Hey folks 👋 In this issue I break down how Big Tech’s slowing growth, the reasons behind it, company-specific growth opportunities, and why being ex-growth isn’t all bad for shareholders.

Programming update: OG readers will notice that the Market Byte is shifting its focus from daily news to be more focused on topical business insights. I will still write about current events (earnings, breaking stories, etc.), but this will no longer be the best place to get daily business news.

This new style of writing is much more engaging, challenging, and rewarding for me personally, so it makes the most sense long-term.

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Today’s article is brought to you by: 100% human and 0% AI 

Big Tech Goes Ex-Growth 📉 

Big Tech’s era of rapid growth may have finally come to an end.

Despite Facebook, Amazon, Netflix, Microsoft, & Google posting better-than-expected results this quarter, it’s become clear that revenue growth is no longer the driving force behind their valuations - no company posted year-over-year revenue gains above single digits.

The core drivers behind slowing growth appear to be following:

• Law of large numbers. Due to the sheer size of these businesses, growing 10%+ year-over-year requires massive increases in absolute dollar terms. A $100 billion business needs an incremental $10 billion to grow +10%, whereas a $1 billion business only needs $100 million.

• Macroeconomic headwinds. In light of a looming recession, companies are looking up and down their P&L for cost savings - Ad spend, headcount, & Cloud infrastructure are some of the highest impact areas and directly impact big tech’s top line.

• Lapping tough comps. Big tech saw explosive growth coming out of the pandemic, so of course growing above and beyond those numbers is challenging at any size (Facebook aside due to IDFA challenges).

Growth Opportunities

Just because the days of rapid growth are over, doesn’t mean the party is over. Each company has room for growth, but at a slower yet durable pace.

Netflix & Pricing Power: Netflix’s clearest growth opportunity comes from pricing & product leverage.

• The first point of leverage Netflix will pull on is password sharing - restricting users from sharing accounts across multiple locations & devices will harm growth in the near-term but should accelerate growth in the coming quarters & years as moochers like myself make the switch.

• The second strategy that complements Password sharing is their lower price Ad-Tier offering. Netflix rolled out their Ad-Tier early this year and has already seen great success. The two complement each other so well for the obvious reason that account moochers are more price-sensitive, so a lower priced ad-tier makes sense for them. However, the ad-tier looks to also provide leverage back to their pricing strategies. Comments from the most recent quarter provide some more color:

That’s right - Netflix’s lower-cost Ad-Tier generates more revenue per user than its higher-priced Standard Tier. Because the ad-tier drives higher revenue at a lower cost to the consumer, Netflix now has the ability to shift its pricing to better match their desired outcomes —for example, they can discount the ad-tier to drive new subscriber growth, or they can raise the price of the standard tier to drive more revenue (because even if some switch to the ad-tier it’s net-positive). The company can also give those gains back to the consumer in the form of a better product offering:

• Netflix noted in its most recent shareholder letter that they have already rolled out two feature improvements to the ad tier - 1080p quality vs 720p & 2 concurrent streams vs 1. This is an effective price cut as customers will be getting greater value for the same price.

Password-Sharing Crackdown and rollout of the Ad-Tier offering should provide Netflix with a decent runway for both Subscriber and Revenue growth.

Facebook & AI: Facebook is investing tens of billions into AI to improve literally every part of their business on both the consumer and business side. A few examples highlight the many use cases Facebook sees with AI:

• On the consumer side, AI will improve content generation, recommendation & discovery. Engagement up = more ad impressions.

• On the business side, AI should improve ad attribution, ad targeting, ad creation, & business messaging. Conversions up = prices up.

Meta will widen its lead as the go-to digital ad platform in the AI era as they are by far the best-positioned to enhance both their consumer & business offerings. They aren’t investing $30 billion a year & open-sourcing AI models just for funsies.

Amazon, Microsoft, & Google & Cloud Services: While growth overall has slowed, the 3 large cloud providers can still look to these business lines to maintain durable growth as more workflows move to the cloud & AI continues its hype cycle.

All three companies should be some of the largest beneficiaries of Artificial Intelligence in the near term as they provide the cost-intensive infrastructure to manage training and inference workloads. Microsoft is projecting a 27% growth rate next quarter for its cloud business, While Amazon and Google did not provide a cloud-specific outlook.

[Note that while Google is growing at the highest clip, it’s growing off the smallest base.]

A New Era / It’s Not All Bad

While each company has its own pockets of growth opportunities, the reality is that they are no longer the high flyers they used to be. This, however, doesn’t mean they won’t make for great investments.

These companies have started and will continue to shift their focus & energy to mundane business stuff like “operational efficiency” and “cost of capital optimization”. Boring, I know; but it can come with big benefits to shareholders at the right price (huge credit to Apple & Microsoft who have been running this playbook since 2016).

Take Facebook for example. Zuck dubbed 2023 “the year of efficiency”, committing to right-sizing his organization, cutting unpromising investments, and removing layers of middle management. $META has risen 100% since the start of the year, and ~200% off its 2022 lows. All done with flat-to-negative revenue growth.

Big Tech has earned the right for so long to ignore boring things like cost efficiency, but now in the new era, they don’t have that same right. Those who can execute the new playbook will print more money than ever before.

What I’m Reading 📖 

• Who Owns the Generative AI Platform? A16Z

  • A great primer on the AI tech-stack - infrastructure, models, and applications - and where business value will accrue near-term & long-term.
    

• Navigating the High Cost of AI Compute. A16Z

  • Yes, two a16z articles.

  • This essay breaks down why AI models are so computationally expensive, compares price points, and offers strategic recommendations for building or buying your AI infrastructure.
    

• Spotify: The Ambient Media Company. Venture Desktop by Brett Bivens

  • The rise of hands-free audio from Airpods, smart-speakers, & wearables represents an evolution in the way we consume media - shifting from active & brief to passive & non-stop.

  • Brett predicts that Spotify is the perfect company to win the market for the “consumer’s ambient hours”
    

• The Subtle Strategy Behind Elon Musk’s Price Cuts at Tesla WSJ

  • Elon maintains the price cuts are a net-positive as the company will drive greater profits from subscriptions when it releases Full Self Driving

  • Analysts are concerned that Tesla is following a similar fate of legacy automakers who have sacrificed margins to win market share, ultimately creating a race to the bottom.

Today’s Challenge: Share this article on Linkedin.

Much Love,

Andrew