In this podcast, Motley Fool senior analyst Bill Barker discusses:
- Microsoft's strong third-quarter results being overshadowed by news about its attempt to buy Activision Blizzard.
- The $3 billion breakup fee Microsoft is now likely to have to pay.
- Chipotle shares hitting a new all-time high after first-quarter profits were much higher than Wall Street was expecting.
Motley Fool senior analyst Tim Beyers and Motley Fool engineering manager Tim White take a closer look at Amazon Web Services.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center . To get started investing, check out our quick-start guide to investing in stocks . A full transcript follows the video.
This video was recorded on April 26, 2023.
Chris Hill: Microsoft gets bad news and good news while Chipotle shareholders get great news for the side of guac. Motley Fool Money starts now. I'm Chris Hill joining me in studio for the first time in a long time it's Motley Fool Senior Analyst Bill Barker. Good to see you.
Bill Barker: Good to be back.
Chris Hill: We're going to start with Microsoft today because Microsoft is dominating the business news for a couple of reasons. We're going to get to the first one. I'm going to say, glowing third-quarter report profits and revenue were higher than expected. Shares of Microsoft up nearly 8% and hitting a new 52-week high. You and I were talking about this earlier this morning. Alphabet, was the same. One of those conference calls where AI was mentioned a lot. In terms of the quarter itself, what stood out to you from Microsoft.
Bill Barker: Azure up 27% year over year. That's continuing to tick down. As quarters go by up from the 50% range. It was thriving, back in 2021. But still, for something as big as this to still be growing 27% year over year is I think one of the big keys to the market reaction today.
Chris Hill: In terms of all of the talk around AI. I know we're in early days, but it seems like there's this general sentiment that Microsoft's doing a better job than Alphabet is. Is that fair? Is that warranted? Or as part of this, we just expect more from that realm out of Alphabet because Google Search has been so good for so long and Bing, has been well, Bing.
Bill Barker: You've got people saying that Google has years of lead in AI and they just haven't productized it. That they've got the top minds and they were on this before others and that they have been slow in bringing it to market, at which they have been in comparison certainly to Microsoft, and barred came out with a whimper rather than a bang, and they've already sunk so much into this that my suspicion is, and a lot of other people's suspicion is that they actually are going to be hitting it out of the park at some point. But they wanted to do it right, and that led them to some people accusing them of a Kodak moment.
Chris Hill: Yeah. I've seen that. What is that in reference to?
Bill Barker: That's in reference to Kodak.
Chris Hill: That part I get. But what what is the Kodak moment? Was it just Kodak not realizing that, hey, this digital film thing is going to take off and the processing of film is going to zero?
Bill Barker: Yes. But even more specific than that of being in the forefront in digital photography before others were, and holding back on getting behind it because it was going to cannibalize their existing and very profitable silver Halide film business. So they could have been the leader, but they chose out of caution toward their ongoing profits to not be, and that was the death of the company ultimately.
Chris Hill: The other reason Microsoft is in the news today is because the UK Competition and Markets Authority is blocking Microsoft's $69 billion acquisition of Activision Blizzard. I'm quoting here from the CMA statement, "Allowing Microsoft to take such a strong position in the Cloud gaming market, just as it begins to grow rapidly, would risk undermining the innovation that is crucial to the development of these opportunities." You had Sony and Nintendo among those who were lining up urging the CMA to block this deal. The reaction from investors was to essentially reward Microsoft, congratulations, you're not going to have to spend $69 billion. So the stock is up a little bit more as a result of that. Shares of Activision Blizzard down 11% this morning. Where do you want to begin with this? Because I'm tempted to begin with the immediate aftermath of both Microsoft and Activision Blizzard saying, we're going to fight this. I'm wondering, how hard are you going to fight this?
Bill Barker: Doesn't matter how hard they're going to fight this. They're not going to come out on top. The history of the regulating body in the UK is to not change anything on appeal here, so they know that they have to posture. In terms of the breakup fee that Activision is going to get, they have to play out the string on this one. But Sony is up today because look, there was some negative effect at this likely would have had on the Sony's and Nintendo's of the world, which is why they were fighting it, and their argument won the day. The market today is rewarding Sony for no other reason than the outcome of this case.
Chris Hill: In terms of the stock, do you think, let's just call it punishment of Activision Blizzard shares is a bit much? If this is truly going the way of you are not going to win on an appeal, and because of that, sometime in mid-July, Microsoft is going to cut you a check for three billion dollars, which goes straight to their balance sheet. I'm wondering how much of an opportunity exists for Activision Blizzard because it's not like this is a business that is flailing about. Yes, they want it to be acquired by Microsoft. But on its own, particularly with an additional three billion dollars, it seems like a good business.
Bill Barker: It is a good business. I don't know what the price of Activision was when Microsoft first made the offer to buy for $69 billion. Activision is worth $60-61 billion absent of that purchase. Also likely the reality that nobody else is going to be able to buy Activision in such a deal because then they would be in the same cross-hairs of the regulations. Part of what Activision doesn't have today that it had yesterday was the possibility of being bought by Microsoft or if not Microsoft, somebody else, and all that's taken off the table. So that's a buyout premium that's gone to Activision's lineup of games, it's going to continue to thrive and going to continue to be at the center of Cloud gaming. But stocks were about the same as it was five years ago.
Chris Hill: If you're Microsoft, obviously you wanted the deal to go through. You say you're going to appeal this, but you're probably smart enough to realize that's not going to happen. Where do you think they go from here? Because clearly, they were willing to spend upwards of $70 billion for Activision Blizzard. Do you think making an acquisition in gaming is worth pursuing immediately or do you let the dust settle from this one?
Bill Barker: Microsoft's got like 20 other things going on that are as big or bigger than their Xbox stuff. I think they'll allocate capital accordingly and not throw it at the next thing that is Activision, but a little bit smaller. Maybe we can get away with that. Xbox is going to thrive by being on the same side of the equation that it's been on up to now, and that's profitable, and they'll be a partner of Activision rather than an owner.
Chris Hill: Chipotle's first-quarter profits were much higher than expected revenue, slightly higher as well. Same-store sales growth for Chipotle was nearly 11%, and the stock is up 14% this morning and hitting a new all-time high today. Brian Niccol and his team have been among the best, if not the very best, at raising prices over the past 18 months. I think when you look at the stock, there's the proof.
Bill Barker: That 11% is 7% on the size of the check, which is basically inflation, the degree to which they raised prices and pass that along, and 4% traffic. That's good. They're not completely reliant on future top-line growth through inflation continuing. They've proven that they can take price, as they say in the business rather than raise price, which is the English that everybody else uses. I don't know, to take price sound like it's less?
Chris Hill: No. I prefer to raise price.
Bill Barker: I'm just adopting their language for the moment. They've got more people coming in. The task now is since they have put out that they hope not to be raising prices, again, not promising because they see some inflation potential in the second half of the year, particularly with avocados, we'll get to that in a second maybe. They've got more people coming in, and that is the focus right now is to continue that part of the equation.
Chris Hill: It's one of the reasons I like Brian Niccol as the CEO is he's a clear communicator. He's been very clear about how they've been raising prices over the past year and a half. As you said, indicated that they're going to hit the pause button on that, which to bring it back to the same-store sales, if they're actually going to do that, even if it's just for a few months then they really need to figure out ways to boost traffic. If they're not going to be relying on higher prices to boost that average ticket, then they're going to have to do a better job than 4% increases in traffic over the next 3-6 months. Aren't they?
Bill Barker: Gone in there lately, been eating at Chipotle?
Chris Hill: No, I haven't.
Bill Barker: Why not? You're not part of this equation?
Chris Hill: I'm not part of this equation.
Bill Barker: You used to like Chipotle.
Chris Hill: I still like Chipotle. I just haven't been there in a while.
Bill Barker: Why do you think that is?
Chris Hill: Other options.
Bill Barker: One of the things that's getting people in and apparently it's not working with you, now we've discovered that, is the limited-time-only things that they put on the menu which you may want to go and try.
Chris Hill: This is the chicken ale pasta.
Bill Barker: Yeah, right. With a big hit.
Chris Hill: The big hit, something like the most successful.
Bill Barker: It's a limited-time-only thing. Get over there.
Chris Hill: it's like the McRib, but they're classier. Let's just move on. When you look at this stock, it's at an all-time high. This is a stock that has never really been cheap on a valuation basis, but I am wondering if, in fact, this is one of those times where it's like, no, really the stock's at an all-time high, couple that with the comments from Niccol. He's not pointing to any weakness there. They're continuing to invest in their locations. They're going to open another somewhere in the neighborhood of 230 locations, at least that's their goal for this year. They are pricing in those investments, which makes me wonder, how optimistic should people be about, call it the next 12 months for the stock?
Bill Barker: I don't know. Who knows what the price of a stock's going to be in 12 months? I don't know. No, you should admit that you won't know that. I mean the health of the business, should the business short-term, intermediate-term, and long-term, all looks good. So maybe there's a recession somewhere in the horizon? Certainly, that's speculated about all the time hasn't arrived yet. If it shows up in a few more people are out of work, then a few more people are going to be saving money by not going to Chipotle as well as often, and that could interrupt the extremely impressive growth trajectory that they're enjoying at the moment. But I think the target is 7,000 total restaurants is the longer-term goal that's going to take I don't know some more 5-8 years or something like that, and everything is smooth sailing at the moment.
Chris Hill: What was the thing about avocados? Is their input cost for avocados coming down, and that's helping to boost their margins?
Bill Barker: It has come down over the explosives, avocados, eggs, or a couple of things that we're capturing headlines for the inflation in those categories, and that's improved their margins a bit. But the conference call indicated that that might reverse itself in the second half, you don't really know so now may be the time to hoard avocados if you're out there.
Chris Hill: So no one should expect Chipotle to lower the cost of guacamole?
Bill Barker: No, it's never coming down. From here, that's not happening. What are you talking about?
Chris Hill: We'll see if there actually is a recession if they actually need to start. They've done a great job with their app. As you said, they did a great job with these limited-edition items so it's not going to stun me if a set of circumstances leads to Chipotle offering deals on guacamole.
Bill Barker: On taking price, you're thinking.
Chris Hill: Because we don't want to say lowering prices.
Bill Barker: No, they might give you a little less guacamole.
Chris Hill: Shrinkflation.
Bill Barker: Shrinkflation, or they might give you a little more like if they're trying to move guacamole as the price of avocados comes down, that might give you a little bit extra. That might be about as much as the un-taking of price would go though. You're still going to be paying the extra for it at that level you are now.
Chris Hill: That might get me in the door.
Bill Barker: They need you.
Chris Hill: They don't need me. Their stocks hitting an all-time high and I haven't been there and I don't know how long.
Bill Barker: Look at how much you could eat.
Chris Hill: Well, that's yeah. Thanks, Bill Barker.
Bill Barker: Thank you.
Chris Hill: Good to have you back.
Bill Barker: Good to be here.
Chris Hill: Businesses are digging through their sofa cushions looking for savings and that's a problem for cloud spending. Tim Beyers and Tim White take a closer look at Amazon Web Services.
Tim Beyers: Welcome to This Week in Tech on Motley Fool Money, I'm Tim Beyers, he's Tim White. Tim, let's talk about cloud spending. Let's talk about Amazon Web Services because we had the shareholder letter from Amazon and in it they talked about over $80 billion in AWS run rate spend. Boy, is that a lot? This is one of Amazon's biggest businesses. It's one of its most profitable businesses. What do you think this means for Amazon that they are so dependent on AWS?
Tim White: I think that the fact that Andy Jassy, the current CEO, came from that business means that he's fully well aware of how profitable that business is and he's trying to bring a similar, maybe not exactly the same, but similar level of profitability to the rest of Amazon businesses and that means a lot of cost-cutting I think.
Tim Beyers: I fully agree and they've signaled that. But they also signaled that there might be some softness, and weakness as we move forward with the AWS business into the second half of the year, and that feels like something we're seeing a lot more of.
Tim White: I think most businesses especially tech businesses are pretty hesitant to commit to the end of this year as far as being big, a lot of businesses are delaying spending holding back on things. Every business is starting to go through the couch cushions and looking for spending cuts, which is part of the normal cycle of how these things go. We have these like boom and bust cycles where growth is the most important thing and then suddenly cost-cutting is the most important thing. But I think a lot of businesses are suddenly realizing that they have a bunch of Amazon Web Services spend that's going out the door that they don't need to be spending.
Tim Beyers: I know this is a little bit of a hand grenade question here, but is this one of the inherent weaknesses of the Cloud model, particularly at the infrastructure level? I mean, are we starting to discover, in other words, that basic Cloud services like AWS are a commodity product and let the price wars kick on?
Tim White: I hope that's true because I think it benefits everybody.
Tim Beyers: Benefits us as a company.
Tim White: Prices has come down across Cloud infrastructure. I think that helps a lot of companies other than the major Cloud providers. But at the same time, I think that every one of them, Azure, AWS, and Google Cloud, and even Oracle Cloud, are working hard at building products that are unique to them and add unique value. They are trying to help their customers spend wisely. But I think it's a little bit of a Janice thing where they've got one phase that says, "Yeah, we'll help you control your Cloud spend." On the other hand, they're like, "By the way, we've been charging you for this thing you haven't been using for two years and it cost you money though."
Tim Beyers: There are companies who actually have introduced tools. This is one that a favorite company of mine Datadog introduced about 18 months ago. The observability said, "Let us help you observe your Cloud spend so you can control it." That is fundamentally, I don't think that's a surprise and that's one of the more popular products that Datadog offers.
Tim White: In terms of Amazon, no one's going to stop their Cloud migrations, but I think companies are going to start looking really hard at exactly what workloads are best in the Cloud, and which ones might be better elsewhere. We talked about IBM's results showing they're still at growth in the Mainframe business. I think some workloads they're still on the Mainframe and probably aren't going anywhere anytime soon. I think that none of that's changing, but I do think that especially for the rest of this year, there is going to be a slowdown and a pullback on that spending. I think it's probably healthy for companies to try to get a hold of their spending.
Tim Beyers: What do you do if you're Andy Jassy then? One of the things we talked about is where can you get differentiation in a product suite that for the most part is becoming a bit more commoditized, as goes AWS, also goes Google Cloud, also goes Azure, like pick your poison, how does AWS get a little more differentiation here?
Tim White: If I was able to do suddenly take over everything Andy Jassy for one day, I would focus on one thing in particular, and that is, as we've often said in the discussions, you and I have had developer experience. Better your documentation can be, the more tutorials, the more questions and answers, the more support that's available to folks using your products, the more stickiness there will be. As soon as someone else goes and tries to use Oracle Cloud and is immediately stuck and they can find no help on the Internet for what their problem is, they might be excited to go back to AWS if your documentation is better, which I would offer today probably.
Tim Beyers: I would say the same, Tim. I would also say that one of the things that you and I have talked about, which is one of the real misunderstood advantages of tech infrastructure companies in particular, is that once a developer sets up a habit, sets up a routine and they have workflows that actually genuinely work, and it's all set up and it's well documented, those developers, no matter how good the other tool is, they're going to resist switching until it's really painful not to.
Tim White: I think that's true. On the other hand, I have seen it happen in huge waves where as soon as something is compellingly better, even if they're used to something else, there will be a giant migration running over to there, people getting off of Angular one, which was a JavaScript framework. It was a miracle at the time when it came out. But as soon as other frameworks came out, people were running away from it as soon as they possibly could, just because the alternatives were compelling.
Tim Beyers: There are these tipping points. Do you think there is room then for these companies, many of whom we've talked about on This Week in Tech that are Cloud independent? Is it a better time for them because they are Cloud independent, or do we expect that Amazon is going to do what's best to lock customers in and will succeed at that?
Tim White: Well, as you and I have often said, history doesn't exactly repeat itself, but it certainly echoes. If we look at the early 2000 foot, what was happening with IBM and Oracle, and Microsoft, they were clutching as hard as they could to hold onto people and to prevent people to open-source solutions. I suspect that's probably what's going to happen here. I had a prediction several years ago that the next wave of open source revolution was coming. I think that probably will happen in terms of Cloud infrastructure. It's lovely to have something that works really well, that's closed source. It's much better to have something that works well, that is open source, and so I think as those alternatives become more viable, you'll see people start to use them.
Tim Beyers: I think we're starting to see a lot of growth in particularly companies in the platform tiers. I already mentioned Datadog, a company that whose products exist across different Clouds. There does seem to be a real allure to having at least a collection of some tools that can live anywhere your infrastructure resides. Speaking of history, echoing here, Tim, we've seen that before as well. We've seen best-of-breed tools have their moment, and then other times, whole platforms have their moment. This does feel like we're in a whole platform for the moment. [laughs] But I wonder if best of breed is going to have its moment here in the next couple of years. What do you think?
Tim White: Well, I do think that it is awfully nerve-wracking to have the same company that's billing you for something, also be in charge of helping you understand where we're spending money. It is nice to have an independent auditor, and so I think that that will be true regardless of how all this plays out. I remember working with a product called HP OpenView, which was a tool at HP across your whole network and what was happening. One of the things that that tool did was helped you control spending on Sun OS licenses for servers that we're having low utilization that you were paying up big yearly license fee for. I do think that that is always going to be a thing where controlling costs across vendors and also auditing a vendor that may or may not be giving you the full story is always going to be an important product.
Tim Beyers: IBM did something similar with Tivoli. That was very similar. Everything old is new again. Let's park on this. If AWS finds itself in a price war, are they the company best positioned to vacuum up the lion's portion of market share here seeing as they're already the market leader or is this disruptive to them?
Tim White: I think they are the best positioned to be able to not care about price. That said, the other players are also well positioned to not care about price; Microsoft and Google have deep pockets. I really think that it could be anyone at the same time. I also think that they are eyeing each other closely and realizing that nobody really wants to get into a price war here.
Tim Beyers: It does feel a little bit like airlines back in the '80s and '90s. Everybody was afraid of the airline that was going to start a price war, but once you started, it was really hard to get out of it. I agree with that. Well, for Tim White, I'm Tim Beyers, that is This Week in Tech on Motley Fool Money. We will see you again next time. Remember the show is on Motley Fool Live on Fridays from noon to 1:00 Eastern time. We'll see you soon and Fool on.
Chris Hill: As always, people on the program may have interest in the stocks they talk about. 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.
