Meta Platforms (META) and Amazon (AMZN) reported strong financial results on Thursday, with both beating Wall Street expectations as trends like AI boosted growth across their respective business segments. Meta also plans to pay an initial dividend of $0.50 per share.
Brad Erickson, an Internet analyst at RBC Capital Markets, appeared on Yahoo Finance Live and discussed the two tech giants' AI focus, taking into account comments from Meta CEO Mark Zuckerberg. He spoke about the current position of both companies in the technology environment heading into earnings season.
For more expert insights and the latest market trends, click here to watch the full episode of Yahoo Finance Live.
Editor's note: This article was written by luke carberry morgan.
video transcript
Brad Smith: Amazon and Meta have here halted the sequential revenue declines of major tech companies. Both companies reported huge profits and strong outlooks, sending their shares soaring in pre-market trading.
RBC Capital Markets Internet Analyst Brad Erickson joins us. Brad, it's a pleasure to talk to you here this morning. After all, considering what this quarter means, perhaps we should take a moment here and focus on the meta first.
Let's start there. Because if investors are paying attention to this company after his year of efficiency, he's one of the areas where he appears to be turning the dial in the opposite direction here.
Brad Erickson: Yes, absolutely. And I'm happy to meet you both. Thank you for inviting me. So last night was quarter. The way we put it together we may look back on it in a few years. And remember this print as a transformative moment.
you're right. The advertising business is firing on all cylinders. In fact, overall digital advertising demand is probably stronger than expected in the first quarter. So it's not necessarily just meta stuff. But I think the bigger thing that came out last night is that Mark continues to expand his AI strategy, which isn't — interestingly, for us, it's about how AI is going to impact the advertising business. It wasn't just about making an impact. He is expanding his reach.
And what we're talking about in this morning's comment posting report is that, as we know, they're moving into cloud businesses and other types of services and capabilities beyond their core advertising business. I think it feels like it's hinting at something. It's today.
Sheena Smith: Brad, let's talk about one of the big announcements from this report. And that's the dividend. Please talk about the importance of this. And when it comes to investor expectations and shareholder expectations, what does this say about Meta's financial stability at this point?
Brad Erickson: Yeah. of course. Hmm, how much of a difference does one year or he two years make? He thought one of the things that investors probably really liked on the conference call was Mark. he loved it. He was mostly blaming himself for not realizing how well the company could run even though you had become more efficient.
And now we add dividends. This is really an olive branch, right? It's not a huge dividend at this point. But it definitely reflects that this company is growing and profitable for the future. And there's a lot of confidence in that. And obviously, we're now seeing returns on capital from a number of different angles, which is very encouraging.
Brad Smith: So from that perspective and from that angle, for an investor who doesn't own Meta, if you hear about this dividend now, that not only makes it more attractive, but it makes it something to buy, right? Or?
Brad Erickson: Yeah. We believe this is at a higher level. We reiterated last year that this was definitely a top mega-cap pick in 2023 and we're bullish on it in 2024 as evidence of that.
Dividends certainly widen the pool of eligible shareholders that can or will be extinguished. And by meta, however, this reminds me of my comment about not just dividends as the driving force, but the possibility of some kind of entry into the cloud market, which would mean unprecedented and multiple expansion opportunities.
We know that this company's revenue growth is going to be very strong. Historically, however, multiples may be subdued, with the emergence of the likes of TikTok highlighting that the competitive moat is not perfect, perhaps in the long term for this business.
You start talking about entering other huge markets like cloud. This is, from our point of view, multiple expansion possibilities on a completely different level.
Sheena Smith: Brad, another big name company you mention here is Amazon. Here's a strong report from the company after yesterday's bell. At least in the futures market, we expect the rally to be only about 6% before the rally. What are your key takeaways from this report? And I think the big announcement about Amazon's position in this AI race will alleviate some of the widespread anxiety. mosquito?
Brad Erickson: Yeah. completely. In the case of Amazon, I think it's a very good report. Also, as you said, stock up. However, the report from Meta is completely different. In some ways, it's more linear and easier. That means the investor really wants two things from this company. And last night we got both, or the beginning of it.
One is that we need to continue to see further improvement in our operating profit performance and outlook. They did it. happened. And second, he's an investor looking for more confidence that AWS can re-accelerate its cloud business. And I think we've gotten over what happened last night. Investors felt better about these two things last night.
So, the theory is understood, but our view going forward is that the stock will continue to work as investors continue to see that Amazon is blocking and working on these two things that I mentioned. That means there is a possibility. And I think we're pretty guilty of that.
Amazon was our favorite idea this year. And indeed, it still is.
Brad Smith: And with that in mind, profitability is a consistent line that we've been tracking for all of these companies throughout earnings season.
Particularly in North America, when they were talking about different regions here, they mentioned that operating margins for the first quarter of 2022 are at recent lows. However, it has now improved for seven consecutive quarters, with a cumulative improvement of 800 basis points. They're talking about that 7/4 here.
So how should investors expect returns from Amazon to change going forward?
Brad Erickson: Yeah. Frankly, margins, profits and free cash flow are increasing at the scale that people have wanted from this company in the 20 years since it went public.
That's why it's so important. To give you some sense of the numbers, operating income in 2023 was $37 billion. Operating income in 2026 is expected to be $100 billion.
And if you're going to make 6, 7, maybe 800 billion dollars in revenue over the next few years, 100, 200, or 300 basis points of profit growth obviously equates to tens of billions of dollars in that operating profit.
oh yeah. Pretty historic expansion in earnings and free cash flow here.
Brad Smith: Brad, I'm always happy to get some analysis here on both Meta and Amazon this morning after both companies reported earnings yesterday evening. Brad Erickson–
Brad Erickson: Thank you very much. I'm glad to meet you.
Brad Smith: –Internet Analyst at RBC Capital Markets. I'm glad to meet you too.
