means both of Amazon's businesses, cloud and e-commerce, are likely to get even better in the age of AI. Given that we are only about a year into the AI age and Amazon is still below its highs, look for its stock to reach new heights in the near future.
