"Have You Seen These Charts" With Bertrand Seguin



  • What is going on with crypto?
  • Bertrand Seguin from App Economy Portfolio recaps the state of mega-tech companies + Disney post-earnings season.
  • We play 'Bullish or Bearish?' with this week's breaking headlines.

Editor's Note: This is the transcript version of the previously recorded show. This transcript is just part of the entire episode. Due to time and audio constraints, transcription may not be perfect.

We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts.

View more of Bertrand's research at App Economy Portfolio.

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Daniel Snyder: So, alright. Well, we’re taking way too long. Let's go ahead and bring Bertrand Seguin into the conversation. This guy, guys, he's a real deal. Like, he's – he quit his job just to do this. I mean, his data, the way he breaks everything down, the way he's diving – he’s diving not only in the tech, but he's doing other things outside of tech. But obviously, ex-Silicon Valley, Bertrand thanks for being back with us. Obviously, the people love you. I mean, you can hear them right there. They love you. Thanks for coming back on the show.

Bertrand Seguin: Thanks Daniel, Austin, as well. Good to see you guys, really happy to be here.

Daniel Snyder: Yeah. Thanks for taking the time. So, obviously, just want to remind everybody as we're having a conversation right here. If you have any questions that pop up in your head, if you have any questions for Bertrand, we can obviously ask him right here. So, make sure you do that. And I'm -- we're going to dive right in, right? So, Josh, let's go ahead and throw up the first slide we have here today with us. And you have this whole thing on how they make money, right?

You do these beautiful, kind of graphs and it breaks down, like, where the revenue comes from? What's the operating expenses? What's the profit or do they have profit? And I think first, I want to dive into Disney before we get into all the tech names. So, Josh, going in to go to the next slide. We're just going to take a quick look at the Disney updated rating summary. These are from today even after the earnings call yesterday, so keep that in mind.

The Quant has a strong buy. Wall Street Analysts and Seeking Alpha authors both still have buys on the stock at this time. And let's go ahead and look in the factor grades real quick.

Josh, next slide. So the valuation is a D, growth is still an A, profitability is still an A, momentum is still B+, revisions are still a B-, but this next slide is what I want to make sure everybody really takes a moment to look at. Go ahead and switch over to this next slide and maybe Bertrand, why don't you just kind of like break down where the idea of creating these graphs and what should people kind of focus on while they're looking at this? Give us a rundown.

Bertrand Seguin: Yeah. You know, I think it was a year ago or something, I came across a Disney chart, actually. I think it was from Charter (CHTR) that was using the Sankey diagrams that you see here. They were breaking down the revenue side, and I realized that the time maybe there is something more we can do here where we not only break the revenue inflows, but also the outflows, right? Where does the money go? How much is left at the end of the quarter, right?

So, as a finance guy, there are things I look for like the revenue growth year-over-year or the margin uptick or downtick all those things I figured I could implement them in one-single view. You know, it takes a long time to review earnings. We all look at them. So, this is a way really to get straight to the point and to digest in seconds what would normally take several hours to really get into the details. So, Disney is a great example for that because they have so many different segments, right, so many business units that it really helps digest the entire operations.

The way to look at Disney is so interesting because this is something I wrote about previously on Seeking Alpha. There is this concept from Schumpeter, which is a - the late economist from Austria who said – who talked about creative destruction, right? And creative destruction is when you have an innovation that takes over the previous one, and renders it obsolete, right?

And so, in the case of Disney, this is exactly what's going on, the concept of creative destruction because there is the headline about direct-to-consumer which is all the apps we know and love that we can subscribe to directly, Disney Plus, Hulu, or ESPN Plus.

Those are the new growth engines potentially for Disney. But of course, what they do in the process is that they are not just the catalyst, they are also eating away at other segments, namely linear networks or cable TV, of course, going down and to the left for the foreseeable future this is going to be down to zero eventually, right, if we really project ourselves far in the future, but also content sales and licensing. So, those are the theatrical releases that make money.

You know, people go less to the theater because they have access to all this great content at home. So, really direct to consumer is -- there is this cannibalistic shift, right where you can see the line direct to consumer eating away at linear networks and eating away at content sales and licensing. And so, that is the top part you see here that's called media and entertainment, think of it like all digital businesses, right? Yeah.

So, overall, media and entertainment are actually going down year over year despite direct to consumers’ growth because other segments are suffering in the process. And so, if you invest in Disney thinking, oh, Disney Plus is going to crush everybody, remember that there are legacy businesses that are suffering in the process within the same company, right? So, this is important to keep in mind. At the bottom, I show a different shade of blue, the other businesses, which are more the physical realm.

So, the parks you were -- you guys were just talking about. But also, consumer products, those are the toys, figurines, collectibles, you name it. And so parks, it looked good this quarter because it was – we had favorable comps, right? Last year with COVID, the parks were actually not doing so great. So, a way to look at it, I was just checking, Parks and experiences were $6 billion of revenue this quarter. If you compare it to 2019, so pre-COVID it’s actually down 9%.

So they are not back yet to where they were pre-COVID. So, there's nothing to really celebrate here. Historically, Disney is kind of a no-growth company, right? This has been a low-single-digit growth, but the margins were pretty great around 20%-plus operating margin. And so, what's going on here, you can see that from the revenue, black bar in the middle, the cost and expenses that I pack together, they are cost of revenue, but also operating expenses, what is left at the end is only 2% operating margin right now.

Very, very thin margin. And so just to have fun and to try to break it down, that is on a non-GAAP basis. So, if you reincorporate costs that are not really allocated to either segments, you can get back to the adjusted margins which allows us to see, okay, what businesses exactly bring in the money, right? And so that's how you know that Parks are still doing good at 20% adjusted margin. Meanwhile, the Media segment is basically operating at a just breakeven adjusted margin, which is really a loss on a GAAP basis.

And why is that? It's because while linear TV continues to be a profitable business, the entire profitability is destroyed by the investments that Disney makes in direct-to-consumer and in the studios. So we cannot just jump to conclusions just looking at one segment. You know, this is something Peter Lynch talked about very often about if you like a piece of a business or product, maybe they do, you have to zoom out and look at the entire business to understand what moves in and out.

And so, I'm going to pause here maybe for a second, but just this is really how a good way to zoom out and look at the entire income statement.

Daniel Snyder: Yeah. I love that. I also think it's worth pointing out, you know, obviously, you mentioned the thing about the parks, right, comparing it back to 2019. But if they're doing 6 billion right now and they're still dealing with the COVID stuff and the lockdowns in the Shanghai parks and so, like, they're not fully reopened, so that's pretty promising. Austin, I’ve got to ask you because I know you were diving into their earnings and looking everything over, what’s your thoughts about what's going on with Disney right now?

Austin Hankwitz: Yeah. So, I got a couple of notes here. So, there -- how I saw it, right, is the Q3 earnings were kind of disappointing, right? Revenue and operating income were both below expectations from Wall Street. However, Disney plus added 12.1 million new users right now was a beat on expectations. The guidance they provided though on both revenue and operating income for next year came in below, but I think a lot of that had to do with this weird choppy advertiser, you know, kind of market we're going to be seeing as a recession potentially looms.

But you know, I think a lot of the headlines were painting a pretty grim picture, and I don't think it's as bad as people might be painting it out to look. Underlying theme park demand remains healthy, their operating miss wasn't due to moderating demand, but this one-off item, right, the cruise ship unless everything goes right for Disney though in 2023, which it's kind of hard to think everything's going to go right assuming, you know, the macro.

Daniel Snyder: Yes, if there is a recession, then you’re obviously going to get hit.

Austin Hankwitz: Yeah, I think there’s a lot of good reasons to be excited, but I do think that, you know, their stock price is definitely going to see some volatility.

Daniel Snyder: Yeah. I agree with you. And that's what I said at the top of the show, I think this is going to be a generational opportunity for those of you that are watching Disney in this moment, right? Stock might not bottom until next year, especially if we get hit by a recession. But I think the thing that they do have going for them just to point out, CFO. Shoot, what’s her name? Christine McCarthy, was talking about on the earnings call about how operating losses are going to improve by 200 million next quarter on the streaming arm.

And then even if people go into this ad tier, right? We talked a lot back when I worked there. It's like the CPM cost that they get a charge as a company with the quality brand and the audience reach they have, if people are going to that ad tier, D2C could potentially become profitable a lot faster than 2024 in my opinion because their CPM levels are so high, so something to keep in mind there that could be a great positive for them or potentially help balance out the destruction they might see in parks and cruises and everything else if we have a recession.

Austin Hankwitz: I agree.

Bertrand Seguin: That's a great point, Daniel. And you know I mean, I'm not an investor in Disney, but I'm an investor in The Trade Desk (TTD). It's actually my largest position, and they are really the ad tech that powers the D2C arm of Disney, and I think it's extremely promising on the connected TV side. So, it's a great point, and you know, Chapek mentioned that D2C would be profitable theoretically by 2024.

So, two years from now, we revisit, you know, and maybe even though we have a creative destruction, there is creative in that concept, so they are generating value eventually on this segment for the entire media operations.

Daniel Snyder: Yeah. For sure. I'm just going to take a quick moment before we move on to Meta, just to pull up the chart real quick that we're looking at just to see where those moving averages are. Obviously, huge gap down today with the earnings that we got last night, you hate to see it. You really do with a company that's been around for so long and is loved by so many. Obviously, and a significant downtrend has been for a while but it also hit -- remember when it hit this high of $203 a share when everybody was freaking out about how fast D2C was growing last year.

So, I mean, look, new CEO, new management, right Austin? Like, we're talking about that, Bob Iger and the Bob Chapek shift recently happened, management, new business practices, or new department arms, as you're talking about Bertrand, about how, you know, they're cannibalizing their legacy platforms as they're going into this D2C shift. So, it's kind of the state of Disney right now. Let's go ahead and move over to Meta if we can.

Josh, let's go ahead and throw up the ratings summary real quick and we'll just push right through this so that we can get to the chart and check out what Bertrand brought us. So, ratings summary obviously for Meta, Seeking Alpha Authors, Wall Street analysts are both a buy on the stock. The Quant holding system has a hold right now. Let's look at the factor grades. Obviously, valuation is a where am I? Sorry B-, growth is an F, profitability A+, momentum is a D-, and revisions are a C-.

And let's go ahead and go to the next slide. Alright. So, here we go. Looking at another chart. I mean, it just looks so pretty. I'm so sorry.

Austin Hankwitz: I love this. This is exciting.

Daniel Snyder: Color coding…

Bertrand Seguin: Thank you.

Daniel Snyder: Green for profit, the red for just stop losing money. I love how you did the four family of apps right there on the left side as well.

Austin Hankwitz: Let's keep this up too, because I definitely want to talk toward this. But yeah. Go ahead Bertrand.

Daniel Snyder: What are we looking at here?

Bertrand Seguin: Sure. So, it's, you know, we talked about the metaverse a lot, with Meta, with the name change and everything. So, this chart was very useful for me to realize how small reality lab is, you know, in a visual format. So, you will have two main segments, right, that people need to keep in mind when looking at Meta. One is called family of apps. So, those are the four apps you see on the left of the screen.

And the other segment is Reality Labs, which is the hardware and software related to the metaverse. So, Meta Quest, it is also a portal if you ever used that, I haven't. But the software related to that would be Horizon which is the place where people can hang out on Meta Quest. So, very much so 98% of the revenue of the company is still family of apps, still advertising. So, this is very, very early days even if Reality Labs eventually succeeds, it will take years for it to be accretive to the business as a whole.

Facebook historically is an extremely profitable business. So, even though you have huge margin compressions right now with FX headwinds, right, and the fact that growth has stalled quite a bit on the advertising side this year, the margin remains healthy. They remain healthier at 20% way down from a year ago, but still healthy. And so, the key aspect to look at on the top right of the chart is to see where does the profit come from?

So, 9.3 billion coming from family of apps, FOA, and a loss of $3.7 billion coming from Reality Labs. So, right now, there is this anxiety among shareholders that basically is a curve of maybe burning the cash due to shareholders eventually by investing so aggressively in Reality Labs. And so, of course, there are two takes here, [indiscernible] well he should be seeking a second act, right? Because those apps are not going to remain popular forever and they need to invest in the future, so that makes perfect sense.

But at the same time, this is such a cash-generating business that you don't want to put it to waste, right, and to destroy shareholder value with all these investments if there is a sense that this Reality Labs thing is not going anywhere, right? So, that's where people are going to disagree. But overall, the thing I will point out is there are a lot of moving pieces. That's the key is that it's not just a single app that moves the needle here.

The ones I have, really, my eyes on are WhatsApp and Messenger mostly because of two, two ways. Those apps can really monetize more. One is through ads, obviously, but also something that was announced during the Salesforce (CRM) Dreamforce event, which was a partnership for paid messaging, so allowing businesses to reach out directly to their customers. So, something is kind of similar to Twilio (TWLO) Engage as well.

There are, again, lots of potential here. The run rate on Messenger and WhatsApp is already at 9 billion annually for these initiatives. So, this is going to be really meaningful over time. So, Facebook, tricky in terms of maintaining the same relevancy. But the other apps can take over. And, you know, users are still here. They are not shifting to the metaverse just yet. There is barely anybody less than half a million people on Horizon, but users, you know, three point well, is it 3.7 billion across all apps?

That's pretty much the entire planet. They are still here, still growing very slowly, but still there. And so the question is, will they remain around and will they shift to other segments eventually, right?

Austin Hankwitz: So, Daniel, Bertrand, and even the chat, I've got a hunch and I really want to share it with you all. And I came to this like epiphany yesterday when I was looking into this. And I want to know if I'm crazy, or if, like, we are seeing some crazy opportunity presented to us. So, I'm going to run through it and I really want your feedback. The stock price of Meta is down 75% from the recent all-time high in late 2021. You know, currently trading at levels we haven't really seen since 2015. And in 2015, the company was doing $18 billion in revenue, $3.7 billion in profits, and EPS was $1.30.

In 2023, right forward-looking stock market, the company is going to do $123 billion in revenue, $21 billion in profits, and $7.82 in EPS, generally speaking. So, we're seeing like a seven 7x, right, on their top and bottom lines. But despite this, right, their stock is still trading at the same price. So, this means one of two things. It could mean Meta is massively undervalued today or it means Meta was massively overvalued in 2015.

And the two things I want to really call out is, you know, Meta is currently a $240 billion market cap company, but they're also sitting on $40 billion in cash and cash equivalents. So, if we kind of strip that cash out, we think of the business of Meta is really worth $200 billion, we’re about 9.5x forward earnings on that 21 billion in 2023 profits, right?

But this $21 billion in 2023 profits include a $13.5 billion headwind of operating losses that go straight to Reality Labs, right, which means that their family of apps is paying for that Reality Labs business as you've very well, you know, illustrated here for us in that top corner to operate at a loss. And so, we can kind of back into the idea that the family of apps, if you take that $21 billion, you add the $13.5 billion is going to do some $35 billion in operating profit, right, in 2023, which means you're only paying today 6x family of apps earnings at this $200 billion market cap assuming all that cash, right?

So, Facebook introduced Reality Labs to shareholders in August 2020, and I promise I'm coming to a point. This is just the buildup, right? Facebook introduced Reality Labs to shareholders in August 2020, which theoretically means that the company's earnings in 2019 were 100% family of apps earnings, right? So, at their bottom in 2018, this Fed-induced rate hike sell off, they were trading at 16x earnings. Average IPO EPS - -I'm sorry. Average, you know, since IPO in -- I think it was 2013 rather, you know, they traded 35x earnings.

So, like, I just want to be clear, like, Meta's stock price today is assuming just 6x forward family of apps earnings, something that the market has historically priced at 35x, but has never been below 16x in history. Is this the new norm? Am I missing something? Is Reality Labs just like PP -- It's just a dumpster that we're just burning our cash into, like I just -- if someone came up to me and said, Austin, do you want to invest in Instagram at 6x profit, I'm like, yeah, yeah, sure. Why not, right? Six times, like that sounds like a no-brainer, like, what am I missing here, Bertrand? I feel like this is, like, just such -- I don't know.

Bertrand Seguin: I think your foots are the ones of so many investors right now in Wall Street, and it's a polarizing stock, right? So, you have, like, definitely about half of investors who would 100% agree with you right away here. The key - the part that's really hard for me, I haven't bought any phase. I own Meta in my portfolio, but I haven't bought it for the past six years.

The key is there is a double whammy on Facebook and eventually on Instagram, which is fewer impressions if users don't grow anymore and engage less because they spend more time on a more engaging app, that is TikTok and less revenue per impression because of the end of the ideas, of course an app tracking transparency from Apple. So, more challenges to monetize and less impressions overall if users come less, right? And so the biggest challenge for this is the so-called value trough, right?

Are we looking at something that looks really impressive if you look at backward-looking metrics, but at the same time five years from now, if Facebook is starting dwindling, like, 5% users per year that go away because there are other shiny objects out there, then you will really put it into question whatever we thought we were looking at in 2022 looking at the numbers backwards, so -- and that's why this is such an interesting company to look at, right?

And that's why I think, you know, there is a very strong case to be made that investing at today's valuation is going to deliver pretty great returns, but you could say that of a lot of stocks right now on the market, maybe that have a higher valuation, but growing like bunkers and are going to rebound very, very well once we are in a different part of the cycle. So, the real question is the missed opportunity, right? Meta is great right now, but other stocks are also 60%, 70%, down from the [indiscernible] high and more attractive than they've ever been.

So, that's really -- that's why I wouldn't look at Meta in a vacuum even though the opportunity is compelling. I totally see your points.

Daniel Snyder: Bertrand, I couldn't agree with all of that, right? Like, the whole thing that came to mind, Austin, when you were kind of laying out your cases. And actually, I was just talking to this -- our Head of Quantitative, Stephen Crest, here at Seeking Alpha yesterday, about this company specifically, and we kind of came to the conclusion that this is almost like a value trap stock. Why is that? Well, because, I mean, all of the growth is getting hit right now.

This stock doesn't pay a dividend. It's trying to figure out where it's going next with its lifespan as a company, right? If we already have 3 something billion people using these apps to Bertrand’s, like, if people start leaving and impressions start falling and they haven't found a way to gather all of that data so that they can target ads at a higher cost, that’s where you're going to -- that's I think what Wall Street is kind of freaking out a little bit. It is like, okay, you haven't really proven where we're going next.

And therefore, why am I going to give you any valuation if I cannot even know that, you know, who's to say that the four family of apps don't get crushed by 60% in the next four years. You know, there's always new apps being created, and we talked about YouTube Shorts too, right? If people are leaving for YouTube shorts instead of watching reels, I think that's all the things that we got to consider when it comes to this company.

Austin Hankwitz: Yeah. I think I appreciate that. I agree, right? I mean, at the end of the day, it's like this company was doing this, and now it's doing this, and then now it's also spending all this money. It's like, okay, what’s going on, right? And to your point Bertrand, like it is you're right. We can't value this company in a vacuum. And at the end of the day, like, you know, the stock market is forward-looking. And it's really hard to think about a world though without this family of apps inside of it.

And I think to your point Daniel, with the YouTube Shorts, I think Mark shared with us that there was a 50% year-over-year or quarter over quarter – I think it is probably a year-over-year increase in reels, 140 billion reels are shared every day on, you know, Facebook and Instagram. So, I think that's, you know, interesting as well. I'm not over here pounding the table on Meta. I want to make that very clear. I'm just super interested in this valuation, like, what's really going on?

And you know, why aren't people talking about this? So, I appreciate the perspective from both you guys and the chat. I really appreciate it.

Daniel Snyder: Yeah. Also, I want to jump in here real quick before we move on. So, Stephanie sent us a little private question here. It says, how often is the Quant being updated? Is it daily, monthly? It has not changed with the price? So, the Quant system actually updates every single morning before the market opens. I believe the algorithmic computer starts running at, like, 4 AM or something like that. So, some days, it's done before the markets open. That's the big point.

And all those factor grades, all the Quant rating systems, the Seeking Alpha author ratings, all of those are updated every single day, not on a monthly basis. I wanted to make sure that we clarify that and that's why we look at them. And that's why I pull them on the day of the show so that they're always up to date for when we're here. Cole asked us, in recession economies, what is a fair multiple of revenue on a company like Facebook aka Meta. Is 9x, 10x revenue still relevant with the upcoming headwinds?

Maybe a 5x or 6x of revenue is at par now? Do you guys have any thoughts on that? I think it all depends on the margins’ goal. Good point.

Austin Hankwitz: Yeah. I think right, it’s like, you know, at the end of the day, you know, you're like, oh, yeah, 10x revenue. Like, that's, like, you know, what your company is from a [indiscernible]. It's, like, 10x revenue if you only like, what if you only have though, you know, 10% gross profit margins. That's obviously not going to be the case, right? Yeah. I think it all just depends on the margins, but for Facebook, gosh. I don't know. I mean, you know, I personally think this isn't really revenue.

This is more earnings per share focus, but like the S&P during bear markets has kind of averaged around this like 12x to 13x, 14x range. So, that and again, that's earnings and not revenue. So, you go to kind of back into that. But certainly, less than what it's been in bull markets. I mean, that's all the answer I really have.

Daniel Snyder: Bertrand, do you have a thought on that?

Bertrand Seguin: Yeah. I mean, you know, interest rates are kind of dictating what is fair to pay at any point in time, and they move fast and they are cyclical. So, what is true today will not be true six months or a year from now. So, I would never look at valuation in the vacuum again, and I would say it's more about, oh, what can you buy today at the same price or if you pay more what do you get in return, right? So, it's -- I care less about valuation standalone or even compared to where the company was at and more about, okay, what do I get today if I put that out to work, that would be my focus.

Daniel Snyder: Yeah. Great point. I'm going to go ahead and hijack the screen real quick. I want to point this out as well. If you do have access to Seeking Alpha Premium, you can go here to the Factor Grades, and underneath the Meta Growth tab, you can actually see I just want to point this out, you're asking about revenue. You know, forward revenue is currently around 12%. Historically, it's 5% right now. And the five-year average was 32 and 26 respectively.

So, obviously, that's what we're considering, right? There's obviously been an overall crush in revenue, and all of this is broken out. Metrics are compared to this sector against other Meta -- companies in the communications sector, I should say. Real quick, we're going to do a quick look at the chart just to make sure we squeeze that in here, where am I? There we go. Alright.

Obviously, huge downtrend. We have re-entered the gap as of this morning with the news about the layoffs. obviously cutting down your expenses, always makes shareholders happy, but unfortunate that it has to happen especially at a time like this with a possible recession incoming, so, keep an eye on that.

So, let's go ahead and keep the show moving. Let's go on to the next stock, which we have on deck, which is what's up next, Josh? Why don't you go and throw it up for us? I believe it's Apple. Go ahead and throw up that slide. Let's go through the ratings summary real quick. Seeking Alpha authors have a hold. Wall Street Analysts are a buy, Quant system is a hold. Factor grades. Next slide, please. Valuation is an F, growth is a D-, profitability A+, momentum B-, Revisions are a C-.

And next slide, so we can go ahead and look at this beautiful income statement. Bertrand, what should we really notice about this chart that you have here?

Bertrand Seguin: The part that I focus on, because you know, my background is in the digital economy. So, I'm very narrowly focused on services, because they have a higher profit margin, right? So, if you look at the cost of revenue on the bottom center, you can see that products, which are the hardware that we know and love, this is a 35% gross margin profile. Meanwhile, services, they do twice as well, right, 70% gross margin profile.

So, with half of the revenue, you can get as much gross profit, right? Simple. And so even though service is only about 20% of Apple's revenue in the full year, FY22, it was 33% of gross profit. So, it is already a third of it. So, again, the story around Apple Services being the [bulk case] is not new, but it's really materializing right now and people might miss it on a quarter-to-quarter basis, or it missed expectations or what have you, but really the trend is here and here to stay.

So, for me, the way I think about it is hardware is the gateway, right, to the ecosystem of services, of course. And so, what will be key is to keep fueling that ecosystem, so one thing that Tim Cook mentioned I think was very noteworthy was you refer to Switchers. So, Switchers is someone who would switch, for example, from a Pixel, Google Pixel to an Apple iPhone, and when you think about Apple's market share, it's about 15% to 20% of the smartphone market depending on the quarter.

And so, the real untapped market is not people upgrading, it’s people switching. That's really when the magic can happen for services. And so, what they mentioned was a double-digit growth in Switchers, and I think that's very bullish for the company. They mentioned that, you know, people really desire their product, iPhone 14 Pros. They are supply constrained by constrained meeting, people cannot buy at any vendor they want to, so similar to companies like Tesla (TSLA), right?

And we have 900 million paid subscription across the Apple universe. So, that was almost a double in three years. So, very bullish as well to see that people are embracing those services. Another aspect that cut my attention was the overall health of the Apple business compared to their direct competitors. If you look at the current Mac Pro, it's actually pretty bad for smartphone makers, everybody was down year-over-year into the calendar Q3, so that's the fiscal Q4 for Apple.

Meanwhile, Apple actually increased its shipments by 6%. So, not a huge growth, but the only positive one that I could find in the top 10 manufacturers, so very bullish as well to see just that the quality pays off and that people are switching to Apple. The last point I would make on this chart is that underneath the services, there is an item that Apple doesn't break down, which is advertising. And so in a way, there is that juicy payment from Google to be the by-default search engine on Apple devices.

This is probably close to 5 billion, 3 billion to 5 billion per quarter at this point. So, this is a big chunk, but there are other advertising revenues that Apple may be able to make down the line that includes placement on its App Store. For example, they have added a few things on the Today page or things you might like, right? And next year, they are supposed -- this is a rumor, but they are supposed to launch more ads in Apple Maps.

So, we all know how Google Maps is a huge business, and if Apple can take a page of Google's book and even just the way Amazon has been able, and we're going to talk about this maybe in a minute, but the way these companies have been able to play the advertising game, if Apple can embrace it, the services revenue I think can be really uncapped, so that's really the way I think about it. People think hardware first, but underneath it, there is really like a long [test] developing.

Austin Hankwitz: I'm right there with you, man, right? They had a wonderful quarterly print, record performance driven by iPhone and Mac, and despite this tougher macroenvironment in these FX headwinds, the company maintained their profit margins and revenue growth in these emerging markets. And to your point, these leading indicators, right, active installed base, paid subscribers, new users, those switchers, right, they’re all looking healthy.

I think it's going to result in market share gain in the coming quarters and coming years, but I don't think it's important to note though that Apple is not immune from challenging macro environments. They have a superior product and, you know, the value of that product and the user experience and pricing power, though despite a challenging environment will allow them to have strong pricing power, stable margins, and share gain likely in the medium term. So, we're definitely on the same page.

Daniel Snyder: I would love to ask the opinion of both of you as well as everybody listening that, you know, jumping in the chat let me know what you think. But I continue to think, we talk about the devices, right? We get -- you get the devices. Once it's in your hand, you're locked in, right? But I think there might be a silent killer for them.

And by killer, I mean, in a good way, right? Like, I think a huge opportunity for them, which they talked about in the past that hasn't been adopted as much as they had like is Apple Pay. Do you guys think that that specific service could eventually translate over into a huge revenue driver for this company?

Bertrand Seguin: It already does. It is part of services. So, you know, in my graph, you have a little logo at the bottom left that's the Apple Wallet logo and that's basically that includes Apple Pay. So, to your point, unfortunately, they don't break it down. So, there is no way for us to know if Apple Pay is already really huge or not. If I had to bet, it is already huge, right? Because –

Daniel Snyder: You would agree -- I remember a little while ago, Tim Cook said it's not as big as they like. I mean, obviously, they want it to be the biggest thing. But I mean, with -- they're turning iPhones into payment terminals, right?

There can -- they're definitely -- we talked about this with the PayPal Square. You know, there's new payment providers coming up trying to take away these legacy systems that we're aware of, and if they can do it and charge a little bit less service fee to the business, I mean, there could be a huge adoption, and I think if you already have the device in your hand, what is it, you press the button twice and Apple Pay pops up and you bop, and you're gone, like I think that's going to be huge.

Austin Hankwitz: I agree. I find myself using Apple Pay more and more. I've got all of my debit cards, credit cards, all that stuff logged into my Apple Wallet, right? I mean, when they first launched, I was like, what the heck is this, I'm not going to use this. But now every time I buy anything online, I double click, it's like Apple Pay, share email, it’s so simple right there with you. I think it's going to be bigger.

Daniel Snyder: I think it's a lurking killer. Alright. Let's go ahead and go on to the next slide, Josh. Let's keep this thing going since we're coming up on the hour. I want to make sure we get through all of these. So, we still got Alphabet and we still got Amazon. So, Alphabet, the ratings summary breaks down like this. Seeking Alpha authors are a buy, Wall Street analysts are a strong buy, and the Quant holding system is a strong buy currently as of today.

Factor grade is breaking it down. Valuation is a little bit high. Growth is a C, profitability A+, momentum C, revisions C-. Let's go ahead and check out this beautiful visual. What should we be pointing out right now about Google?

Bertrand Seguin: Similar to Apple, there is a specific segment that's catches my attention. And for me, it's Google Cloud, fastest growing segment, 38% growth year-over-year. This is in yellow at the bottom. So, Google Cloud did well this quarter because Microsoft (MSFT) Azure, they don't break in tandem necessarily the same way, but Azure was growing 35% year-over-year and AWS grew 28% percent year-over-year.

So Google Cloud app was actually the only top three cloud infrastructure platform to gain market share. They gained 1 point quarter to quarter. So, doing well, they improved also their margin profile for that segment. They're still losing money on that segment, but they improved by several points. So, they are doing well. They are mixing it with Google Workspace. So, it's, again, not perfect comparisons, right? But we take what we have.

Overall, you know, they face the same advertising headwinds as Meta and other platforms that rely on ads. But really, what I focus on is how they use AI to power their ecosystem and improve engagement and improve the kind of results you get because this is what's going to retain people in their ecosystem, you know, they mentioned something like, I think it was 8 billion requests on Google Lens. I don't know if you guys have used Google Lens before.

This is amazing. You just take a picture of something. They will give you a result and show you what it is or what to find -- where to find online equivalent of the photo you just took. So, I love how AI is really powering the entire ecosystem, namely well, you're all familiar I think with DALL E, DALL E2 generative AI. So, Imagine is the name of it for Google. It's very impressive. It generates tremendous results.

You can only imagine how -- if they can start creating images out of just things you like, maybe your color, maybe your sports team, you name it, and it can serve an ad to you that is actually completely tailored to you and your taste, the monetization potential is really high. So, I like how just the investments they put in AI is often compared to the shift to mobile, that was one of the references of management during the call where AI is going to be really leading the way for them.

And so highly profitable business, really just a big machine here. I love it. It's one of my biggest positions. And even though there are headwinds for the foreseeable future, right, I think underneath it, there is, like, a huge potential long term in AI -- hard to replicate for competitors. And, of course, Google Cloud gaining market share is a nice to see.

Daniel Snyder: I think they pulled it off. What do you think Austin?

Austin Hankwitz: Oh, yeah. They pulled it off. It's you know, I'm going to save all my remarks here because I don't know we are running up on time. But my conclusion is, you know, trends are pointing down in the near term, but with that being said, I'm buying the weakness. it's Google, right? I mean, they -- we know where Google's going, we know what they've done, we know what they can accomplish, we know where things are headed. I'm buying weakness on Google every day of the week.

Bertrand Seguin: Nice.

Daniel Snyder: I mean, I agree with you. I think this company is continuing to innovate. It has made a great acquisition with YouTube, of course, advertising spend is being pulled back, YouTube's getting hit with that. Mathias here in the chat says can Apple restrict Google in any way the same way they did with Facebook? I think you’ve got to remember Mathias, I mean, obviously, Apple's anti-tracking went across everyone. But also, Apple and Google already had their partnership where Google pays -- isn't it Google pays Apple every year to be the primary search engine for Phones. Is that right?

Bertrand Seguin: That's right. So, 10 -- 15 billion to 20 billion if I have to guess is paid by Google to Apple, and that could be -- that could be a challenge if Apple ever decided, you know what, I'm going to do Search Now or we can talk about -- we can have a show when that happens.

Daniel Snyder: Yeah. For sure. I mean, that would be, like, huge news though, so we would obviously have to. So, you guys are asking where can you find all these charts? App Economy Insights, guys. Obviously, Bertrand, he started this not too long ago and it is blowing up. You guys got to go look this up. And I'm like these are only a few of the charts that he's done. Like, you put out literally, like, what is Airbnb, Warner Discovery, you’ve been crushing it.

Like, I can't even keep up with all of it. But let's go ahead like I said, we're getting to the end of the time. Let's go ahead and get into this last one of Amazon. It's going to go to the next slide, please, Josh. Ratings summary, Seeking Alpha authors have a buy on the stock. Wall Street analysts have a strong buy, but the Quant system is a hold at this moment in time. Factor grades breakdown has a valuation D-, growth B-, profitability A+, momentum D+, and the revisions are C+ at this time.

Let's go ahead and look at the last beautiful Economy App chart of the day. So, obviously, Amazon's diversified like, crazy. Like all these other companies we've been talking about, all the different arms, what should we be pointing out here Bertrand?

Bertrand Seguin: Alright. I know we are short on time, and we could do an entire show about Amazon. This is very hard for me, but I will point out to three things that are driving Amazon's future. And for me, that's AWS, of course. It could justify the entire evaluation of the company arguably. [Indiscernible] growing segment slower than it used to be, and people have been spooked a little bit by the slower growth.

I think in particular, next quarter is expected to be only 20% growth for AWS based on the run rate in September, so that spooked a lot of investors. Now you have to consider that the way Amazon works is they want to focus on the customer. This is the absolute must for them. And so what are they doing right now? They are helping their business customers in the cloud segment to spend less. They are actively helping and this is important.

They are helping their customers spending less on their platform so that they can retain them long term. Everybody is trying to save money right now, and so they want to help their customers do that because they know that it will pay off down the line. So, very lovely to see, I think they are making the right call here, and we have to look beyond the cycle that we're facing right now. In two, three years, AWS is going to maintain a healthy growth rate.

They have not lost market share, right? Google gained but Apple did not lose market share this quarter in the cloud infrastructure market. So, very lovely to see. The second one is advertising, of course. Second fastest growing 25%, very high margin. This could really turn everything around Amazon.com into a powerhouse in terms of margins. They continue really implementing new things. And so, I think it will continue.

And, of course, subscriptions in general, I think it was -- there was a study recently. It's on my Twitter page that referred to the least likely subscription services that people would come back on due to inflation is Amazon Prime. That's least likely to be cut because why would you do that, right? It saves you money. It's very important and it gives you all these other services that are optional, but people are not going to cut back on Amazon Prime.

This is really part of our lives, still large and that market in Europe. So, I think the potential is here. And so what you have to do though is to kind of like ignore or accept that margins are going to be razor thin for foreseeable possible future free cash flow is going to look ugly because they are doing all these CapEx, right, investing in growth. So, I wrote an article that's free about Amazon on my website where I cover in detail why the free cash flow in question is not a concern because they could stop investing.

The only reason why they have those razor-thin margins and struggle with the cash flow is because they chose to invest aggressively into their future. And it may not work out, but if you look at the past twenty years, it's been doing pretty well for them when they follow that strategy, right?

Daniel Snyder: Yeah. No kidding. I mean, it's always day one at Amazon, right? Isn't that what they say? Awesome. What are your thoughts on Amazon right now? I mean, there's so much we could pack. And like you mentioned, this could be an entire episode, but just off the top of your head, what are you thinking?

Austin Hankwitz: Yeah. I mean, I agree with everything Bertrand is saying, right? AWS saw a growth of 27%. It was less than the 30% that people expected, but this likely isn't much, you know, a theme, right? We're not going to see, like, oh, it's all slowing down, right? That's not the case here. You know, they're certainly going to survive just fine and it makes a lot of sense to your point Bertrand about people saving money, right?

This is a downcycle. People aren't going to be dumping millions and millions and millions of dollars into this cloud infrastructure. So, let's just retain these customers as we can. And then finally, right, the good news here is Amazon has slowed their shipping costs per unit. CapEx spend seems to stay flattish. They're poised for wonderful margin expansion when macroenvironment improves. It's a playbook. They're following the playbook. We're in a bear market. We're in, you know, this macro uncertainty. They know they've done this two, three times before. They know exactly what they're doing. I'm here for it.

Daniel Snyder: It's a good day. Great point. Alright, guys. Let's go ahead and say thank you to Bertrand for spending so much time, breaking us down through Disney, Facebook, Meta, sorry I still call it Facebook. Apple, Amazon, Google. We appreciate you so much. I mean, the guy, go check him out on App Economy Insights if you haven't already. Obviously, there’s so many other companies. These charts just help you visualize it.

If you're anything like me, I just love looking at the visuals. Obviously, you get it broken down by departments. revenue growth. You put it right there in the parentheses, so we know when they're losing money and making money. Can't thank you enough. So, thank you, thank you, thank you for hanging out, and everybody in the chat is popping off right here. Thank you, thank you, thank you. I hope you see that as well because this is just so valuable. This is so valuable. So, thank you Bertrand. We hope you have a great rest of the week. Anything else you want to say before we hop out of here?

Bertrand Seguin: No, that was great. I really enjoyed chatting with you, Austin, Daniel. It was lovely, and, you know, you can follow me on the Economy App at Twitter -- on Twitter just if you want to see more of these beautiful charts. And, yeah, that was fun.

Daniel Snyder: Awesome. Well, we're going to go ahead and get on out of here. Everybody have a great rest of the day, have a great rest of the week, careful with what are we at? Like, 5% of earnings left? Luckily, it's over for almost the quarter. Disney heard, not going to lie. It was really bad to see that one. But everybody have a great rest of the week. Remember the crypto webinar next week. And besides that, we'll see you on Stock Market Live next Wednesday, same time, still me and Austin, our beautiful faces and we get to hang out with you.

So, take care everybody. Have a great day.

We encourage you to listen to the podcast embedded above or on the go via Apple Podcasts.

View more of Bertrand's research at App Economy Portfolio.

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This article was written by

Welcome to the Investing Experts Podcast. Each episode Daniel Snyder interviews experts found on Seeking Alpha who provide topical takes on the stock market, dive into macro and stock analysis, and discuss trending news items. Subscribe on Apple Podcasts to never miss an episode - https://apple.co/3ATpnMh*Nothing in this podcast should be considered financial advice. Do your own research and speak with an advisor before investing.*

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