Big Tech, Big Payments, Big Burrito

During earnings season, larger companies are outperforming smaller ones. According to Motley Fool Money co-host Dylan Lewis and his guests, Jason Moser and Matt Argersinger, the bigger companies have the financial stability and customer retention to weather economic downturns. Moser adds that we may be approaching the end of the economic expansion, and the GDP growth rate of 1.1% is a sign of this. The guests suggest that smaller companies are facing liquidity issues and customer spending slowdowns, making it more challenging for them. Therefore, having a strong financial position is crucial during uncertain economic times. Additionally, the Think Fast, Talk Smart podcast, which focuses on communication skills, can help individuals improve their business and personal interactions.

Despite the anticipation of a recession, companies like Microsoft continue to perform well. Microsoft reported a strong quarter with earnings and revenue surpassing expectations. The Azure Cloud segment, although growing at a lower rate than before, still showed significant growth. Microsoft's investments in AI and its various business segments, including Office 365 and Teams, contributed to the strong performance. The acquisition of Activision Blizzard faced opposition from U.K. regulators, but this seemed to boost Microsoft's shares. Amazon also reported strong earnings for the quarter, with revenue and earnings surpassing estimates. Overall, these tech companies continue to thrive despite economic uncertainty.

Amazon's cloud segment, AWS, experienced a larger-than-expected deceleration in growth during Q1, causing investors to worry about future quarters. This came as a surprise given AWS's significant size and scale, with net sales up 16% to $21.4 billion and an annualized rate of $85 billion. However, CFO Brian Olsavsky and CEO Andy Jassy only mentioned AI once in their prepared remarks, which some saw as an unforced error given the importance of the technology in the cloud market. Furthermore, Amazon's core e-commerce business saw flat growth in online store sales, which was more surprising given expectations coming off a quarter where people were still buying online due to the pandemic. Despite these concerns, tech giants like Alphabet and Microsoft reported encouraging results, with Alphabet's cloud business continuing to gain traction and Microsoft's earnings stealing some of Amazon's thunder. Overall, the deceleration in AWS growth and flat growth in Amazon's e-commerce business raised concerns for investors, especially given Amazon's higher valuation compared to other tech companies.

While Alphabet's YouTube revenue saw a decrease, its cloud business showed significant growth, with a 28% increase in revenue and a $191,000,000 operating profit. This is a positive sign and a potential tailwind for the business in the future. Additionally, Meta reported encouraging results, including revenue growth and a focus on efficiency. However, the future success of both companies hinges on the performance of their respective "other bets" segments, particularly Alphabet's cloud business and Meta's Reality Labs. Alphabet's recent authorization of a $70,000,000,000 share repurchase program was also noted, but the speaker expressed a preference for the company to pay a dividend instead. Overall, the reports provided some positive news for these tech giants, but there are still uncertainties and challenges ahead.

Despite the ongoing losses in Meta Platforms' Reality Labs division, the company's ambitions for the metaverse are seen as a significant growth opportunity. However, investors are growing increasingly curious about how Meta will monetize this venture, especially as losses continue to mount. Meanwhile, Visa and Mastercard both reported strong earnings, with revenue growth and increased consumer spending. Mastercard's acceptance footprint has surpassed 100 million locations globally, and Visa's cross-border volume saw impressive growth. Chipotle also reported strong earnings, with net income nearly doubling year over year due to price increases and strong same-store sales. Impressively, Chipotle's labor costs were lower in the quarter, despite not cutting wages, but rather scaling across a larger store footprint. No mention of AI was made on Chipotle's conference call, but the company's focus on menu price increases and cost savings has paid off. Overall, these companies' earnings reports highlight the resilience of consumer spending and the ongoing relevance of traditional industries, even as new technologies and trends emerge.

Chipotle continues to expand its store count and digital orders, with plans to reach 7,000 restaurants in North America. Impressively, they've managed to make digital orders more efficient by separating kitchens for pick-up and digital orders. Chipotle is also incorporating automation into their models to help with operational efficiencies and labor costs. Meanwhile, in the cybersecurity industry, Zscaler's cloud-based security products have gained FedRAMP certification, allowing them to enter the federal government market and secure sensitive information. Zscaler's goal was to build a platform from the start to help CISOs dealing with appliance fatigue, and expanding into the federal government was a natural next step. Despite Zscaler's impressive growth and market success, their stock has been cut in half since last fall. The conversation between Motley Fool senior analyst Tim Byers and Zscaler CEO Jay Chaudhry touched on the expanding opportunity in government contracts and the importance of FedRAMP certification for cloud-based security products.

Zscaler's focus on zero trust security architecture has led to significant growth in the public sector, specifically in the federal government. This growth is due in part to the highest level of certifications Zscaler has achieved, allowing them to act as a secure connection between users and applications, rather than securing the network itself. The shift towards zero trust architecture reflects the maturity of cloud technology and the increasing importance of securing sensitive data. Zscaler's pioneering approach to zero trust security has been a disruptive change in the network and network security landscape, which was invented 30 years ago and has seen little significant change since. The Biden administration's focus on implementing zero trust security in organizations is a significant opportunity for Zscaler to continue growing in this area. With over 12 cabinet agencies and 700 organizations as customers, Zscaler is playing a crucial role in securing infrastructure and sensitive data in today's cyber world.

The future of cybersecurity lies in a more controlled and verified approach to connecting users to applications, akin to being escorted to a meeting room instead of roaming freely in a building. This approach, known as "zero trust," is based on constant verification and authentication, ensuring that users only access the specific applications they are authorized for. The speaker emphasized the importance of this architecture in today's world where traditional security measures like VPNs and firewalls can leave organizations vulnerable to attacks. He also warned about the risks of inertia and slow adoption of new technologies, as well as the innovative nature of cyber threats, such as those related to AI models like ChatGPT. The speaker's organization, Zscaler, is working to address these threats by developing features to protect intellectual property and prevent unauthorized access to sensitive information. In summary, the key takeaway is the importance of a zero-trust architecture in today's cybersecurity landscape and the need for continuous innovation to stay ahead of evolving threats.

The economy is seeing a shift from goods to services spending, as indicated by UPS's volume decline and Packaging Corp of America's shipment volume decrease. This trend aligns with credit card companies reporting softness in the goods category. The question now is how long this service economy can sustain, as it makes up the larger part of consumer spending. Additionally, for new professional football players entering the workforce, it's important to remember that taxes will take a significant portion of their earnings. Matt Argersinger is looking at Activision Blizzard (ATVI), despite Microsoft's failed acquisition attempt, while Jason Moser has no stocks to share this week.

Despite regulatory challenges and revised guidance, both Activision Blizzard and Cloudflare continue to show signs of growth and present potential opportunities for investors. Activision Blizzard reported strong first-quarter results, with bookings up 25% and revenue from Blizzard's online subscription business up 62%. The company's popular games, such as Call of Duty and Diablo, continue to drive growth. Activision Blizzard's stock price dropped after the UK's regulatory body blocked the proposed Microsoft acquisition, but the company still has a strong business and a significant cash reserve. On the other hand, Cloudflare's stock price dropped after the company revised its guidance for the year, citing macroeconomic uncertainty and longer sales cycles. However, the company's quarterly results met or exceeded targets set out a quarter ago, and the market's skepticism may present an opportunity for investors to buy at a lower price. The company's aggressive leadership team may need to prove its growth projections to the market, but its innovative technology and large market potential make it a company to watch. Investors in both companies should keep an eye on regulatory developments and future guidance, but the strong underlying businesses and growth potential make them worth considering.

In the current economic climate, larger companies with significant resources are better positioned to weather the headwinds in the cloud business sector. This was evident in the recent financial reports of tech giants Amazon, Microsoft, and Alphabet, which all signaled potential challenges in the cloud space. Smaller players, on the other hand, may be more vulnerable to these macroeconomic uncertainties and longer sales cycles. Based on this discussion, Diablo and Activision Blizzard were identified as potential watchlist stocks, as they may face greater challenges in this environment.