Flip the Switch Episode 23: Q4 Wins and Losses
SOPHIA: Today on Flip the Switch. We round up the 4th quarter for the top tech companies and discuss where the titans of the industry are headed next. The Dow plunged 1200 points on Monday, but the guys explain why you shouldn’t panic. Cryptos start rebounding after an important Senate hearing. And Elon Musk is up to something.
Let’s get into it.
00:51 AUSTIN: Welcome to Flip the Switch presented by Power Digital Marketing. This is our Michael Jordan episode–number 23.
00:58 PAT: Stole my joke. Episode 23. Thank you guys so much for joining us.
01:02 AUSTIN: I couldn’t not. It was too good when you said it beforehand, but yes I did take that from Patrick.
01:05 PAT: I was going to say it’s our LeBron episode, but they’re not doing so hot right now.
01:08 AUSTIN: Yeah, trouble in paradise. But not here. Things are looking good for our podcast and man we got a great show for you today.
01:13 PAT: Yup. We’re going to go through some business news and trends. And then our main topic today will be a Q4 earnings wrap up. Talking about some of the biggest players in the space, and seeing how everything turned out during their busiest time of year. And then we close it out with a little segment about Elon Musk.
But first, let’s go into our business news.
01:30 AUSTIN: So, as I’m sure you are all aware, there’s been a lot happening in the financial world. We’re starting with the Dow Jones–and there is a pretty substantial plunge at 1200 points on Monday. That is the largest single day dip in the history of the Dow Jones.
01:46 PAT: Yeah, so I’m looking at an article from CNN Money right now title: “Dow plunges 1175. Worst Pont decline in history.” So, of course, I was drawn in immediately. The drop was about 4.6% drop which is the biggest decline that they’ve seen since August 2011.
Again, the reason why the percentage drop can be the same but the point differential is the biggest is because it’s the highest point total that the index has ever had is right now. So, of course, there’s going to be more points that decrease, but the percentage could stay the same.
We haven’t seen that much of a relative drop since the European Debt Crisis.
02:18 AUSTIN: Yikes.
02:19 PAT: So again, this is nowhere near close to the destruction of Black Monday in 1987, not to be confused with Black Friday or the financial crisis of 2008.
I think the biggest worry for investors right now is… there’s a mix of a few things. The market has been surging upwards at almost a near straight or exponential line going upwards. And the market’s bound to correct itself at some point.
02:45 AUSTIN: Absolutely. I think that the word that you just said right there is what you should think about this dip is “correction.” so, in a bull market, which we just had for a pretty long time. We’ve had a lot of capital injection into the financial market in 2017.
A lot of people made money. And when that happens, a correction is bound to occur. And what we’re seeing right now, especially with taxes coming up, is people were taking profit. So I think that there was a pretty substantial amount of individuals, after riding this wave from the entire 2017 that want to reap the benefits. Just like we’ve talked about with the crypto market. There is a bit of correlation here. There’s been some profit taking.
And outside of that there are a couple other factors as well.
03:23 PAT: Yeah, exactly. Well, first, touching on that point a little bit–you gotta think about the seasonality effect here, right? So at the end of Q4, that’s likely when it’s going to be at its highest, because that’s when the most consumership happens. The most are buying things, pumping money back into that economy helping drive that index number higher.
Q1 comes around and people are either re-evaluating their finances, whether that be for tax reasons, New Year’s resolution reasons… But I think you hit it right on the head. People pull out for profit.
Another aspect that has come into play here is that investors are looking at the bond market. So the Dow Jones is an index for the stock market, but bonds are different. And investors have been looking at this and yields have been creeping higher and higher as time has gone on.
As yields rise, bonds offer better returns, which makes it more attractive to investors…
04:12 AUSITIN: So we’re looking at the 10 year yield on the bond rate, and that pretty much never moves. It’s a really substantial move. I think it rose… it’s still at 2% but it’s just a slightly higher 2%. I think it rose to about 2.85. Right in that range. Up from about 2.25. So that’s enough. That’s enough to cause a little bit of issue. A 10 year bond at 2%, that’s actually pretty substantial. So any sort of… just because it’s a long period of time. So any sort of movement on that interest rate can cause people to start questioning, “Why are interest rates going up?”
04:42 PAT: Exactly. So there’s a few reasons that a lot of the experts on Wall Street have named. Including that bond market reasoning, some of the profit-taking, so to speak, at the end of Q4. But there’s a few things at play.
Another one, and you hit it on the head a little bit right here. People are worried that the Fed is going to raise rates. This goes back to that market correction piece.
So stocks had been skyrocketing ever since the election because the economy is so strong right now. And unemployment is really, really low. companies are starting to pay workers more to retain their existing employees, and also attract new hires to keep that unemployment rate low–like we’ve talked about before… The new age of corporate social responsibility right?
So this has all been going on and the economy’s been growing steadily for like, 9 years. Inflation has remained pretty stubborn and mysteriously low is the term that CNN Money uses. Mysteriously low.
05:34 AUSTIN: I think that… that’s what I thought of right away too. So I Look at the crypto market deeper than just the Dow Jones. And what we saw was inflation. And we were seeing that also with this market as well. So, as things creep up, just one little thing… one piece of news can really trigger a panic.
And we saw a bit of a panic sell-off on Monday. Because there was some negative information that came out. And one of them was around the bond market.
05:59 PAT: Exactly. So there’s the bond market…you have politics at play. You have this whole memo shindig that CNN has been reporting on pretty religiously…
06:08 AUSTIN: Yeah. Can you dive into that a little bit…?
06:09 PAT: So the details are still a little bit murky since it just came out, and the FBI has also come out and openly ridiculed this version of the memo. Saying that they believe the Trump administration has basically omitted material fact that has fundamental importance to the validity and the accuracy of the memo.
It’s basically about the election process. Trump administration’s relationship with the Russians. That’s neither here nor there. We’re not here to get political. But there’s no denying the fact that any kind of political turmoil does cause public unrest. And when that happens, people are going to pull their money out of a market that they think might not be stable.
So you pair that with the bond market. People looking at the feds to raise interest rates, and they’re also seeing that inflation has remained fairly stagnant. With wages where they are, stocks rising as much as they have been, and this talk of the Fed potentially raising interest rates, this has to do with inflation. So people are anticipating that there is going to be some kind of inflation happening. And they’re pulling their money out of the market.
07:08 AUSTIN: And what we saw pretty much right away, just straight into the next day, is a rise back in the Dow. So I think a lot of the sharp money–the investors that know what they’re doing–just capitalized this right on the bottom of the market. So when this quick sell-off… it reached a point of below the mean. So maybe a price where it’s worth more. And that’s when the people who have analytical ability… the technical ability to understand this market better than you and I… they capitalize and buy. And place large buy orders that are in turn setting a bottom of where the fall is. And then also producing a bit of a bull run.
So it could be a little bit of a trap. We don’t know the health. There are a lot of concerns politically and with interest rates. So I think we’re in a bit of murky water, but as of today, we did see a bit of a jump.
07:55 PAT: Yup. We’re seeing it come back up. Of course, there’s always going to be that relative increase anytime that… there’s like a 1200 point drop, 4.6% decrease. It’s the most in history. So if it were to go any lower then that would be cause for some pretty grave concern. But this was to be expected. We’re going to be looking at a good adjustment again, by the end of this week probably.
08:18 AUSTIN: Yup. Absolutely.
All right, let’s transition into another market. One that we talk about a lot, and that is the crypto market. So last week we talked about a pretty substantial issue with Tether and their might be a fraud situation with Bitfinex, which is the crypto-exchange that was creating fake money.
We saw that… what we talked about was a potential trend downward and that continued. We saw that actually this week, and they believe Bitcoin hit an all-time low for the past 2 years. Hit about 7,000 dollars which cause quite a bit of panic.
08:49 PAT: Yeah, exactly. So we’re looking at this on coin desk. And Bitcoin’s price dipped below 7,000 dollars. I believe it was Tuesday of last week. As the crypto sell-off started to… or I guess, continued. So this was all kind of related to one another. It’s like a domino effect a little bit, right?
To my understanding, Austin, there are these event that went down with Tether. And then there was a pretty pivotal Senate hearing though, that should give crypto investors some more hope. Can you elaborate on that?
09:17 ‘AUSTIN: So as we talked about… there was this just massive panic sell that led to a much larger drop than maybe should have happened. So a lot of the inflation was ripped out of the market, and we had a bit of a correction. Just like we saw with the Dow Jones.
But the good old U.S. of A. actually helped us out here. There was a Senate hearing that just so happened to be occurring this week. Very good timing. In a low, low market. And they came out actually in defence of crypto-currencies. Which was a bit of a surprise to a lot of people.
But let me explain to you why that they like cryptos. And then what they want to do to make this structurally sound.
09:52 PAT: Lay it on me.
09:53 AUSTIN: Just like with our typical securities markets, they want to create regulations. So anything that they can regulate means that they can make money off of it. if they can keep things 1) from being volatile, and 2) tax it, that means that the government is doing their job of creating a safe place for you to make money and also a safe place for them to make money. It’s continued returns for them in terms of tax dollars.
So the Senate wants to come up with a plan to regulate this market. And that’s what they were discussing in their hearing. Is it worth it? And what’s going to be our stance on it?
So they didn’t say, “We wanna shut cryptos down. We think they’re wrong.” They actually said the opposite.
They believe in the technology. Block-chain technology is extremely useful beyond just a market perspective. It is as we’ve talked about, it’s data storage. It’s a faster way to do transactions. It’s a decentralized ledger where you can store information in lots of places. So it’s a revolutionary idea.
And they understand that. And they also know that in terms of that, you cannot step away from the coin aspect of it. The crypto-currency aspect. That’s tangible and connected to the block-chain technology.
So they understand that those 2 aren’t going to go away. And they just need to come up with a proper way to regulate it. And then a proper way to have an ability for it to flourish in the United States, and for us as individuals to have a safe place to invest our money and also have a piece of technology that we can benefit from on a day-to-day.
11:14 PAT: It’s pretty interesting to see that, given the fact there’s been so much open scrutiny from some pretty big Wall Street pockets. People who are considered to… like, Warren Buffett for instance. The Oracle of Omaha, coming out and saying that crypto-currencies are not necessarily a… they’re not a currency, right?
And then you have this almost counter-intuitive… if you take that all as fact, this counter-intuitive decision by the government in this hearing… almost like laissez-faire. They’re keeping their hands out of it because they understand the intrinsic value that a decentralized system can bring. Is that right?
11:48 AUSTIN: I think, absolutely. And what we’re discussing, also… market manipulation. It seems so clear to me now, especially after this Senate hearing, that it just so happens that there is a pretty substantial sell-off and that type of thing. And then all of a sudden there’s positive news directly right when the market is at its very lowest. To make the price just kick up.
And also, think about this, the government was the one… this same commission was the one that audited Bitfinex. They’re the one who issued the subpoena. Just so happened to be 2 weeks before their Senate hearing, of course.
12:19 PAT: Right. Interesting timing.
12:21 AUSTIN: Same commission. Very interesting timing.
12:22 PAT: Almost like a conflict of interest, right?
12:23 AUSTIN: The price dips absolutely and it goes down to a bottom of a year. And then they come out on the other side and say, “No, no, no. We really like cryptos. We want to regulate them. We’re with them. Don’t pay any attention to when we were just bashing them a week ago. Here’s all this good stuff that we have.” And what do you know? The market goes up.
12:39 PAT: I have a question for you on that. So let’s say that… I think that we can all agree that some of Bitcoin specifically, but crypto-currencies as a whole have gained popularity as a result of market manipulation. Despite the fact that the government is taking a little bit of that laissez-faire approach to it, and keeping their hands out of it.
To what extent will that market manipulation still be in play? And second-hand to that. Is that going to affect the value that people think they can get from it?
13:10 AUSTIN: Absolutely. So we’re still not out of this. This is not going to be the end of market manipulation because one Senate hearing says, ‘Hey, we wanna regulate the market.”
That’s going to be years of laws. That’s years of code. That’s an understanding of… they need to make a separate commission. Separate from the SEC to regulate this market and understand it.
Do they need to create an exchange? Where they will list and index all of these crypto-currencies so they can have a better handle on it?
So in the meantime they seem to just be profiting from it. Just like you and I or anyone else that’s interested in crypto-currencies…
13:42 PAT: Well, not last week.
13:43 ASUTIN: right. Well not last week. Unless they shorted the market on the futures through Chicago. They might have done that.
13:48 PAT: They might have.
13:49 AUSTIN: so it’s at play here. Always remember, there’s more money out there that you don’t have, that is manipulating this market for their own benefit. And that’s the way it’s going to be. So you can either sit in this for long-term and expect the technology to pay off for your pocket. Or you can get scared and pull your cash out because you’re getting crushed.
So think about it, shot-term. Pretty Risky. You’re going to lose a lot of money. You’re also going to make a lot of money.
Long-term, you get behind the technology. You don’t care about what happens in the short-term because you believe in the future.
14:15 PAT: Right. You’re taking that value investing approach to it, just like you would with a stock for a publicly traded company.
14:20 AUSTIN: Same thing.
14:21 PAT: Last piece that I wanted to get into on this… I think… again, not to bring politics into this… but the Senate and the House of Representatives as it stands right this second are still Republican controlled. Which, as we know, they advocate for a lack of government regulation in monetary and fiscal policy.
We have seen with re-elections and seat changes, a lot of counties and constituencies that had traditionally voted Republican have put in Democrats. To take their seats.
Is that going to affect the crypto market in the long-term? Are we going to be sitting here a year from now after another Senate hearing by the same Senate committee with a different decision because of different political platform.
15:04 USTIN: We gotta look at it regulation versus deregulation. And those 2 parties differ very much. Also you’ve gotta think about it from even if there is a liberal control of the situation, the government doesn’t want to lose money. So I think, regardless of who’s in power, they’re going to make the decision that best benefits them to make the most money.
And with this market, that’s going to lead to some sort of regulation. Now I don’t know how deep this is going to go.
15:25 PAT: And how much is going to affect things. In investor decisions.
15:27 AUSTIN: but believe me. The government knows that they’re not making as much money off crypto-currencies as they could. And they need to figure out a way to do that. And it’s going to happen. It’s just a matter of time. Regardless of what party you belong to. Regardless of your ideals, morals and beliefs. The US government will tax this entity.
Main discussion for today is we are wrapping up the fourth quarter for the top tech companies. So we’re going to be discussing Apple, Amazon, Google and then Snapchat–because they are making a little name for themselves after a pretty brutal year. So we’re going to be wrapping all that up. We want to talk about high -level of where they’re headed. And some of these companies did have dips, so we want to explain why that is, and what they can do to get out of it.
16:09 PAT: Absolutely. So starting off–Apple. iPhone sales in Q4 missed their Wall Street estimates. So running through the numbers with you all really briefly and then we’ll go into some discussion here.
So Apple said that their revenue for the last 3 months of the year would be 60 billion to 62 billion dollars. Analysts were looking for 65.9 billion dollar return. Based on their averages.
And then for the final quarter, it sold 77.3 million iPhones which is down 1% from a year earlier. And below analyst projections of 80.2 million units.
So just taking a look at everything here with Apple, I think the question that I have around it… cause we’ve always been pretty big advocates of Apple always able to bounce back. Having this massive consumer base and some of the best technology on the market. If I’m an investor, should I be worried at all about some of these reports that I’m seeing? Because I think of–when we talk about value investing, I think the first companies that come to mind are blue chip companies like Apple, Amazon, Google. And what we’re seeing right now is that they kind of missed the mark in Q4.
17:18 AUSTIN: It was the first time they’ve made a mistake in a while. And what it comes down to is the price of the phone. So we’re looking at his graph right now, and the first quarter of 2018 was the highest price iPhone they’ve ever had. And that was the 10. So I think that the retail price came in pretty close to a thousand dollars, if you were buying that phone directly off the shelf from your cell-phone provider. And that was a pretty significant spike.
So in the 3rd quarter, 4th quarter of 2017 it was just above 600 bucks on average for an iPhone. So it jumped to about 800 in the 4th quarter. $200 price increase and for the individuals that they’re targeting, that’s a pretty substantial price point to pay for a cell-phone.
17:59 PAT: Yeah. And if you think about it… so I understand that. I think that I was always holding out for the possibility that Apple has… or not the possibility, the fact that Apple has this cult following of hundreds of millions of individuals. And they were just… as long as that Apple logo is on it, they’re going to buy it. And I was holding out for that. And I thought that it was a really good, calculated play by Tim Cook, because if you kind of look at that and look at their typical consumption trends… especially releasing a new apple product before Q4… they should have been poised to blow that 65.9 billion dollar estimate out of the water, if they could keep up their unit count.
And I think that what Apple discovered in this last quarter of this year is a very important lesson for them moving forward. They have a very loyal consumer base up to a point. and then after that it’s still a commodity and people at Apple need to understand that they can’t just jack prices up on every single new piece of technology, especially when the platform itself didn’t develop that much…
19:01 AUSTIN: They seem to be getting a little comfortable over there and just expecting the sheep to follow the shepherd, right? And what we’re seeing here by the increasing of the price–which they’ve done every single year, with their phone. Increase the price. And then their pre-sale numbers have still gone up every single year.
So when you look at those pre-sale numbers going up exponentially for them, I think that you expect your 4th quarter earnings to follow suit. You’re seeing that this many people every single year are wanting your phone before it’s even out. You’re expecting, “Man, I can’t wait ’til the public gets a hold of this. Because once we have the units available, it’s going to go through the roof.”
But it turns out they finally met their match with price-point. And there is a ceiling for how much someone will pay for an iPhone.
19:39 PAT: And I think that it makes sense too to project that way. Because if you think about it, people are getting new phones that are faster, they’re better connected to the Internet… not only are they paying that $1000 price-point, but then they are more likely as a consumer to want to buy things through the app store. Because it’s faster, it’s easier… Your phone is compatible with it, and it will work better with some of the apps that they offer. So not only are they looking at that primary source of income, they’re looking at this ancillary source of cash flow that they can get through the app store.
And to a degree, that was correct. Apple’s cash reserves jumped to 285 billion dollars this past year, which is… obviously, they have the most cash–the most liquid cash–of any company in the entire world. The problem is that they are going to be taxed on that offshore money under the new legislation that was introduced into the US. So they’re going to be bringing hundreds of billions of dollars back to the US. They’re not going to be using these tax shelters anymore, to have to evade some of these tax payments. And they’re also going to have to pay 38 billion dollars in back taxes after that initial investigation.
So not only did they not make enough revenue on some of these units that they were trying to sell. But they are also in worse shape financially than we’ve seen them in a long, long time.
20:55 AUSTIN: so it seems as though to front for this tax they did increase their cash flow. So that was on their report, their 4th quarter to come out. They did increase their cash, the amount of cash that they have available. So I think because they know they need to pay these big tax bills. The question that we have now is where does Apple go from here, because they’ve realized that they’ve hit a ceiling. Do they need to pivot to creating another product? Do they have some sort of technology that’s going to allow them to create a new stream of revenue, or to get back on track with iPhone sales?
21:28 PAT: Well, here’s my thing.so they have these Q1 projections that they need to hit. Not too long ago the Apple Home came to market. I think that… cause think about it, as a CEO, you would understand your financials on a day-to-day basis. Let alone a quarterly basis. You know whether or not you’re going to hit your marks. So I think that they rushed to bring this new product to market to try to ease investor concerns right now, after that earnings report from the last quarter came out.
So that’s an interesting way to deal with that kind of problem. When you have as much of an investor base as Apple does.
Switching gears to another huge tech company, Google. Another company that posted a fat loss in Q4. They posted 3.02 billion dollar loss for the quarter. And, you know, It’s we had never seen Alphabet or Google perform this poorly before. And I think that some of it has to do with the advertising landscape. Some advertisers choosing different avenues, like Facebook, Instagram, programmatic, whatever it may be. In lieu of google, which is where 70% of Google and Alphabet’s income usually comes from is advertising. And switching to some of these other avenues.
22:35 AUSTIN: They’re really missing the mark when they’re trying to show investors that they aren’t just a one trick pony and that is what we’re talking about. With just their advertising on the search engine. So I think a big goal they had at the end of the year and in 2017 was to show that they can do more.
“Watch us. We’re going to get into the smart home devices. Watch us, we’re going to get into streaming. Watch us, we’re branch into other aspects of technology with AI that you’re going to be surprised at what Google can do.”
Well, turns out they don’t generate much money when they do that. They may be making a big deal out of it but that doesn’t necessarily mean that it’s going to lead to more revenue.
And I think that that’s what scared investors here. Well, a one trick pony hasn’t boded well in the history of finance. For business just in general. Someone who can only just do one thing, needs to be so deep in a niche that no one… they have zero competitors. And Google does have that cause their search engine is the most intuitive. But where they’re starting to miss the mark is where individuals are advertising. And now they have more options to advertise. It’s not just AdWords that’s most intuitive. It’s not just Google search engine where you can advertise.
You have Facebook, which is a very intuitive type. Instagram. Same thing. There’s a lot that you can do to advertise outside of Google.
23:42 PAT: Yeah, and so the interesting thing to your point… is Google has been a one trick pony and it’s been really reliant on that advertising channel as a source of revenue. But the funny thing is, we talk about it… These other players in the space. They are such a miniscule, miniscule part of the advertising landscape. But what we’ve seen every single quarter… and I’m showing Austin this on a graph. Just to get his perspective on it. But these other avenues, and other ways of advertising have been growing in popularity. Slowly and very subtly but surely over the course of 2015 through now. So an increasing share of that one main source of revenue for Google has been dwindling. And if you look too… and this is all on Quartz in case you ever want to take a look at it. Its other bets are not paying off.
24:33 AUSITIN: It looks like their operating at a loss on pretty much every type of what we consider to be other bets. So what we’ve just discussed with the hardware sales. Like Nest, which they’ve shown. And fibre-optic internet services like Fiber that they’re doing. They’re operating at a loss with these. They’re not generating any capital and the top level, when you see the revenue that they’re generating on a yearly basis, you may not notice this.
You’re going, “Oh, they’re still continuing to rise and make money.” but guess what? There’s a thing called profit margin and when you’re operating at a loss on every other type of your business that starts cutting into what you’re taking home. And what the net net here is, after taxes how much are they brining in?
25:14 PAT: Yeah, and what we’ve been seeing too… so I totally agree with that. And another reason why advertisers are starting to switch gears a little bit and starting to look for other avenues is because as Google’s landscape gets more competitive, cost of advertising increases. So advertisers and chief marketing officers are looking for the most cost-efficient way to acquire qualified traffic.
And if you look at how much it cost to acquire traffic, just those traffic acquisition costs were 4.7 billion dollars during the 4th quarter for Google. Which is up 37% from the year prior. Meaning that it’s now costing the advertiser more to acquire the same amount of traffic due to increased competition. That was about 15% of Google’s overall revenue for the year. Which is still down.
It’s kind of counter-intuitive, right? You think as Google–more competitors in the space, you’re going to be making more money because they’re all going to stay.
What has started to happen is some advertisers are leaving the Google space because it’s not appropriate for their business objectives, their business needs and their traffic acquisition goals. And they’re finding other avenues to do that.
So people don’t like the fact that it’s more expensive. And now they’re moving.
26:20 AUSTIN: So if you’re google, what does this mean? Do you panic? Do you worry? What are your thoughts on the situation at hand?
26:28 PAT: Well, if I’m Google, I’m not worried. But I need to do something to demonstrate to my investors that we’re taking this seriously. And let’s not cross the lines between Google and Alphabet. Alphabet is the parent company that’s making these decisions. 99.9% of Alphabet’s income comes from Google. But just for the sake of being diplomatic about it.
But that being said, Alphabet has appointed a new executive chairman as of last Thursday.
26:54 AUSTIN: Okay. That’s pretty interesting. So clearly they want to prove a point to their investors that they’re going to head in a certain direction. And I think my understanding here is they know that they need to start generating other forms of revenue. If you can’t convince people to advertise on your platform, which that was trending down slightly… you need to come up with a different area. And as one of the largest technology providers in the world, and one of the best R&D departments in the world–they’re very great at developing new technology.
27:22 PAT: They should be. They have all the information in the world.
27:25 AUSTIN: They have everything. So this should be pretty simple, right? If you’re an investor, you’d think, “Well, Google has the most information available to any other company in the entire world. Why are they not coming up with new ways to generate new revenue? They have that information.”
27:37 PAT: Exactly. So I think this is a 2-fold piece. Because the guy that is going to be taking that executive chairman role, and let me find his name really, really quickly here. It’s John Hennessey. He started a semi-conductor company back in the day. He’s used to innovation.
And I think they’re looking for that fresh pair of eyes on Alphabet as a whole. Seeing what direction they can take it, to try to bounce back from this. Because they don’t want people pulling their money out.
Transitioning into a chairman, president and CEO that is doing very, very well after Q4. One of mine and Joe’s favorite topics here. Jeff Bezos and Amazon. So Amazon posted an absolute monster Q4.
28:16 AUSTIN: That really gets you going, doesn’t it Pat?
28:17 PAT: Yeah. OH, I love this stuff.
28:18 AUSTIN: We all know that Pat is a massive fan of Jeff Bezos. I believe it was his favorite big time business guy on a former episode. And what is Amazon doing to just continue to dominate the market?
28:32 PAT: Okay, so in Q4, Amazon reported nearly 2 billion dollars in profit. Which blew past Wall Street expectations by a lot. They made more net profit in Q4 of 2017 than they did in the first 14 years that they were in business as an aggregate.
28:53 AUSTIN: That’s a lot. Amazon web services. So the cloud service business, and they started doing advertising for this, which I thought was interesting. I’ve never seen cloud-based services advertised just the way uniquely that they do. And that accounted for 5.1 billion dollars in revenue. That’s up from 3.5 the previous year.
So they’re doing pretty damn well with their cloud service businesses which is where all types of enterprise businesses are headed.
Cloud based servers is what you need. It keeps your overhead costs low because you’re outsourcing where your data is kept. You don’t have to pay for the server space in your own office. And it’s just a monthly recurring rate. An annual rate if you will for the amount of storage you get.
So you’re offsetting your costs of having to pay for hardware.
29:35 PAT: I agree. And if you think about it… that also helps their margins in terms of their net sales. And their net income. So their net income was 1.9 billion dollars for the quarter of the 3 billion it was for the entire year. So Amazon had a monster year already. And it did basically 2/3rds of its net income just in Q4. Which would make sense, consumer trends typically trend that way during the end of the year.
People are buying holiday presents, things like that. But what the interesting thing is too, net sales increased to 60.5 billion dollars. Which is a 38% increase since last year. 38% increase since last year in a company that has one of the biggest market caps in the space.
30:14 PAT: And I think it does go back to that cloud computing piece. This is something that people disregard about Amazon. They think of them as this innovative company that’s just savagely taking over these industries. But they fail to understand that the reason why that’s even possible, is because their operating costs are so low. It’s because they’re dependent and reliant on this really sophisticated cloud technology that they can utilize better than almost any other company in the world.
30:39 AUTIN: Also, on top of that, Alexa had a much better year than I think a lot of people expected it to. The Smart Home devices are really taking off. And as a first mover, it’s kind of surprising to see them do well. We don’t usually see that with first movers into an industry quite like them.
But I think they’ve taken a very unique approach in the way that they advertise it. So we see a lot of really funny commercials that came out last year that kind of caught your attention. Caught your eye. And maybe got you a little bit more involved with the product than their competitors.
But that did quite well for them and brought in a surprising amount of revenue. From what they thought would happen.
31:11 PAT: Yeah, and again, we see how this trickles down even to the individual level. Jeff Bezos is securing his spot as the richest man in the world, once again. His net worth… just his net worth went up 6.5 billion dollars in after-hours trading last Friday. After their Q4 earnings report came out.
So his net worth increased by more than the company’s income was by more than 2 fold. And it’s risen 17.4 billion dollars just in January. And so he’s going to see his…
31:53 JOHN: IN that big drop on Monday in the stock market, he alone lost I think around 3.1 billion dollars of his net worth.
31:58 PAT: Still sounds to me like he’s up by 3.4 since the Friday…
31:59 JOE: At least he gets to like, alter his net worth by that much up and down…
32:09 PAT: Yeah. My net worth was essentially unaffected by the stock market…
32:12 AUSITN: You think he even bats an eye? I bet he sits at home with a giant ticker, just a giant wall and watches it go up…
32:18 PAT: Watches it go up and down.
32:19 JOHN: He doesn’t have a TV…
32:20 PAT: I could see him stressing out about it.
32:23 AUSTIN: it’s just a price index of Amazon, and it just goes over like in the Wall Street trading rooms where it just goes across the wall.
32:29 PAT: but I think that the super-interesting part about this too is that so he had 116.4 billion dollar net worth at the close on Thursday. And then by the end of the day Friday, at one point his net worth was a record setting–and Bloomberg made sure to make this blatantly clear. They bolded it. A record setting 123 billion dollar net worth. As of the next day.
So I think that the biggest takeaway from this isn’t just that this guy got rich and this company’s good because of the technology. It’s because of all those aspects that we’ve talked about. Throughput the year. They make incredibly smart, strategic partnerships. They continually find new ways to generate revenue.
But what I want to talk about is that they do it by using data. They use it because they have access to essentially the whole consumer index. They can see if people are searching for products that there is no good product currently existing for. And now they have the net income and the capital to go buy the manufacturing plant, control the supply chain, and sell it at what looks like a low price-point for a high margin. Because of their cloud computing.
33:36 AUSTIN: So what he’s saying right there, it’s really smart to differentiate from what Google is and then what Amazon is. So Amazon is, I believe, the 3rd largest search engine behind YouTube and Google search engine. The big difference here with what Amazon can provide is e-commerce data. So they have the ability to understand not only what people are searching but what people are buying.
So what they’re buying on their platform. So they have all that data on the sales of individual products, on individual markets, on verticals. And what they’ve done–which is so brilliant–is they’ve looked for gaps in those markets. Like what we’ve seen them do with health food and then also with sportswear.
So they look for gaps. They go, “I can do that better. I can get a better profit margin. I see there’s a need and a want for it. People are searching and not finding what they want. Let’s go do it better. Make a better profit margin than our competitors and then increase our earnings.”
34:22 PAT: And they’re also going after parts of the consumer demographic that historically have not been considered for e-commerce. So what I mean by that–look, they opened up their Amazon retail store a few weeks ago up in Seattle. That strictly is a lead generation mechanism to get people to sign up for Amazon Prime, because that’s where… monthly recurring revenue per user. That’s where they’re going to make their most money, right? And they can do that. They can afford to undertake that kind of endeavour because of the low overhead. And the interesting thing is like, people think of retail and e-commerce shoppers as these two completely distinct types of people. Where it’s like, “Okay, they shop retail because they’re old and traditional and yada-yada-yada. And I’m sleek and young and I shop online.”
It’s not true. At the end of the day, what shoppers are looking for are a few things. They want a good price, they want a good product, and they want convenience. And if Amazon can take the retail experience, cater it to that. Get some brand affinity and move them to the online space, they’re going to make even more money. So I see this as just the beginning, and we’re going to be covering it a lot during Q1.
35:24 AUSTIN: Yes, we are. Stay with us. We’ll keep you up-to-date and we’ll see where these titans of tech head next.
Okay, we’re going to end things on a bit of a fun note. Also have some information of course. But we’re talking about Elon Musk and is Elon Musk a Martian?
35:42 PAT: I wish that was the topic. We should do one of those at some point.
But no. Elon Musk has had a hell of a week. Well last couple weeks…
35:50 JOHN: Hell of a year…
35:51 PAT: Hell of a year. Hell of a lifetime.
35:55 AUSITN: hell of a life. But we’re specifically talking about what he just did recently and that is with Falcon heavy. So this man just launched rocket and I believe it’s going to Mars.
36:01 PAT: Two rockets, I believe. And so fact-check there. But the cool thing about this is that these have been widely regarded already as the most powerful rockets in the history of the world.
36:18 JOE: That’s a cool sentence.
36:19 PAT: How cool is that to be able to say? Imagine being so innovative and so on the cusp of just like technological breakthrough.
36:27 AUSTIN: The fact that it’s the private sector is what blows my mind, because the government has been the one that should be controlling this, right? They want to be the ones with all the weaponry and the ability to go outer space. But a man came along named Elon Musk and he had a vision. And he has just absolutely executed on that and created probably one of the coolest pieces of technology of our generation.
36:46 PAT: Yeah, I know. I’m looking at one of the articles that’s on the Guardian right now, and he’s saying that a problem free launch is going to be a game changer for Space X. so that happened before the Falcon take-off, right? So what this means, basically, is that since he was able to land the rocket… so he launched it, it cruised to an extremely high altitude. Into orbit at one point. Came down and landed, which means that it’s reusable. So he figured out how to recycle rockets.
Which if you’ve ever seen movies like Apollo 13 or any kind of space exploration movie. Interstellar I think at one point. The space garbage… like, the litter that comes off of your rocket when you go into orbit is obscene. Like, we’ve already done a bad enough job in my opinion of polluting the planet that we’re on, but then we’re like also, “Yeah, we can toss some of this up here.”
And I think he found a way to fix that problem. Again, in the private sector.
37:42 AUSTIN: That’s amazing. Let’s do a little comparison here of costs. So the United Launch Alliance–the Delta 4 was a rocket they launched. And that cost 435 million dollars. And then we look at Musk and what he just did with his rocket, 90 million dollars. That’s it. That’s a pretty substantial cut-down on the cost to launch the rocket. Plus, the big difference here too, is he gets his rocket back.
38:05 PAT: Yeah, exactly. He gets his rocket back. I like that.
But at any rate, he’s like… it’s just so interesting. I can barely find the words to explain this cause in my lifetime I never thought that I would see something like this.
And it can be unmanned to my understanding. It can be loaded up with cargo. There’s 9 cargo packs that are on these bad boys. And you can send them off to wherever. And it’s like auto-pilot.
So to be fair, I do think now in retrospect that’s part of the reason that the cost isn’t so much. You don’t have to anticipate 3 to 4 astronauts living on there for months or a year at a time…
38:40 AUSTIN: You guys remember that big rocket that launched out of Santa Barbara recently? And it was really crazy, and everybody’s like, “Oh my gosh, what was that?” And it turned out to be a SpaceX rocket. I wonder if that was, like, the final step before they were able to launch a Falcon heavy?
38:52 JOHN: Yeah. I think it is.
My favorite thing about all of this and Elon Musk is that I love sci-fi stuff. That nerd side of me. I was very into that,
39:03 PAT: Oh yeah. That side that we never see. The Web dev guy’s a little nerdy. Alert.
39:12 JOHN: No, but I love the fact that that Sci-Fi stuff is now coming to life. When that first one went off, people were looking at it, and it wasn’t just like, “Oh, there’s a cool thing flying through the sky.”
It was like, “I have never seen something like that happen before.”
39:28 PAT: I thought we were under attack.
39:29 JOE: Yeah, that’s what I thought too.
39:31 PAT: I saw those and I was like, “It finally happened.” You know?
39:33 AUSTIN: Au contraire. We’re just stepping into a completely new world here with rockets that land themselves and are unmanned.
Ooh, also just a quick note here. Elon Musk’s wife, she said that he is brilliant. So there’s a stamp of approval as well.
39:46 PAT: Oh wow. Yeah. As if no one knew that already.
39:51 AUSTIN: That was actually quoted in this article from the Guardian. So I thought that was kind of funny.
But yeah, just tying it all back in… We’re entering into an age where we’re seeing what John was talking about here. What we didn’t think was possible, is happening. So rockets, and all these exciting steps. So I think we’re going to keep up to date with the Musk situation, cause it’s really fun to talk about. And a…
40:09 JOE: New Flip the Switch favorite…
40:11 AUSTIN: Yeah. New Flip the Switch favorite is Elon Musk a Martian?
40:12 PAT: he’s creeping up there. He may or may not be a Martian, but we’ll uncover that in future episodes.
40:17 JOHN: We’re almost endorsing Amazon at this point, so we need a little shake-up.
40:20 PAT: We should ask for a partnership.
Also, one thing that I wanted to bring up, Elon Musk started a company called the Boring Company. If no one has heard this already… selling flamethrowers for 500 dollars.
40:30 JOHN: They’re also trying to build an underground railway in Los Angeles.
40:35 PAT: It’s crazy, the stuff that he is able to do.
40:37 JOHN: He also powered Puerto Rico with his Tesla batteries. So that’s… good guy.
40:41 PAT: The whole thing? All of it?
40:42 JOHN: Not the whole thing.
40:45 PAT: No, but even just looking at this, I think that he touches on something that’s so cool. And I know that we have to wrap up, so I’d love to do another segment about this in another episode with you guys. But he only made a finite amount of these flamethrowers. And he sold through them in 100 hours. He’s selling them for 500 bucks a pop. They raked in 10 mil. In dough. And they received a fire extinguisher on a complimentary basis.
41:09 AUSTIN: Do we get one?
41:10 PAT: No. I wasn’t able to cop one in time, unfortunately.
41:13 AUSTIN: I will put up the capital for that. I need one.
41:18 PAT: Yeah, he touches on scarcity. He touches on that cool Sci-Fi side of people that I think everybody expected the future to be like. And it’s just a great time to be alive and see this kind of innovation.
41:26 AUSTIN: Imagine if we just woke Joe up with a flamethrower in the morning. He just had no idea.
41:32 PAT: I would personally love that. All right, you guys, thank you so much for joining us for Flip the Switch. Episode 23. The Jordan-slash-LeBron episode. We will be back again next week with a new piece of content. Some more business news and trends. And a new segment hopefully about Elon Musk. And another great technological innovation.
But until then, this has been Pat Kriedler, Austin Mahaffy, John Saunders and Joe Hollerup signing off.