Big Tech results beat expectations: Neuberger Berman's Dan Flax on key takeaways

Key Concepts

• Amazon Web Services (AWS): Amazon's cloud computing platform, experiencing accelerated growth.
• Silicon Roadmap: Amazon's strategy for developing and utilizing its own semiconductor technology.
• E-commerce Business: Amazon's online retail operations.
• Advertising Business: Amazon's growing revenue stream from advertising on its platforms.
• Free Cash Flow Growth: The cash a company generates after accounting for capital expenditures, a key indicator of financial health and potential stock outperformance.
• Headcount Reduction: Amazon's strategic adjustment to reduce organizational layers and increase agility.
• Artificial Intelligence (AI) Investment: Significant spending by tech companies on AI development and integration.
• Generative AI: A type of AI capable of creating new content, driving demand for cloud services.
• Capacity Constrained: A situation where demand for cloud services exceeds the available infrastructure.
• iPhone 17 Product Family: Apple's latest iPhone models, showing strong demand.
• Install Base: The total number of active devices of a particular product.
• Services Business: Apple's revenue from services like the App Store, Apple Music, and iCloud.
• Large Language Models (LLMs): Advanced AI models capable of understanding and generating human-like text.
• Apple Intelligence: Apple's suite of AI features integrated into its devices and services.
• Hardware, Software, and Services Integration: Apple's strategy of seamlessly combining its physical products, operating systems, and digital offerings.

Amazon's Performance and Strategy

Dan Flax, Senior Research Analyst at Neuberger Berman, discusses Amazon's strong performance, highlighting the accelerated growth of Amazon Web Services (AWS) to approximately 20%. He emphasizes Amazon's effective innovation and execution, particularly concerning their silicon roadmap. Customer feedback indicates significant value derived from AWS, which empowers other businesses to build upon its infrastructure.

Flax notes that Amazon's e-commerce business remains healthy. Looking ahead, he anticipates strong performance driven by investments in various sectors, including e-commerce, AWS, and a substantial advertising business exceeding $60 billion with over 20% growth. This is projected to translate into robust free cash flow growth over the next two to three years, potentially leading to stock outperformance.

Regarding Amazon's recent announcement of reducing headcount by approximately 30,000, Flax views this as a strategic adjustment rather than a significant deviation from expectations. He explains that with over a million employees, this move is intended to reduce organizational layers and enable faster movement, crucial in the current dynamic market. This is consistent with Amazon's historical track record of aggressive investment in people and technology.

AI Investment and Cloud Growth

Flax addresses the significant investment in Artificial Intelligence (AI) by tech companies. He supports Amazon, Microsoft, and Google continuing to spend heavily to meet the demand for AI. He points out that these companies are experiencing tremendous growth in their cloud businesses, often facing capacity constraints. This growth is fueled by new workloads, particularly in areas like generative AI. The key, according to Flax, is for these companies to generate strong returns on their investments while navigating a complex cyclical environment, with a focus on thoughtful investment levels over the next 12 to 24 months.

Apple's Innovation and Services Strength

Turning to Apple, Flax highlights the company's continued innovation and strong demand for the iPhone 17 product family. He attributes this to significant differentiation in key areas like the camera and video capabilities, which are increasingly important with each product generation. This has led to a growing install base and a healthy product mix.

A significant takeaway for Flax is the strength of Apple's services business, now exceeding $100 billion and growing at double digits. He reiterates his positive outlook on Apple, expecting solid growth in the year ahead.

Addressing the LLM Question

In response to questions about Apple's perceived lag in Large Language Models (LLMs) compared to competitors like Google (Gemini) and OpenAI, Flax emphasizes Apple's historical approach of empowering others to succeed on its platform. He states that Apple possesses its own large and small language models and expects them to be further integrated into user experiences, with improvements to Apple Intelligence anticipated.

Flax believes Apple's success hinges on its ability to partner with others for certain technologies while owning others internally. The critical factor for Apple's narrative is its capacity to integrate hardware, software, and services in a fun, intuitive, and secure manner that delights users. While acknowledging the possibility of future acquisitions to strengthen its product roadmap, Flax concludes that consistent execution on product cycles, such as the iPhone 17 and upcoming iPhone 18, will position Apple well for solid performance over the next 12 to 24 months.