Merits Of Metaverse + Big Tech Wipeout — With Eric Jackson

Eric Jackson is president and portfolio manager at EMJ Capital. He joins Big Technology Podcast to discuss Big Tech's terrible week on the public markets, with a focus on Meta, which is now down 71% on the year. We also cover Alphabet, Amazon, Apple, Microsoft, Snap, and more. Tune in for a conversation that makes sense of these companies' punishing ride of late. And what the bottom might look like. Maybe we're already there. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Alex Kantrowitz?

  This episode is brought to you by Genesis. What does it actually take to put Agentic AI to work across an entire enterprise? I recently spoke with Genesis chairman and CEO Tony Bates about why orchestration is emerging as a competitive advantage in customer experience and what companies need to get right in the AI era. Then I sat down with Adam Mitchell, head of enterprise business solutions at Voya Financial, to go inside a large-scale Agentic CX transformation, including the business decisions, trade-offs, and lessons along the way. You can watch both conversations now on my YouTube channel today. It's never been more challenging to get frontier compute. How do you know where to look, who to trust, or how much to pay?

• 0:43Alex Kantrowitz?

  Akash is an open cloud that provides easy access, flexibility, and peace of mind. That's how companies like Razer were able to cut their inference cost by 15 times. Visit akash.network/alex for a free consultation. That's akash.network/alex for a free consultation.

• 1:03Speaker 01

  LinkedIn Presents.

• 1:19Alex Kantrowitz?

  Welcome to the Big Technology Podcast, a show for cool-headed nuanced conversation of the tech world and beyond. Well, it's been a big tech wipeout. Earnings last week was a true disaster for these companies. We have Meta falling off the face of the earth, Amazon dropping 20% and after hours before it returned a little bit, but it's been brutal. Microsoft had a bad week, Snap had a bad week. I mean, take your pick, even Apple, which had a good week, beat earnings expectations, also saw some shortage. So, you know, as we tend to do on the podcast, we are going to break down what the heck is happening with big tech, whether this is a blip in the radar or some bigger structural issues. And joining us to do it is Eric Jackson.

• 2:00Alex Kantrowitz?

  He's the president and portfolio manager of EMJ Capital, one of my favorite followers on Twitter, based out of Toronto. Eric, welcome to the show.

• 2:08Speaker 02

  Hey Alex, thanks for having me. Great to be here.

• 2:10Alex Kantrowitz?

  Yeah, great to have you. We spent Monday, I think, on the set of CNBC. The week's been a blur, talking about whether Mark Zuckerberg would rein in his spending on the metaverse as investor Brad Gerson asked him to do. He didn't. And Wall Street is really meting out the cost. So we'll get into that. But just briefly, from the top, what do you make of the fact that Big Tech has washed out so hard over the past few weeks and really just had a very disappointing set of earnings that's destroyed billions and billions of dollars in market cap over the past week?

• 2:48Speaker 02

  To me, I tend to focus on smaller growth tech rather than the big FAANG names. And so, and that's simply because I think that it's, I want to find sort of the next generation of companies that are going to form some acronym one day. And those are the ones that hopefully still have a chance to double, triple, quadruple over the next few years. The FAANGs are great companies. They are not anything like the companies that existed during the dot com craze. They're gushing cash. But when you're so big, and many of them a year ago were over a trillion, how much more upside do they have is sort of the question.

• 3:32Speaker 02

  They're certainly not as easily able to double and triple. So what's interesting to me about what's happened this past week is that 2021 was a great year for tech. If you just looked at the NASDAQ. The NASDAQ, I looked it up today, was up 21% in 2021. And the FAANG stocks, and I'm including Meta, Apple, Microsoft, Amazon, Netflix, and Google, collectively, those companies were up 31% in 2021. So 10% above the NASDAQ. But the smaller growth tech companies and the Kathy Wood type stocks had a brutal 2021. Really, the bear market for those kinds of stocks started really

• 4:15Speaker 02

  in mid-February of 2021. And so those were the companies that really felt the first tremors of inflation and what was to come for the rest of the market. But in large part, FAANG held up in 2021. And I think a lot of people started to crowd into kind of the roach motel. That's a little harsh on these names, but they really piled in. And I think now in hindsight, we're seeing 2022 being a sort of a rewind of those kind of Johnny come latelys into those positions. So for 2022, and I think this is pretty up to date, we're recording this on Friday.

• 4:57Speaker 02

  So the average, so Nasdaq's down 31% this year instead of like plus 21% for the year before. But the FAANG stocks, plus Microsoft, whatever they call that now, FAMG or whatever it is, those are down 41%. So basically, the 10% outperformance you got in 2021, you're now seeing 10% of underperformance in 2022. And for a kind of a two-year period now, the FAANGs are underperforming Nasdaq. I've got like Nasdaq's down like 17% for those almost two

• 5:34Speaker 02

  years, whereas FAANGs are down 24% collectively. So this week was really kind of the crescendo, I think, of that unwind for a lot of these names, except for Apple. Apple's sort of a last man standing here.

• 5:51Alex Kantrowitz?

  So what caused this? I mean, can you kind of unpack why we saw the smaller tech companies get it first than these bigger companies? And then what caused the rough, you know, the mass exodus that we just saw?

• 6:06Speaker 02

  I think, you know, smaller stocks are always more volatile. So, you know, the Russell 2000 or 1000, you know, are more volatile than the S and P 500, because they're, you know, they're just smaller, they're more prone to kind of earnings ups and downs. It can work great on the upside. They can be, you know, big outperformers when things are going well. But if they hit bad patches, they can, they can be more tumultuous to the downside. And so I think these smaller, so tech in general, obviously, is more volatile than consumer packaged goods and, you know. Industrial companies, even energy companies.

• 6:47Speaker 02

  So the growth, the growthier tech companies just were inherently the most volatile of all of tech. And I think there was a false sense of security last year with the big FAANG names. And it wasn't just last year. I think, I think this has been growing some time. Ever since Jim Cramer kind of coined the acronym for FAANG, which I think this goes back like six or seven years. When he first came up with it, it just becomes a shorthand and sort of an easy way for investors to say, hey, these are, these are the biggest, safest tech names. They're the ones I know. They're the ones I have experience with.

• 7:28Speaker 02

  So from a retail investor perspective, I think, I think there was just a tendency to want to flock to them as sort of like a safe haven, almost like the, the banks of, of the world of tech. That they're going to be here no matter what. And I think, you know, this week and this year has shown that there's, that complacency, you know, can be disrupted. And, you know, they're even, even for these, these stalwarts that they, it's, it's just tough to keep growing at an increasing like year on year level after six, seven, eight years.

• 8:05Alex Kantrowitz?

  Yeah, Liz Young from SoFi said something interesting on air on CNBC. She said that you first see the valuation contraction, which you certainly had, then the earnings misses, which seem to have come, you know, in the past week. And then you start to see that show up in the economy. So, you know, these are companies that have large footprints in places like advertising, you know, even the growth of the internet with cloud hosting. So do you think that this is a sort of precursor to a real downtrend in the economy? And can we read that from big tech?

• 8:35Speaker 02

  I don't think so, not necessarily. You know, nobody, nobody knows, but I think actually this, my, my take is that these, these memes and they're, you know, be, being taken out to the woodshed this week or this month, this year is probably a signal that we're closer to the end of the real kind of downturn in stocks and does make me more, you know, bullish that, you know, there's always going to be interest in technology, you know, price, price is a, you know, a cure for everything. So high prices, you know, after a while they get cured by, by stocks dropping, low prices get cured by people getting, you know, attracted that there's attractive valuations here.

• 9:19Speaker 02

  And the one thing that technology stocks have going for them over all industries is, is there's always growth, you know, you, you might have to change horses and, you know, find a new technology company to, to get on board with, but, um, you know, that's, that's, they're, they're on the leading edge. And so there's always a growth story somewhere and people are always going to be attracted to that, especially in this environment of high inflation, low growth elsewhere, like you're not going to find growth, you know, maybe, maybe for energy companies, but it's going to be a struggle to find growth out there. So, uh, there, there will be a search for new leaders and the, um, the smaller names, the lesser known means have been beaten down so much over the last year and a half going

• 10:04Speaker 02

  on two years that, um, you know, many have been left for dead. And so I, I think, you know, people will stop, take a pause, um, and start to, you know, get away from just the FAANG acronym as sort of like the, the quick and easy way to be invested in tech and start to look a little bit beyond that. And, and so I think, um, it, the, these smaller names are going to be, they were the first into this downturn and I think they're going to be the first out, even if the economy generally, uh, that we see every day when we go out and get a cup of coffee is still challenged for the next six months to, you know, two years.

• 10:41Alex Kantrowitz?

  Yeah, and some of these bigger companies are now starting to become those smaller names like I'd love to go company by company now and sort of break down a little bit about what we've seen, but starting with Meta, are they now small enough that they might become a company that you're interested in? I mean, they started, you know, what 13 months ago, they were 1 point something trillion dollars. Now they're 265 billion. They've lost 70% year to date. Are they in that Eric Jackson area now or are they still a little too big?

• 11:09Speaker 02

  I always find it dangerous to look for value stocks in the tech world because usually you don't get the name value stock unless your stock's down a lot. And usually there's a good reason why your stock's down a lot. And so for Meta or Facebook, you know, obviously it's been the concern about

• 11:28Speaker 02

  their core business and how it's being attacked by TikTok. And can it hold up? And what's the the black hole that that's going on with the with their investments in the metaverse? And reality labs, so

• 11:44Speaker 02

  I guess on the plus side, you know, if you wanted to say like, okay, like, what's the case for investing in Facebook here? Because 70%, you know, you should take a look at something that's been so diminished.

• 11:57Speaker 02

  I think, you know, the bullish case would be that time spent on kind of the core Facebook platform is getting better. Reels is improving.

• 12:10Speaker 02

  It's amazing to me, like, when you start to think about these numbers, they did 27 billion, over 27 billion in ad revenue in the quarter. The quarter, not the year, the quarter. And

• 12:22Speaker 02

  but only, I think it was like something like 750, 770 million of that was attributable to reels. But it was double what it was in the previous quarter. So you have, you know, you could say, hey, there's still a lot of upside here with reels. That's incremental. They've got the users, they've got 2 billion on WhatsApp, 2 billion on the main kind of core Facebook and Messenger. Instagram is huge, so there's still growth there.

• 12:53Speaker 02

  In normal times, like not this past quarter, when their free cash flow went from like 10 billion a year ago down to like almost nothing, in normal times, they have a lot of free cash flow.

• 13:05Speaker 02

  Even though growth is slowing, they can put that cash flow to work on buybacks. And even if you say, well, is that really a growth story that you want to get behind in tech? It's certainly worked out for Apple over the last, you know, five years. They haven't had the highest, you know, top line revenue growth either, but they're they've bought back so much stock that that does have a material effect on people and it's attracted a new type of investor. So, and then the last thing I would say, which would be a bullish sign for them would be, this is this is another mind blowing stat. They've spent $69 billion in the last two years on capital expenditures.

• 13:45Speaker 02

  So basically building out their their servers with the latest and greatest AI techniques to figure out just what type of ad you want to see when you're clicking through reels and all this kind of stuff. And that's a scale that we just haven't seen in the world before. And you you have to believe that they are not idiots and that $69 billion is going to have an effect down the road. So those would be the bullish cases for it. But that said, I'm I'm still hesitant to pull the trigger on on owning the stock because of the fears of the, you know, where is where do things really bottom? When TikTok is still growing like a weed and how does that affect the core business over time?

• 14:28Speaker 02

  And despite the stock buybacks or the promise of stock buybacks, what's going to happen with the with the Metaverse investment? Is it going to continue to be 10 billion a year? Is it going to grow to be 12 billion a year? I'm skeptical that that's going to see a payoff anytime soon.

• 14:43Alex Kantrowitz?

  Let me, you know, make the counterpoint to a couple of things that you mentioned and see, see how you react. First is this idea that Instagram and Facebook reels are on the upswing. My perspective on that is, is I don't see, you know, despite their, they're showing some nice numbers, but I don't really see it as, as ramping up its competition with TikTok and YouTube Shorts, because we just started creating for those platforms, for all of these platforms on the podcast. And one of the interesting things is with TikTok, you could have an account with no followers and that platform will blast out your video to ever, you know, to, to people, see if it's good and then keep distributing it. Same with YouTube. But with Instagram, that's not the case. So TikTok and YouTube are actually

• 15:27Alex Kantrowitz?

  taking into consideration a broad array of videos and bringing the best to people, no matter where their origin is. I think Instagram and Facebook way too tied to the follow model. And ultimately, that's going to lead to worse content to users and less incentive to create for creators. Now, they can say that they've seen growth. Of course, they had to start places zero. But ultimately, is this like actually a competitive product? You know, I, I just don't, I don't see it. I mean, it seems like lots of TikTok rip offs from meme accounts that might let you to believe that you have a competitor where you don't actually have one. What do you think about that?

• 16:02Speaker 02

  Yeah, I mean, I haven't, I haven't checked recently, like in the last month, but like the last time I was on reels, it was like 50% of the videos seemed to be TikTok videos that sort of cut and paste there. So you wouldn't think that that's a great competitive differentiator when you're building your, you know, it's not quite the same as the stories killer that they experienced with going after Snapchat back in, back in the day.

• 16:27Alex Kantrowitz?

  Totally. Because stories was still social based and this is entirely algorithm based. And if the algorithm is not treating the videos the same as TikTok is, then you're, you're up the creek.

• 16:36Speaker 02

  Yeah. So, and how monetizable is WhatsApp, the $2 billion there? That's still an open question. What's going to happen in core Facebook Messenger? Is that just, just going to kind of slowly melt away over time?

• 16:51Alex Kantrowitz?

  Right.

• 16:52Speaker 02

  You know, as the grandmothers and grandfathers continue to flock there. Yeah, so I, I take that point and to me, out of all the Fang names, I would say Meta or Facebook is the least interesting to me as an investor.

• 17:10Alex Kantrowitz?

  Okay, so now I will make the case for Meta, buying Meta stock. I'm going to do this a little bit more on a special episode this Saturday with Marshall Koslowski and Sagar and Jedy of the realignment. So folks, we have a special one coming focusing on the midterms and on, you know, broader US global politics. And then we do a second half, a short one on tech. But in case you don't get that far, I feel like it's worth bringing up now. If you buy Meta stock today, and this is a little bit based off of Josh, what Josh Brown said, he bought into it. You almost get two bets in one. You either bet A, that this metaverse is going to work out, or B, that they'll come to their senses and it won't work out. And then the stock market will be like, okay, you know, they're not investing anymore in the metaverse.

• 17:53Alex Kantrowitz?

  And then take that stock and double it or triple it. So for that one share, you get those two options. Appealing?

• 18:02Speaker 02

  Not to me. I mean, I, they're an ad company. The metaverse is a product company or, or it's, it's a, it's sort of like a product slash enterprise play, the way that they've sold it. It's like, it's not you personally are going to buy this and take it to your meeting. But if you work for, you know, big company A, they're going to buy all these VR headsets and send them out to all the workforce to use to do Zooms and stuff with. I just don't think, I think it's real challenging for, for a company with a DNA, you know, that's been so successful in one area, i.e. ads, to just change stripes to, to a different type of, type of company.

• 18:48Speaker 02

  So I just think it's probably still years away. And, and yet the headcount is enormous there. So there's that.

• 19:01Speaker 02

  I think like probably the,

• 19:04Speaker 02

  And then, and then what if they cut back on spending? I was, I was thinking like, I liked Brad Gershner letter from Altimeter.

• 19:12Alex Kantrowitz?

  Right. So for folks listening, Brad was saying, instead of spending 10 billion a year, spend 5 billion a year on the metaverse. And now Facebook said they're going to lose even significantly more next year. So they didn't listen.

• 19:22Speaker 02

  And, and I think he was saying like, just have more job cuts in general. Because for across the kind of core business, which is more consistent with what other, other companies are doing. But I was thinking like, even if they did everything that he suggested, what, what, you know, maybe there would be a one day reaction, stock, stock would pop. But would it really carry through? Would it, would, you know, a month later, three months later, six months later, where would the stock be? And I think you, you know, you'd still be probably with a challenged stock price because of just concerns about, you know, what is next for, for the main core business of, of Facebook? And is it really going to be down to bounce back?

• 20:05Speaker 02

  Even if you do a bunch of job cuts, if it's still a shrinking business. You know, people are reluctant to jump on board with that kind of a story in, in the tech world. So there's probably, probably, I would say that their best bet is probably this kind of financial engineering, Apple, you know, massive buyback.

• 20:26Speaker 02

  Approach with, with like conscious, you know, showing that they are conscientious about costs, you know, and they're going to pay homage to free cash flow and all this kind of stuff. That, that could, that could happen. But my guess is that this is stock is going to be in the penalty box for the next six months regardless. And, and with Apple, it took some time for there to be a turnover of a certain types of investors, like the, the growthier investors left. When the buybacks became like, you know, center, center stage. And it's sort of attracted the Warren Buffets of the world and kind of these like more, you know, sort of traditional kind of, you know, slower growth institutional investors to come in and kind of participate in the story. But that, that took some time.

• 21:10Speaker 02

  It just didn't happen like overnight, but you know, one investor exits and one type of investor sort of arrives.

• 21:17Alex Kantrowitz?

  And you know, I was actually like seeing all this investment they're dumping in. You know, speaking of financial engineering, I was looking at all this investment they're dumping into Metaverse. And I was like, you know, does this, you know, can this hold up to the law of physics? Like spending 10 billion or even more, losing that much money, you know, losing more money next year. But it turns out that Meta has made this year 84 billion so far, and it's spent 25 billion on R and D. It made 5 billion last quarter. So, you know, for all those people hoping that Zuckerberg might pump the brakes, it doesn't look like he has to and doesn't seem like he will anytime soon.

• 21:53Speaker 02

  No, he doesn't, certainly doesn't have to. And you're right, like that's the scale of Facebook is so enormous that I think sometimes we forget that. And so that he would probably argue that the percentage investment relative to the size of the business is is still,

• 22:10Speaker 02

  you know, modest. I don't know. I wouldn't agree. But, um, you know, YouTube was bought for 1.6 billion, like back in 2006. Uh, you know, if we have three years of Metaverse spending, what, you know, we're talking like, what? 30 to 40 billion that Facebook is going to make. If Facebook like announced on, you know, if they were allowed by the government to make a $40 billion acquisition, we would think it was nuts and the stock would have a huge sell off. So, uh, but you know, this is a company doing 100 billion a year in revenue too. So, uh, they see it as a bet the, bet the farm kind of thing. Thing. That's why they changed the name of the company. I think that's what also scares investors is that, you know, things must be really worrisome with the core business.

• 22:55Speaker 02

  Uh, if the management is just like burning the boats, you know, and basically saying, you know, we gotta, we gotta get to this metaverse, uh, future come hell or high water, even if it kills the company.

• 23:06Alex Kantrowitz?

  Yeah, it's kind of interesting because with Zuckerberg, it doesn't have to be that the core business is, you know, going down immediately. You could potentially have decades of, you know, good, good advertising returns. But then you look at Zuckerberg, he's just 38 and. He has this ability to think in decades and not in quarters. And there's probably, there is definitely truth. Everyone can see it, that that core business is just, the writing is on the wall for it. But it's going to be a while, but the fundamentals that it was predicated on, you know, broadcast sharing to friends and, you know, advertising with attribution. Those have taken pretty big hits due to the fact that the social behavior change in Apple has come in the way.

• 23:49Alex Kantrowitz?

  So if you're sitting in Zuckerberg's chair, you're 38, you know, you have a good business, but you care more about legacy and not becoming Microsoft. And he has good buddies with Bill Gates, who went through this where he built Windows, didn't adapt quick enough because they had an asset that they could milk and then pay the price.

• 24:10Speaker 02

  I think that, yeah, I think that's right. But, you know, one counter is, I was talking to a former Facebook, kind of longtime exec, yesterday, actually, and they were saying, the thing about Zuckerberg is, he hasn't really, he has a reputation for not sticking with things. So you remember Facebook phone?

• 24:30Alex Kantrowitz?

  Right.

• 24:31Speaker 02

  Remember Facebook was going to kill Match and dating, online dating? So they have a history of these sort of big announcements. And then Zuckerberg himself is, you know, is obviously the one in charge, but he's sort of, he's seen as like very interested in that particular area for a while, sitting in on meetings and Zooms or whatever, but then losing interest and kind of moving on to some other things. So this, maybe he's learned from that and maybe this is, he's going to, you know, say that this is why I've been double down on this. And I think another argument he would make is like, hey, if I'm not going to invest in the metaverse, like I certainly know Apple's going to be, you know? And do I want to make kind of the same mistake I made, you know, with Facebook phone?

• 25:16Speaker 02

  Kind of like end of life in that and sort of seeding the whole market to Apple and Android? Or do, you know, do I really want to go whole hog now and keep up the investment? So that I don't just seed the market to these other bigger players?

• 25:30Alex Kantrowitz?

  Totally. And this is kind of, it goes along the lines of what I mentioned when I was on air with you, you know, last week, which is that. That Facebook starts initiatives, looks at the data, and then adjusts basis for that. And that can mean, you know, tripling down on a project, or that can mean, you know, ignoring the sunk cost and then abandoning it. So, you know, maybe that is what we see here.

• 25:52Speaker 03

  I'll read you what Brad told me just a few moments ago. Quote, "He may be king, but the best kings care about the well-being of their subjects. They are curious about ways to improve and talk to their stakeholders about ways to make the kingdom even better." So that's from Gersner just a few moments ago, literally. How would you address the issue as to whether Zuckerberg's going to be willing to do anything that Brad suggests? And they are just that, suggestions, because as Bryn said, they can't be anything more. The way that the whole thing is structured with the voting power.

• 26:25Alex Kantrowitz?

  The way that Brad describes Mark Zuckerberg, I would say, having met the guy, having spoken with his employees for years, is exactly the type of person that Mark Zuckerberg is. Now, I know it might sound crazy to say that Mark Zuckerberg is amenable to listening to stakeholders, users, and employees, but that's exactly the way that the man has made Meta what it is today. And I don't think it would be where it is today if Zuckerberg was not amenable to feedback. It's a value all throughout the company, and I expect that he's going to do the same thing here. Okay, I want to move on to the thing underlying all this, which, well, not all this, but underlying Facebook's business, underlying Alphabet's business, that's advertising. We're in the middle of what looks like a pretty big advertising slowdown, you know, both these companies.

• 27:08Alex Kantrowitz?

  Facebook, you know, did have its revenue contract, okay, Apple was part of that, but it's also due to this advertising contraction. So, having looked at the reports from Facebook and Google, or Meta, or an Alphabet, whatever they want to call themselves these days, what is your view on the state of the ad market? Because it's important, you know, to these tech giants, to a lot of the smaller companies, I imagine, and to the economy overall. Are we now seeing like a real drying up in advertising?

• 27:39Speaker 02

  I think we are. You know, I think that's definitely occurring. I think what really hurt Google in its report was CPG companies cutting back spending on YouTube. So that that hurt them. Now, we've seen Snap, obviously, for five quarters now, experiencing cutbacks. You know, Facebook, you know, there's no question that when times get tougher, ad budgets, the easier ad budgets, you know, can easily be cut. And so I think all

• 28:17Speaker 02

  these companies are experiencing that and going through that. I think that, and I said to Scott when I was with you on Monday, that, you know, I still like Google a lot because of the, you know, internet search still being kind of more resilient to that because it's serving a need. And so I, while this quarter, you know, was a setback for Google, I think they're going to be the kind of the best, one of the best positioned going through this downturn because once the cuts are done in YouTube, you know, it's still a great platform delivering a lot of traffic. So I think they'll be able to kind of move forward from that and people will continue to spend on

• 29:00Speaker 02

  search. But yeah, there's no question that this is a sea change for all these companies. And I mean, if you look at some of the small, like, you know, we talked about smaller companies, like tech companies, like, if you look like, like, there are companies like the Trade Desk or Magnite, which is sort of like, you know, sort of like a selling digital, they're selling digital ads on connected TVs and stuff, or Roku, maybe is another, another example of this, like, these smaller tech companies that are, that are exposed to digital ads, like, they've been hurt way more than these, these bigger players, or even, you know, way more compared to somebody like a Snap.

• 29:42Speaker 02

  So, yeah, it's brutal if you're living and dying by digital ads these days exclusively in your business.

• 29:50Alex Kantrowitz?

  Yeah, let's talk about Snap before we head to break. I mean, it's very interesting with Snap. They are having some of the best user growth in social media right now. Like Twitter for years has, you know, clawed its way to add, you know, five, five million users a year, quarter, whatever it is. Snap added, you know, let's see, in daily active users increased 19% to 363 million. So it's way bigger than Twitter, but it's spending is still out of control. Losses were 359 million over 72 million expected. And it's really struggling to make money. It has its slowest revenue growth, I think, maybe ever last quarter. So what's the hope for Snap? And what's the story there?

• 30:36Speaker 02

  Well, I see that they are trying to emphasize how they have such a lock of the younger demographic. And, you know, some high percentage, you know, the folks eighteen to thirty-four use Snap. And they sort of are implying that they have this global footprint and a lock on this demographic that's just going to continue to age with Snap. And so I think that's their argument for why they're relevant and they're going to, you know, become increasingly relevant as that demo ages and, you know, gets more income. Another friend of mine once said to me, like, one of the secrets is that, you know, young demos don't spend money.

• 31:17Speaker 02

  And so you got to live like with the, you know, you play the game on the field, right? And so while I have like a thirteen year old who's addicted to Snap and sending messages to his friends all the time, I mean, he's not looking at ads. He's not going to stories. So how are they going to make money from him? You know, that's been their challenge right now. So, and, you know, of course, they always have talked about things like spectacles, you know, and we're a camera company. And now they talk about AR. We're an AR company. We don't believe in the metaverse and we're going to help you do commerce, you know, with AR and stuff.

• 31:59Speaker 02

  It's just, again, like, kind of like Facebook with the metaverse. It's just tough. Like, I remember twenty years ago, Alex, I was at Columbia Business School in the middle of the dot com era, and I took a job working for a company that was, it was a software company, basically doing like Siri, Alexa type voice recognition apps for all different kinds of companies. And I remember when I joined this company, you know, in like early 2000, they were saying to me like, man, you know, this thing is going to be a rocket ship because they started working on voice recognition twenty years ago, but now's the time that this thing is going to take off. And, you know, you know, in honesty, you know, it really didn't take, it took another

• 32:39Speaker 02

  fifteen years after the first twenty for Siri and Alexa to come along and really mass market it. So I think with all these things like augmented reality, metaverse and stuff like that. These guys like Evan and Zuckerberg, I'm sure they're right on the vision. It's just, it's just, is it going to be another two years or is it going to be another eight or 10 years? That's really the question.

• 33:05Alex Kantrowitz?

  Eric Jackson is with us. He's the president and portfolio manager of EMJ Capital. We've talked Meta, we've talked Snap, a little bit of Alphabet. We're going to get into some of the bigger enterprisey names like Apple. Well, Apple is consumer, but, but Amazon, Microsoft, we'll touch on Apple. And we'll come back and kick off with, with Twitter and whether Elon Musk is going to have, you know, anything interesting to do with that, that company's business. So stick around, we'll be back right after this. This episode is brought to you by App Point. Everyone's racing to roll out AI right now. Co-pilots, chatbots, agents doing real work. But here's the part nobody loves talking about. All that AI runs on your data and most teams have no single way to see it, secure it and

• 33:50Alex Kantrowitz?

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• 34:33Alex Kantrowitz?

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• 35:16Alex Kantrowitz?

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• 35:38Alex Kantrowitz?

  And we're back here on Big Technology Podcast with Eric Jackson, the president and portfolio manager of EMJ Capital based in Toronto. One of the best voices that you can listen to on tech and business. Eric, what I mean, the deal is done with Elon. He's already in Twitter headquarters, you know, making a ruckus. Is there anything he can do to that business? I mean, obviously, it's a private company now, but is there anything that he can do to that business to change the struggles that the company's had for all these times? Or is Twitter just Twitter?

• 36:05Speaker 02

  I think he definitely can. He's got a great track record, obviously with Tesla and SpaceX in particular. He's got a great reputation for attracting like the best of the best, especially on the engineering side with talent. I remember hearing like seven years ago that SpaceX was just like cleaning Blue Origins clock when it came to just attracting like serious space talent to that company relative to the Bezos is Blue Origin. So he has that going for him. We'll see how many, you know, if he cut 75% of the headcount or not, but my guess is he will

• 36:48Speaker 02

  for a couple of reasons. One, obviously, they have a lot and.

• 36:56Speaker 02

  They haven't been effective thus far through many different management teams. So he probably sees opportunity to to upgrade some of those people. But the second big reason is that with what he paid and the price he paid, a lot of the valuation and a lot of the lending tied to that deal is sort of based off of this EBITDA that Twitter is able to produce, its profitability. And it has been a billion a year for the last few years. But it's also had, I think it's something like three and a half billion a year in in things like general and administration costs and so forth. So basically, all the people that are working there. And so it really wouldn't surprise me if like a year from now,

• 37:40Speaker 02

  he had reduced headcount by three quarters and added in some of his own people to the technical team and to senior management. And suddenly, they're not doing a billion a year in profitability, but two to three. And they have a much, much more of a focus. They address some of these kind of like long time issues that have plagued Twitter. So overall, I'm optimistic. It's pretty, it's everybody loves to complain now that he's paying too much. Back when he made his offer, everyone was complaining for the first week and a half about that it was like 20 bucks below the all time high or the 52 week high.

• 38:19Alex Kantrowitz?

  That is true, yeah. Times have changed that fast, though. But yeah, so wait, do you predict, do you predict that he's going to do well?

• 38:26Speaker 02

  I do, yeah, two, three years out from now. I think he's going to make money for his, his investors. I think he's going to still have control of this important digital asset. And I think it will have worked out for him. But along, you know, he, he will have to cut a lot of costs out of that business.

• 38:50Alex Kantrowitz?

  Yeah, so, so, okay, we've done the consumer side. We'll save Apple to the end because they're the exception to the rule. Maybe they're, they're doing some stuff that's helped them survive this at the expense of the others, which we'll get into. But just looking at Amazon, Microsoft, I mean, one of the really interesting things is that, you know, one of the stalwarts of tech, cloud computing, which you would imagine it just keep going up at the same rate. We haven't seen the same results there. We've seen some slowdowns. We've also seen Amazon be unable to contain costs, which I want to ask you about. But let's talk about cloud first. My view on cloud is cloud is a business will do well in predictable economics times. If you think your company is likely to grow, you're going to invest in cloud infrastructure.

• 39:34Alex Kantrowitz?

  You're going to buy some extra space and you can plan, buy, implement and go from there. We're living in this just incredibly uncertain economy where the Fed one day seems like it's going to keep raising rates forever. And the other day, people, the big narrative is there's going to be a pivot and then all of a sudden, we're not going to go into recession or we are. Companies can't plan, so they can't spend on cloud and sort of sends the entire thing up in the air. I mean, similar with advertising. But I'm curious if you think that's what's behind some of the slowdown that we've seen in cloud for companies like Amazon, which dropped 19% after hours. Now it's down 15% on the week. So curious what you think.

• 40:15Speaker 02

  Cloud's obviously been a huge secular force over these last few years in tech. But we are seeing this week. I think that the slowdown in Azure and AWS were kind of the two biggest things that popped out to me out of those reports this week from Microsoft and Amazon. So we used to be talking like maybe a year ago, about 50% year-on-year growth for those businesses. And now with like the way that they've cut it down, it's, we're talking about something like 20, mid 20s annualized kind of growth rate. So that's quite a pause.

• 40:59Speaker 02

  So I think there's not a one size fits all with cloud. There are different, all kinds of projects that are occurring in enterprise. And some are seen as sort of must haves, especially as we kind of go through these tougher economic times. So I think ServiceNow had an earnings report. On Thursday, which was bullish and they, you know, they pointed to the fact that they were, you know, they're, they saw a lot of growth from their productivity tools and customers sort of feeling like they had to invest in these tools even more in these times to kind of, you know, make the most of either existing investments or fact that

• 41:42Speaker 02

  they've done some layoffs in their areas. But there are projects for the sake of doing projects which might end up utilizing space on AWS or Azure. You know, we, I think what we saw in their results is that companies are able to turn some of those projects off that aren't seen as, as mission critical. And so that can have an effect even on these kind of behemoths out there. So it's, uh, there's not, you know, you have to look on a case by case basis. I mean, I think, again, as we get in kind of the smaller enterprise names, I think, you know, you're going to see some companies do really well out of

• 42:21Speaker 02

  these earnings and some that just get, get decimated because they're sort of seen as like not, not, not that important businesses. So I think that, you know, Amazon and Microsoft still are strong companies, well positioned for the future. They've gotten like, you know, many different aspects of their business, but the cloud business is definitely slowing. You know, if you minus out the effect of AWS on, on Amazon's profitability over the last five years, it's, it's a pretty shocking how little money that they've made over these past five years. So, and they would say, well, you know, we're setting ourselves up

• 43:06Speaker 02

  for success. We're making these big investments. Of course, they, you know, they've had to, in some ways they over invested. They took on too much of a footprint for different distribution centers and all this kind of stuff. So they're, they're trying to kind of tweak themselves to, to fit the market. But cloud is not just as bulletproof as, as we probably thought six months ago even.

• 43:29Alex Kantrowitz?

  Which is fascinating. And the, the thing that saved the Amazon business hilariously is, is advertising where they actually had an increase and it's sort of like, well, they're not subject to iOS. So, you know, that helps them.

• 43:39Speaker 02

  Yep. I think, you know, and they've got new management or, you know, Amazon does obviously. So, you know, they, they.

• 43:51Speaker 02

  I remember the days where people were saying, you know, Tim Cook was no Steve Jobs. And, uh, you know, they, they sort of blamed him for any sign that the business wasn't growing as quick as they, as they thought it should be. But, uh, Satya is very competent, so is Andy. I think they're, they're, they're, you know, they're going to get through this. Amazon's come back a lot on, on the Friday and, you know, it's, its stock was down something like 20% initially after, after they first reported earnings, but, you know, it's nowhere near that now.

• 44:21Alex Kantrowitz?

  Right.

• 44:22Speaker 02

  So, um, so it's still a very strong business that has made a bunch of investments that are setting itself up well for, for years to come. And they, they have no kind of global competitor.

• 44:32Alex Kantrowitz?

  Andy Jassy, I mean, he comes from the AWS side. Do you think he has the ability to cut costs in a way that a Bezos might? I mean, Bezos brought up in this retail world, right? Ruthless. And, you know, you, you need to be. You don't have margins, the same way that a cloud business does. Actually, you know, people are like, well, maybe Wall Street, you know, hit them because of these cloud, uh, results, but it's actually seems their inability to cut costs, right? They were predicting, you know, multi-billion dollar operating margin in, in the fourth quarter. Now it's going to be zero, um, you know, according to their guidance. So is Andy Jassy the right person for the job when it comes to, uh, living in an era where you have to cut versus you can spend freely where we were before?

• 45:12Speaker 02

  I think so because he was, uh, he was an Amazon person before he was an AWS person. So I, I think that they have a-

• 45:20Alex Kantrowitz?

  Yeah, but he was in AWS for a very long time.

• 45:22Speaker 02

  Yeah, fair, but, um, they have, that company has a very strong, um, cost-conscious culture. And I, you, you don't get to be sort of one of the kind of early, uh, members of the founding team and kind of grow up within that and kind of not have that soaked into your bones. Uh, even if you have to go out and build like some nascent business that nobody believed in initially, uh, and, you know, was seen as a sinkhole for costs, uh, for several years by Wall Street. Um, so I, I think that's still in him. And so I think he, uh, you know, he's much better positioned than if they had brought some-

• 46:03Speaker 02

  You know, other big, big name who'd never been a part of that culture, had no, no kind of experience with it as an outsider to be CEO. Those kinds of things are very dangerous, and I don't think they would work well at a company where the culture is as strong as Amazon.

• 46:19Alex Kantrowitz?

  Yeah, you're right. Those leadership principles at Amazon, I mean, anyone who's listened, who's either working at Amazon or who's hung out with someone working at Amazon, I mean, the leadership principles, you know, they, they hold them more closely than religion oftentimes, or almost all the time. You know, people in Amazon, Amazon marriages, evaluate the marriage based off of the leadership principles. They take, teach them to their kids, and they do apply across the business. But yeah, I do wonder if you, you'll, you'll have to figure out a way to do this, otherwise it's gonna be troubling for, for Amazon. And then let's, let's just move to Apple. I mean, they seem to rise above it. You know, they, they've done a nice job kneecapping Facebook's business. Facebook's been one of their, their main competitors. You know, is, is Apple doing this well because of shortcuts? Or

• 47:04Alex Kantrowitz?

  is it doing it this well because it's that good?

• 47:08Speaker 02

  Well, they're complex. You know, they're such a big business with so many different moving parts. But they, they do everything extremely well. They have, they make money everywhere. They, they have a culture of, you know, we're gonna, we're gonna make a lot of money out of this. And they have such, you know, a positive inertia going for them. They're, they're an object in motion that's going to stay in motion. And so they, as I said at the beginning, I, I do, you know, they're, they're really the last man standing

• 47:51Speaker 02

  here of all these big tech names. It was astonishing to me to see that on Friday, that the stock was up something like 8% on the good, good earnings that they had. That, that was basically a, they added a Facebook in market cap from the move off of, off of the earnings. So that really kind of gives you a sense of how big they've grown to be. So what, what was interesting to me about their quarter was that there was a report a couple of, like a month ago, I think it was, from the information, that there were signs that they were cutting back on 14s, iPhone 14s. And people took that as sort of like a read through that there was going to be,

• 48:37Speaker 02

  you know, a negative quarter for them.

• 48:38Alex Kantrowitz?

  Yeah, no, such an incomplete report because it left out the, they had a report that the iPhone 14 was struggling, but, but, I'm sorry, it was cutting back production, but nothing about what was happening in the factories where the Pro was being made and there was lots of demand there.

• 48:53Speaker 02

  Yeah, and, and those reports always happen and they always get a lot of attention and usually they're from like something like the NK News or something like this. Overseas supplier, they got some word from some factory somewhere that something happened, but Apple is just such a big organization, they have so many factories all over, that it's really impossible to, to tell what's going on just from, you know, one person's random comment about what's, what's happening in one factory. And so, you know, the bottom line is that even though iPhones was, you know, iPhone was a slight miss on the quarter, it still, was still incredibly strong, the guide for the next quarter was still incredibly strong, especially compared to the other mega cap tech names.

• 49:37Speaker 02

  They, they saw Apple raising prices on a bunch of their services. Which, you know, obviously they're, they're doing that from a position of strength, so I think this, and, and there was a surprise that the gross margins were stronger than, than what people expected, and so just like a lot of companies have been hurt by inflation on the cost side, actually Apple benefited from sort of deflation, you know, sort of the, the other side of this on, on some key components, especially overseas, that, that led to this like gross margin surprise, even though they had to deal with a stronger dollar and all this kind of stuff, so I think, I think the bottom line is people looked, looked at the report and they said,

• 50:18Speaker 02

  this thing is, this, this company is still doing incredibly well, they have, you know, this big loyal. Installed base of customers, there's still a lot of Android customers switching to Apple to get on the platform and that doesn't seem like it's going to change anytime soon. So it's just like full steam ahead for the SS app.

• 50:39Alex Kantrowitz?

  It's interesting that you say they're raising prices on services from a position of strength. I thought it was from a position of weakness. You know, the services revenue is slowing. That was one of the things that came out in the earnings report. And I felt, you know, them having to raise rates on Apple TV plus some music and Apple One and trying to squeeze Facebook on those extra few dollars from boosts that happened in app was their attempt to re-accelerate the services growth where it had slowed down because App Store purchases were down. You don't agree with that?

• 51:09Speaker 02

  Well, I guess we could, like, one person's, you know, raising prices

• 51:16Alex Kantrowitz?

  Strength is another one, yeah.

• 51:16Speaker 02

  From weakness as another person's like, anytime there's a price increase, like generally investors kind of applaud that.

• 51:25Speaker 02

  And if they wouldn't do that if they didn't think that they were going to be a net beneficiary from that over time and that enough people were going to stick around with that price increase. So, so I, I, I see it as, yeah, hey, services wasn't as strong. You're right. But there are things, there are levers here we can pull, you know, and that's going to change in the future. So it just, you know, it gave comfort that there are things that they can do there to continue to see that grow. And as that grows, and presuming that people decide to pay a higher multiple for that versus the hardware part of the business, it should work out in Apple's favor.

• 52:07Alex Kantrowitz?

  You know, Eric, hearing you speak about this stuff, it does seem to me that you're, you know, despite not being in any of these big tech stocks, you're a lot more positive than, you know, maybe the market seems to be at this point. So what are you, are you feeling optimistic about these companies? And what's your outlook, I think, moving forward?

• 52:24Speaker 02

  Yeah, I mean, I think I think we're in a place where rates have gone up so much in such a relatively short amount of time. We haven't really experienced that, that I do think that things are going to start to grind to a halt in the general economy. And that is something that the Fed is just not going to be able to ignore. And so therefore, we're probably closer to, you know, rate cuts, you know, being kind of the, you know, the main focus rather than continued rate increases. I don't know if it's going to be next month, or, you know,

• 53:05Speaker 02

  the first part of 2023, or something like May of 2023. But I definitely think we are, you know, by the second half of next year, everybody's going to be talking about the lousy economy, deflation. We got to cut in order to kind of get things stimulated again. And while that's bad, in general, for for all of us, for the economy as as citizens, and it will be painful for many as as they go through unemployment, that surely to to rise, you know, with that. It it's, you know, that period is generally the beginnings of kind of a new bull market when it comes to stocks. So we've been, you know, it's been

• 53:47Speaker 02

  tough to be bullish with stocks over the last year especially. But, you know, things are shifting and changing. And as I said before, the tech stocks in particular, they're just always going to be a fascination for a lot of investors, because they perceive that corner of the market as having the highest growth potential. And as as so many names have been, you know, really brought down to to earth over these last two years.

• 54:18Speaker 02

  The winners definitely will see some big stock gains to come. So as a stock picker, that gets me excited.

• 54:26Alex Kantrowitz?

  So near the bottom?

• 54:27Speaker 02

  Yeah.

• 54:28Alex Kantrowitz?

  Okay. Well, you heard it here first. Thank you, Eric, for being on the show. Really great to speak with you. Man, there was a lot of action with the big tech companies, and I think we managed to cover almost all of it. So thank you very much.

• 54:39Speaker 02

  Thanks, Alex.

• 54:40Alex Kantrowitz?

  Great chatting with you. Thanks, Eric, for being here. Thanks to all of you for listening. Thank you, Nick Watney, for editing the audio. Sorry to anyone who heard some drilling going on in the background. Certainly had some drilling in the area today. My apologies. And apologies to Nate for having to figure that stuff out. Thank you to LinkedIn for having me as part of your podcast network. Thanks to all you listeners. Just as I mentioned earlier, we have a special midterms preview coming out over the weekend. So stay tuned for that. Two of my favorite political commentators will be on. Marshall Kosloff and Sagar Angedi from the Realignment. Well, that will do it for us here. Thank you again for being here this week, and we'll see you next time on Big Technology Podcast.

• 55:29Speaker 04

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