Things Just Changed

Key Concepts

• RPO (Remaining Performance Obligations): Cloud backlog – future revenue commitments from customers.
• IBA (Incremental Booking Amount): A metric indicating the increase in cloud bookings.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• OpenAI Impact: The significant influence of Microsoft’s partnership with OpenAI on its financial results.
• Circular Financing: A situation where Microsoft funds OpenAI, which then commits to Azure cloud services, inflating Microsoft’s RPO.
• Robo-Taxi: Autonomous vehicles intended for commercial ride-hailing services.
• Optimus: Tesla’s humanoid robot project.
• XAI: Elon Musk’s artificial intelligence company, now linked with Tesla.

Microsoft Earnings & OpenAI Dependency

Microsoft experienced a significant 12-13% stock drop following its earnings report, an unusual event for the typically stable company. While initial numbers – 17% revenue growth, 110% RPO increase, and substantial gains in IBA, net income, and free cash flow – appeared positive, a deeper dive revealed a critical factor: OpenAI.

Approximately 45% of Microsoft’s commercial RPO now stems from commitments made by OpenAI. Stripping out OpenAI’s contribution reduces RPO growth from 110% to 28%. Similarly, while earnings per share jumped 60%, excluding the accounting impact from OpenAI’s increased valuation, the growth falls to 24% (a $7.1 billion equity gain from OpenAI’s valuation boost artificially inflated the EPS).

This dependency fundamentally shifts investor perception. Microsoft is no longer viewed as a globally diversified, predictable entity but as a “levered bet” on OpenAI. The company is now seen as heavily reliant on a single customer, with Microsoft effectively funding OpenAI’s operations (OpenAI’s $350 billion commitments are backed by Microsoft’s capital). This creates a “circular financing” problem. Furthermore, Microsoft’s capex growth is outpacing revenue growth by a factor of three, adding to investor concerns.

Despite these issues, the speaker maintains a hold position on Microsoft, acknowledging the company’s strong core financials but recognizing the need for organic growth outside of OpenAI to justify its valuation.

Meta’s AI-Fueled Rebound

In contrast to Microsoft, Meta experienced a positive market reaction, with its stock rising after a strong earnings report. Revenue grew by 24%, with guidance projecting 30% growth for the next quarter. Daily active users reached 3.58 billion. Meta’s earnings per share also saw significant growth, recovering from a previous one-time tax hit.

Like Microsoft, Meta is increasing its capex, but investors are more accepting of this due to the company’s robust revenue and cash flow growth. Meta is strategically diversifying beyond its core payment network into value-added services, reducing its vulnerability to government regulation.

Mark Zuckerberg’s vision for Meta – owning the entire technology stack, from AI models to hardware – is impressing investors. The speaker considers Meta a potential buy, citing its cheap forward PE ratio, healthy free cash flow yield, and significant growth potential.

ASML’s Continued Success

ASML, a key holding for the speaker, reported strong earnings, beating expectations across key metrics. The stock is up 25% year-to-date and 100% over the past six months. Revenue, net income, and earnings per share are all growing, and the company is aggressively buying back shares. Despite initial market reaction to conservative guidance from management, ASML remains in the green, demonstrating investor confidence. The speaker maintains a hold position.

Mastercard’s Diversification & Growth

Mastercard also delivered a strong earnings report, with revenue up 18% (15% currency-neutral). A key takeaway is Mastercard’s successful diversification into value-added services, which grew by 24%, outpacing the growth of its core network business (12%). This diversification insulates the company from potential government interference in payment processing fees. The speaker views Mastercard and Visa as strong performers and is bullish on the company.

Tesla’s Transformation & Future Focus

Tesla’s earnings report presented a mixed picture. While the stock only fell 2%, despite disappointing numbers (revenue down year-over-year, declining vehicle deliveries, and a 30% drop in free cash flow), this is attributed to a shift in investor focus.

Elon Musk has explicitly stated that Tesla is transitioning from a car company to an AI and robotics company. The company is phasing out its Model X and Model S, converting the Fremont factory to produce 1 million Optimus robots annually. Tesla is also investing in XAI, Elon Musk’s AI venture, to accelerate its AI development.

Investors are now looking beyond the current automotive struggles and focusing on the potential of robo-taxis and the Optimus robot. The speaker remains cautious about Tesla, citing the ambitious timelines and execution risks, but acknowledges the potential upside if Musk’s vision is realized.

Conclusion

The earnings season revealed a complex landscape. Microsoft’s struggles highlight the risks of over-reliance on a single partner, while Meta’s success demonstrates the rewards of strategic diversification and a clear vision. ASML and Mastercard continue to deliver solid performance, and Tesla is undergoing a fundamental transformation. The market is increasingly focused on future growth potential and the ability of companies to navigate evolving technological landscapes. Investors are reassessing risk profiles and pricing companies accordingly, leading to significant market volatility.