Amazon (AMZN 1.15%) is up more than 10% on the strength of its last quarter results, but that's not the important takeaway from its earnings report. Fool's General Manager Eric Bleeker explains how the retail giant's recent announcement offers a peek "under the sheet" at what's really going on.
Bleeker also discusses Facebook's (FB +0.30%) stellar results and points out a key area of the business investors should keep a close eye on when it comes to long-term results. Finally, he reveals why most investors are wrong about Google (GOOG 0.47%) (GOOGL 0.49%) and frequently misinterpret its results.
A full transcript follows the video.
Sean O'Reilly: Bill Belichick must be the new CEO of Google because their earnings got deflated by $468 million. This is the tech edition of Industry Focus.
[INTRO]
Howdy everybody, I am Sean O'Reilly with my special guest, Eric Bleeker. How are you today, sir?
Eric Bleeker: Good! Ready for the Super Bowl.
O'Reilly: You're not leaving much to the imagination with who you're pulling for on Sunday.
Bleeker: Patriots.
O'Reilly: Patriots, naturally.
Bleeker: I'm just going counter, here.
O'Reilly: Counterintuitive, faking us out?
Bleeker: Yes, exactly.
O'Reilly: Yes. For those of you that are listening, that cannot see, Mr. Bleeker is in fact wearing his Seahawks jersey, because he is a Seattle native.
I did want to also point out that Google's earnings are actually not that bad, but they just were pulled back about $468 million by currency fluctuations, due to the strength of the dollar. We'll get to that in a minute here.
Big week for tech, huh?
Bleeker: Yes, definitely. It's hard to keep up with. It's a fun week; some unexpected losers and some unexpected winners, so let's get to that.
O'Reilly: For sure! First up was this morning, Amazon shares are up more than 10%?
Bleeker: Yes.
O'Reilly: This is of course one of our co-founder, David Gardner's, favorite companies so I'm sure he's happy. Blew past earnings, stock up 11.5%, free cash flow was awesome. Tell me a little bit more.
Bleeker: The thing with Amazon is, if you're watching it quarter to quarter and trying to figure out why it's dropping or rising, you're going to go crazy!
O'Reilly: You need to look at it decade by decade.
Bleeker: Well, it doesn't make a whole lot of sense.
O'Reilly: Right.
Bleeker: What we saw this quarter was, in the past people have cheered revenue because the long term story for Amazon is the fact that e-commerce is still, I believe, 6-9% of retail, depending on what kind of measure you're looking at in the country, so it's got all this room to rise and you're looking at what the total addressable revenue side is.
This quarter, they actually came in a little lighter on revenue, but they showed profits, and what happens? They're up!
O'Reilly: Amazon with profits? This is crazy!
Bleeker: They're up 10%.
O'Reilly: This is crazy!
Bleeker: It is kind of crazy, but they'll probably go back.
O'Reilly: They actually have money in their bank account? I can believe this.
Bleeker: They'll have losses next quarter.
The thing with Amazon, though, it's always a bit of a ... the only word is a "black box" I would say. We're always trying to get a peek under the sheet.
A few really positive things from this quarter that I'm looking at; number one Amazon Web Services, their cloud computing division, has always been hidden away. I wrote it down because I always ...
O'Reilly: This is my favorite thing in the release, too. I was like, "You're actually going to bust it out?"
Bleeker: We're going to break it out.
O'Reilly: This is fantastic. Oh my gosh!
Bleeker: It was in "North America Other." We can see North America Other was up 43% year over year to $1.67 billion. We'll actually get some information on Amazon Web Services.
Also, they actually gave some information on Amazon Prime. They said it was up 53% year over year. In classic Amazon fashion they give us a big number but nothing to base it off, because we don't know what number of members they started the year off at, but 53% is a very impressive number because Amazon is really working on a system.
They're putting such resources into getting people in Prime, under the expectation that they'll create lifelong customers who buy 2-3x the amount of products that a non-Prime member would.
They actually gave one more number on this, which was $1.3 billion in Prime video spending last year, which finally gives us some context in them versus Netflix (NFLX 0.75%) and what kind of resources are being poured into video because we can look at Netflix and see that they have $3.7 billion under their Cost of Goods Sold last year, to get a rough look at how these two companies are spending versus each other.
Hey, maybe we're comparing to old releases, where there's just a tiny meat on the bone, but I feel like I at least got maybe one chicken wing here, a little meat!
O'Reilly: He's throwing us a bone.
Bleeker: He's throwing us a bone with a little meat on it.
O'Reilly: This is a big deal.
Obviously going forward, first and foremost do you feel like the story -- and you mentioned this -- but for years the big story was sales. Clocking 20% sales gains then. "At some point, if their sales get big enough, they'll be able to pull some magic lever and profits will just fall from the sky."
Do you think that story's still intact, or are they finally having to milk this business that they've built?
Bleeker: Do investors still have belief in some kind of a long-term vision?
O'Reilly: I couldn't believe the stock popped like this, because they got beat up a bit three months ago.
Bleeker: Investors react to Amazon differently than just about any company I can think of. I think when you talk about long-term kind of looks into the company's future, I think you should really focus in on two things from the past quarter.
Number one the Prime number, because whenever they're growing Prime, again this is an investment in very engaged customers. We've seen some private estimates; I believe something about 40 million Prime customers.
You can think, whenever they drive that number by 50% up, and you think about Prime customers spending two to three times as much, we're talking not just billions but potentially tens of billions in added revenue. That's essentially guaranteeing growth for coming years.
Another area I would look at was actually they discussed an Amazon mail service which, on its own, I don't necessarily think it will be a driver. I'm not going to leave Exchange or Gmail or whatever, and I think a lot of companies won't, but it does show the services direction that they're building on top of Amazon Web Services. This is probably a piece of Amazon ...
O'Reilly: Sorry to interrupt. That seems like a natural extension of AWS.
Bleeker: Exactly because AWS, at its core, we saw a recent acquisition that they made on the hardware and chip side, but where a company wants to make money off this isn't necessarily being the cloud servers that you put your stuff in. It's building services on top.
When you think about where Amazon will profit from this, long-term, for example there's actually an Amazon Marketplace for its web services that kind of functions like an app store. They take a cut of software services on top.
If they want this to be the most meaningful part of their business long term, which Bezos has said he believes it could be, you're going to need to build some of these services on top. It's just a signal, I think, of where we'll see Amazon's investment in the future.
O'Reilly: Awesome. Before we move on to Facebook here, for years they weren't busting AWS and the Prime numbers out of their results. They just kept it in Other North America because they didn't want anybody to know how well AWS was doing.
Do you feel like they feel like they have enough lead now that they can tell Microsoft (MSFT +1.04%) and Google, "Okay yes, we have this many customers in AWS now," or is it just them throwing investors a bone?
Bleeker: I have no idea what Bezos does!
O'Reilly: Maybe he pulled it out of his hat or something.
Bleeker: Quite frankly, it's probably just hit a point of meaningfulness, where they felt it was prudent. As much as we've talked about AWS, in recent years it might have been 1, 2, 3% of their business. It's finally starting to take that movement up to a 10% level, where it would be prudent for a company to break it out.
O'Reilly: Right. Good stuff. I'm sure the lawyers yelled at them!
Moving on to Facebook and their incredible money-printing machine, revenue for the full year came to $12.47 billion. That's up a modest 58% over 2013. Net income for the full year, $2.94 billion, free cash flow of $3.63 billion. Good lord!
This is just two-three years ago that everybody was worried about Facebook monetizing things and getting the ads, and they've just nailed it.
What I wanted to talk to you about specifically though, was I am one of your followers on Twitter (TWTR +0.00%) -- and for our listeners that do not know Mr. Bleeker's handle here, it is @bleekertech.
You had a couple of interesting tweets that I wanted to share with everybody. You say, "Looking at $FB results, incredible that real monetization of Instagram just beginning, WhatsApp maybe a year or two, and Oculus 5+ out." "You get an amazing core business and so many potential drivers in coming years."
Bleeker: Yes.
O'Reilly: How are they going to monetize WhatsApp?
Bleeker: Let's talk about Facebook, the trajectory of the business itself. As you mentioned, if you go back to 2012 the story with Facebook was only disappointment.
O'Reilly: Suspicion.
Bleeker: Yes. They had actually seen decreasing profit margins, and the problem was everyone said, "How are you ever going to monetize your site, your apps, your platform? Because at the end of the day there's just banners on a right rail that no one is going to be watching."
They took a very concerted effort to really increase engagement, make their product and their platform, as positive as it was, get people using it more, and then they actually put ads in streams. They've been so successful at that, I can't believe how successful they've been.
It's funny to think about now, but people at the time thought basically a payments platform in the old Zynga games was going to be what we would see for Facebook, and now it's kind of a rounding error to their results.
O'Reilly: Small potatoes, yes.
Bleeker: I think they're going to be able to drive something like that similar to WhatsApp, but again this is an optionality on top of their business. When investors first saw these earnings, they were actually disappointed.
I think Facebook, for the first time after earnings in the little bit that I can remember, was down because net income was only up 34%. But then you realize it was because of acquisition costs, and actually once you back those out it was relatively flat.
When I look at Facebook, here's what I'm looking at as an investor. I'm looking at areas within the core business, like you said -- not even related to WhatsApp -- and saying, "Look at what they're doing in video. It's truly incredible."
You always want to start at the total market for a business, and the total ad market in the world is $520 billion. Television advertising is $200 billion of that, and all of online including mobile, where they've dominated so much, Google, search ads, banner ads, is $120 million.
I do a little test for companies. Would you be crazy to think that as everyone is watching video online and shifting their viewing habits, that out of that $200 billion we won't even see $20 or $30 billion of it shift?
O'Reilly: Right.
Bleeker: I think you would have to be crazy to say that wouldn't happen. Now, who's going to see the gains from that? Well Facebook, they are now serving up 3 billion video views a day. That's one per person in the world, every two days.
There have actually been tests with advertisers on Facebook versus YouTube. For example the new Avengers film, they put huge efforts into this on YouTube and Facebook, and Disney (DIS +0.50%) is really liking their Facebook results.
O'Reilly: The results, yes.
Bleeker: I think the earnings call to Facebook was largely about video, and I think that's 100% right. I think the opportunity in front of the company, just from video alone, will last a decade. We talk about a company with a valuation of $200 billion, and getting the revenue up to where you can grow into that?
I think just their main opportunities within in-stream traditional advertising, working on getting more brands to be able to use Facebook, and then video on top, gets you there alone and more than that, just because the growth is so great over the next decade.
That was the point to that. Their core business is so amazing, and then you look at Instagram. I've seen private valuations on that from $35 to $50, and it's not even really reflecting their results. As much as Zuckerberg was derided, that might be the acquisition of the decade.
O'Reilly: Right.
Bleeker: WhatsApp is still so new, but you've seen the popularity of messaging products.
O'Reilly: Everybody on our planet uses that thing.
Bleeker: Exactly. I don't quite know what they're going to do, but ...
O'Reilly: The founder's got that note on his desk that says, "No ads, ever." I don't know what the game plan is there.
Bleeker: We'll see. There's a lot of approaches to that, and quite frankly with messaging programs we've seen things as crazy as stickers be able to drive huge amounts of revenue.
I don't know what the end game there is going to be, but at the end of the day you look at stocks, you see them, and the opportunities so readily apparent, and people aren't just looking at that decade-long opportunity. You can really feel in your bones it's going to beat the market, and I really believe that situation is here for Facebook.
I think investors would be crazy not to have that as a part of their portfolio. It's a really exceptional company. It really has exceptional optionality to it between those three acquisitions I had mentioned in that tweet, and the core business is really firing on all cylinders.
You just look at the broad trends, and I can't think of another company so well positioned as Facebook.
O'Reilly: Awesome. Okay.
To finish it up, we're going to talk about the other ad elephant in the room, which is Google.
Bleeker: Sure.
O'Reilly: Results were not that bad. Earnings came in at $4.8 billion, $6.91 a share. They obviously had that $468 million hit from currency swings that I mentioned. Bill Belichick is obviously not the CEO of Google.
Bleeker: Not yet, anyway.
O'Reilly: Not yet, anyway. He might, I don't know ...
But I did want to talk about, we've got two companies that we've talked about here today, Amazon and Google, that just keep investing in tiny little future tech crazy things like drones, and we just found out that Google has dropped a billion dollars on SpaceX.
At what point does a Google investor start to say, "Okay, why are we buying these container ships? What are they doing with these driverless cars? We're obviously not going to be a new GM (GM +2.56%)." What's the deal there?
Bleeker: Yes, I think people have already begun asking that!
At the end of the day, they have a really great core business but they've been, as a stock, relatively stagnant for I would say about a year and a half now. We even saw investors -- side note -- this shows how insane short-term earnings are.
Let's just dive for one minute into Google. They release earnings, their $200 million in revenue, or whatever. I don't know the exact number. They're down I think 3-4%, right away. Then they go, "Oh no, this is currency, $400 million."
Everyone's like, "Oh, you actually beat this!" and sends it up.
But let's look at one more layer of insanity to how people are analyzing Google. People cheer about the fact that their Other revenue, which is non-advertising related, has been increasing as a percentage of total revenue.
It was, I wrote down, $1.95 billion last quarter. You know what's included in that? The hardware they're selling. You think about a phone launch, often phones cost $400-500 each.
O'Reilly: Right.
Bleeker: So, if you sell a million less phones than expected, your revenue's off $400-500 million. But it affected nothing to do with your business. In fact, Google's phone sales aren't necessarily driven for profits. They're kind of driven to move Android as a platform for it.
O'Reilly: Right, and now we find out they're teaming up with T-Mobile (TMUS 1.10%) and Sprint (S +0.00%), which is fun.
Bleeker: Yes. The point here is just entirely reasons to look past short-term reactions on Wall Street, because they're looking at slight, $100-200 million revenue numbers for Google, but they've suddenly got this swing portion of their business, revenue-wise, in hardware that's completely detached from their search business that actually makes all their money, and can in any given quarter swing them like that. Just one reason to look past the insanity.
Now these little bets, I think they get way too much attention. Look at all of the ink spilled about Google Fiber in 2011, 2012; I don't know exactly when they started. How much has Google Fiber affected their business?
O'Reilly: Not at all.
Bleeker: Almost none. They announced a recent kind of larger launch, and I am reminded of Qualcomm (QCOM 6.14%) in the late 1990s. They had invented the foundational technology behind basically 3G; data-intensive mobile technologies.
They had actually gone out and used an investment arm to go and found wireless companies in different countries, under the belief that if they did this they could spur the market, and once phones were sold they could take a licensing rip off them, because that's their business.
They had to basically write everything down, because when companies go in and try and spur markets that they have very limited connection to, and are often heavily regulated and move slow for a reason, they normally have sub-optimal results.
When it comes to Google making all these kinds of investments, I think it's almost completely immaterial to their business, and I think it's too much of a focus. Quite frankly, it's a bit of a distraction from what people should be analyzing with what they are as a company.
O'Reilly: Moral of the story, Google's search monopoly is still intact.
Bleeker: Their search monopoly is still intact. It's not quite as strong as it once was, just because of how people are using devices, and the devices they're using.
O'Reilly: Right. Was it Sergey Brin that said, "Our biggest competitor is actually Amazon, because that's where people go to look for products, and we want them to go to Google"?
Bleeker: Well, there is a big battle over that because there's a lot of money inside search for different products. They could spin it any way they want, but they've got competitors all around.
I actually think Facebook you'd have to look at, just because of this quiet brewing war for video dollar share.
O'Reilly: That $300 billion, yes.
Bleeker: Yes. A lot of that I truly believe will be moving online. One of the nice things, you look at the demographics of Facebook versus YouTube and the different approaches; Facebook has much more attractive demographics for their video platform, so I could see a lot more mindshare moving there.
Like you said, Google's done very good with online advertising. It's a $120 billion market, TV's a $200 billion market. I believe this will probably come into focus a little bit more for tech companies than many will expect, and accelerate over what we saw in the past decade.
Who do I see Google in conflict with for dollars? Probably Facebook in the next five years.
O'Reilly: Wow. Man. Okay, cool.
Bleeker: That's what we've got.
O'Reilly: Before we sign off, your call for the final score on Sunday?
Bleeker: We'll I'm a little bit of a Homer so I'll do it 27-23 Seattle, but at the end of the day this is still a pick 'em at many casinos in Las Vegas. We've never had Super Bowl as a pick 'em, so I think everyone should enjoy what should be a very competitive game after what happened last year -- which I enjoyed, but no one else in America did.
O'Reilly: Naturally! Very cool. All right Mr. Bleeker, thank you for your time. That's it for us, Fools. Thanks for listening, and Fool on!
