The US market is an endless source of entertainment and insights. Companies report their results quarterly and market news is dominated by the most important companies in the world.
It’s a challenge to choose five insights from the raft of information available, but we’ve tried to do exactly that. In no particular order, and with recognition that we’ve barely scratched the surface here, these are five things you need to know:
Microsoft’s press release for the quarterly result made no secret of where the growth story is: “Microsoft Cloud Strength Fuels Fourth Quarter Results.”
Microsoft’s overall numbers were up brilliantly, as usual. Revenue increased 21% and operating income increased 42%. There are reasons why Microsoft has been a spectacular investment for multiple years.
The most important current driver in the business is the commercial cloud segment, which grew 36% to $19.5bn for the quarter. Office 365 grew 25% and Dynamics 365 performed even better, up 49%. Server products and cloud services revenue jumped 34% and the clear winner was Azure, up 51%.
Interestingly, the gaming business has slowed down. Admittedly, growth in that space last year was huge as people were locked down. In the latest quarter, Xbox content and services revenue declined 4%.
In the past two years, Facebook’s Daily Active Users (DAUs) in the US and Canada increased from 187 million to 195 million, a modest increase of just 4.3%. Europe has grown marginally faster over the two years, from 286 million to 307 million users (up 7.3%).
Across Asia-Pacific and Rest of World, total DAUs grew from 1.1 billion to 1.4 billion users, an increase of 26% from Q2’19 to Q2’21. Clearly, growth is coming from developing markets, which makes absolute sense in the context of broadband access and population growth stats.
This trend is interesting but doesn’t tell the complete story. It’s easy to assume that the US isn’t that important to Facebook’s growth going forward, as the market looks saturated. This idea is quickly thrown out the window when looking at Average Revenue Per User (ARPU).
There has been a structural shift in Facebook’s business, as ARPU jumped in the US and Canada from around $35 - $40 in mid-2020 to over $50 since the end of 2020. There’s been a similar trend in other regions, as advertisers have flocked to Facebook with their marketing budgets. However, the US and Canada is by far the most profitable region per user, with Europe the next highest at an ARPU of just $17. Asia-Pacific only comes in at $4 and Rest of World at just over $3.
Fascinatingly, the user growth vs. ARPU trend comes out in the wash when we look at relative revenue contributions per geographic segment. The US and Canada contributed around 48% of revenue two years ago and that is still the case today. It’s a good example of how platforms create value through user and ARPU growth depending on levels of saturation in each region.
In case you’re curious, Facebook generated $8.5bn in free cash flow in Q2’21. That’s astonishing compared to $4.8bn just two years ago.
Social media platforms exist because people want to be connected to other people and topics of interest. Creators are a critical part of this ecosystem and platforms need to provide them with an effective way to make a living.
Facebook is focusing on helping creators do exactly this and has announced a $1bn investment in creators across Facebook and Instagram. Although Instagram works well for visual products, Facebook itself isn’t a great place for creators. It has been built as a way for friends to stay in touch, which isn’t easy to pivot into a creator-friendly environment.
In contrast, Twitter has been built to create niche communities around topics. The level of interaction on the platform is incredible and Jack Dorsey’s company has proven adept at product innovation. For example, Spaces has been a hugely successful initiative, copying the success of Clubhouse (and almost killing it off in the process).
Twitter is a reminder that platforms with existing audiences can respond effectively to new competitors. Twitter’s revenue is up 87% year-on-year, with advertisers willing to pay lofty amounts for access to this high-quality audience. Net income of $65.6 million in the recent quarter is a stunning turnaround from a loss of $1.4 billion in the comparable quarter of 2020.
The creator economy is booming!
The realities of competition are starting to set in at Netflix. Lockdowns greatly accelerated subscriber growth last year (27.3% year-on-year growth was achieved in Q2’20) and the market went crazy, valuing Netflix at revenue multiples that should only be reserved for businesses with strong network effects. The growth rates have crashed back down to earth, with just 1.54 million subscribers added in the latest quarter, taking the total to just over 209 million.
Netflix doesn’t have network effects. It isn’t more valuable to you just because your neighbour also happens to be a subscriber. Netflix is a media production company with vertically integrated distribution; a model that simply isn’t in the same league as the social media giants.
People are starting to realise that streaming is a highly competitive space. Netflix arguably has the strongest brand from a streaming perspective, but there’s little doubt that the company is way behind on its content library. You just need to compare Netflix to Disney to see what the N in FAANG is up against.
Although the share price has been incredibly volatile this year, it’s now trading at the same levels as at the start of January.
Apple’s latest quarter delivered record revenue in each geographic segment in which the business operates.
In the nine months of the financial year thus far, iPhone sales have shot the lights out. iPhone sales growth is up 38% and this product line now contributes 54% of revenue. The next largest contributor is Services, up 28% and now contributing nearly 18% of revenue.
The reason Apple is fighting so hard to protect its App Store revenue model is because this part of the business is a huge profit contributor. Apple achieves gross margin of 36% on its mix of products and 66% on Services.
So, Services ends up contributing 32% of Apple’s gross profit despite only contributing 18% of revenue. It’s no wonder that investors are closely monitoring the Apple vs. Epic Games legal battle over App Store policies. Elon Musk came out last week in support of Epic, calling the App Store’s policies a “de facto global tax on the internet.”
If the App Store’s business model is forced to change, Apple’s investors will need more than a new iPhone to ease the pain.