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Facebook, Microsoft, and Apple: Don't Underestimate the Giants

Motley Fool Staff, The Motley Fool

Investors lately have taken a somewhat jaundiced view toward many of the superpowers of the tech world, but is that really justified? Take Facebook (NASDAQ: FB), for example: If you were looking only at the coverage the social networking leader has enjoyed in the media lately, you'd expect its latest quarterly numbers to show a company on the ropes. But no -- its total revenue rose 30%, and mobile ad revenue increased 36%. Or consider Microsoft (NASDAQ: MSFT), which underwhelmed investors because it hasn't been able to keep growing its cloud business as fast as it once did. That's largely due to the fact that it has already grown so very big. And then there's Apple (NASDAQ: AAPL), which -- despite an unusual decline in revenue and operating profits in the holiday quarter -- still delivered a quarterly earnings beat.

In this segment from Motley Fool Money, host Chris Hill and senior analysts Andy Cross, Ron Gross, and Jason Moser dig into the areas that long-term-focused investors should be watching when it comes to these tech majors, ponder the near-term drags, and lay out the questions that we should be asking about them.

A full transcript follows the video.

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This video was recorded on Feb. 1, 2019.

Chris Hill: This week, Facebook shares had their biggest post-earnings gain in three years. Facebook up 12% on Thursday after fourth-quarter profit came in higher than expected, Andy.

Andy Cross: Hoo, and they needed it! 2018 was a tough year for Facebook. This was the quarter that Mark Zuckerberg really needed. Revenue was up 30% to just shy of $17 billion. Now, the growth rate actually was trending down over the past couple of quarters, but still, mobile ad revenues up 36%, now 93% of total ad revenue. Very interesting active revenue per user at $7.37. That's up 19% year over year. Seven million advertisers across the platform.

The message for me is that Facebook is still relevant, with 2.3 billion monthly active users on the platform. Still relevant. Obviously, they have some challenges with privacy issues, trust issues, but a lot of advertising flocking to get access to those billion users on a monthly basis. Continue to show impressive growth on the top line for Facebook.

Jason Moser: Yeah, really in line with what we've been saying for a while. All these concerns aside, it's really difficult to imagine an investor not making money in this stock simply because of the size of the business and the size of its user base. I found this really interesting, they're going to essentially stop reporting all this granular user data and just start talking about users as a family, with Instagram and WhatsApp and Messenger and Facebook. I think it's a bit of a cop-out, honestly, because we're not going to get clarity as to how monetizable WhatsApp is. It sure feels like they paid way too much for that business, and we're never really going to find out if they're generating the return on it. But, they can do that. You have to at least admire that.

Hill: Microsoft's second-quarter profits came in higher than expected, but shares falling a bit this week due to concerns over Microsoft's cloud business slowing down. Ron, when we talk about Microsoft, it's always about the cloud. What's happening here?

Ron Gross: This was not their best quarter, but I'm a Microsoft bull. Two things going on here. As you said, cloud business growth slowing down, but still up 76% for the quarter. But as that business gets larger, just the way the math works, the growth is going to slow down. It's almost inevitable. But still, a very strong business.

The other thing that investors were focused on is that the Windows operating system business was troubled due to the shortage of computer chips out there, largely because of Intel not anticipating the proper growth and putting production in place to meet that demand. Supplies of chips was lacking, that hurt the business. That had a flow through effect.

Still, I think this is an overall strong quarter. I wouldn't be surprised to see that shortfall of chips continue into the first half of 2019. But, again, short-term problem, I think. Business continues to execute. Satya Nadella has done a great job turning this into a cloud business.

Hill: Well, and when we just look at the stocks, and we talk about the big tech stocks pulling back from their highs, Microsoft is really not in the same boat as the others that we've been talking about. You look at Facebook, you look at Amazon, Apple, which we'll talk about in a second, those stocks are down double-digits, 20%, 25% from their highs. Microsoft is still pretty close to its 52-week high.

Gross: Yeah, up 8% over the last whole year. That's pretty good. And as you said, didn't nearly take the hit as the others. It's a fundamentally sound business with strong profits and a strong balance sheet.

Hill: Shares of Apple down from its 52-week high but bouncing back this week after first-quarter results came in higher than expected. Andy, it seems like, not that we're market-timers here at The Motley Fool, but when they came out earlier in January with their warning, and the stock fell, in hindsight, that looked like a really good time to buy shares of Apple.

Cross: I think so. Same thing we saw with Facebook. A little bit of, "Wow, it could have been a lot worse." Or maybe investors were expecting that. Now, both revenues and operating profits were down for the holiday period for the first time in more than a decade. But it's still an amazing business. The real struggle they're having now is, the iPhone business is slowing. Tim Cook wants you to think, "Now we're building a services business over at Apple," and focus more on the services. Services revenue was up 19% this quarter. Services, good. China concerns, iPhone concerns, not so good at Apple.

Hill: Am I the only one who looks at these comments from Cook -- you touched on this as well, Jason -- they're moving maybe not away from the iPhone, but they're trying to really build up the services business so it becomes more important to the bottom line. Because of that, I don't see how Apple avoids getting into video programming in a much bigger way than they are right now, whether they make a bid for live sports, they start getting into their own type of movie production in a bigger way, in the way that we've seen with Amazon and Netflix. I don't know how they have all that cash and don't put it to use. If you really want to ramp up your services, that could be a key piece to it.

Moser: They're putting together video content as we speak. That's something that's going to appear more and more on their platform. I don't know that I necessarily look at that as the biggest market opportunity out there for them today. When I think about a services business in relation to Apple, I like payments. I think Apple Pay has a lot of potential. Apple Pay yielded 1.8 billion transactions, more than double from a year ago this quarter. If they can continue to build out Apple Pay, cases to use it, communicate with merchants why they need to be using it.

And then, healthcare. Tim Cook keeps talking about how he believes that we'll look back at Apple decades from now and feel that the biggest impact they made was in the healthcare space. That's perhaps the biggest market opportunity out there when you think about it. They're making steps into that space. The partnership with Aetna. We know that telemedicine is taking off. There's potential there for them in that regard, as well.

Video, sure, but it's going to be a collection of things, for sure.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Andy Cross owns shares of Facebook and NFLX. Chris Hill owns shares of AMZN. Jason Moser owns shares of AMZN and Apple. Ron Gross owns shares of AMZN, Apple, Facebook, and Microsoft. The Motley Fool owns shares of and recommends AMZN, Apple, Facebook, and NFLX. The Motley Fool owns shares of Microsoft and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.