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1. The Trade Desk (TTD) -- Google

This week, the DoJ and 8 states filed antitrust legislation against Google. The Trade Desk Founder/CEO Jeff Green -- in tandem with the filing -- released a fiery op-ed. I’ll cover the highlights of both here, their overlapping message and how The Trade Desk stands to potentially gain.

The DoJ complaints center on Google using its monopoly power to unfairly treat competition for its own ad-tech dominance. It specifically argues that Google is blocking fair ad placement auctions by “manipulating mechanics” to prevent fair and open supply side and ad-exchange opposition. It even accuses Google of forcing ad buyers to use its software by preventing an open bidding process.

I think it’s clear that Google is allowed to do too much in this space to be expected to behave fairly:

It controls the publisher impression selling process, controls the ad buying process AND controls the matching of these buyers and sellers. This creates an inherent conflict of interest where it’s incentivized to sell its own placements to buyers through its own exchange to juice unit economics of its advertising branch. It’s effectively preventing full access to publisher options and unfairly routing demand through its own software. This fosters an inefficiency that hurts a publisher’s ability to compete for ad demand and also leads to buyers paying more than they would in a fair market.

In Green’s words:

“Today, for a substantial percentage of online advertising impressions, Google controls the decisioning, the routing, the audit trail, the bid, and the ask -- seemingly playing the role as judge, jury, bailiff, prosecutor, defense attorney, and warden in many of the ad transactions they claim to be finding justice within… In many cases Google is even buying from Google on behalf of its brands.” –- TTD Founder/CEO Jeff Green

The Trade Desk -- as the largest open internet buy side ad tech company -- would stand to gain mightily from Google being reigned in. Its business model avoids conflicts of interest by working solely for the largest ad buyers in the world. It does not directly serve the supply side (although does allow publishers to plug directly into its platform via Open Path). This bias-less approach means its sole objective is to buy the highest value ads for its brands which means these brands know they’re being matched not with the best possible option for The Trade Desk… but the best option period.

If programmatic advertising is allowed to openly compete for business, what would that mean for The Trade Desk? Two things: First, it would provide the company many more publisher options to match demand with supply. Secondly, it would allow The Trade Desk to bolster the return on ad spend (ROAS) metrics it provides for its clients by eliminating Google’s ability to overcharge for impressions. Industry leading ROAS is the sole reason that The Trade Desk has consistently fetched a 20% take rate for the last decade -- this would help preserve or even bolster it.

This is not to say that The Trade desk needs any legislative help. It doesn’t… at all. Its execution, growth, margin expansion & market share gains have all been elite without the assistance, but a Google practices reset would still be good news.

As with all legislative news, any action resulting from the complaints is far from certain. But again, The Trade Desk will be just fine regardless. This is either good news or a nothing burger.

2. Meta Platforms (META) -- Data, TikTok & an Interview

While it seemed like bad news headline after headline was unavoidable for Meta in 2022, the reverse has been true thus far in 2023. Funny how that works.

First, on TikTok. Per research out of Citibank and Bank of America, Instagram has been taking time spent share from TikTok since August 2022. Specifically, the percentage of time spent on Instagram as a percentage of TikTok has risen from 77% then to 87% now. YoY engagement growth for both Facebook and Instagram have both also been sharply accelerating for the better part of the last 12 months, while TikTok’s has slowed to rates BELOW both Instagram and legacy Facebook. User growth for TikTok in December even turned slightly negative YoY. Meta is starting to win this battle for screen time and eyeballs as Reels ramps and its AI-based discovery investments gain popularity with audiences.

Further bolstering its position v. TikTok, , Senator Josh Hawley introduced a bill to ban the app across the nation. It’s unlikely that this specific bill would pass, but American regulation is clearly racing towards TikTok prohibition as several states have already banned it for public sector devices.

I’ve said it before and I’ll say it again: Now is Meta’s time to reassert its dominance. We’ve lapped the impact of Apple’s privacy changes. That YoY comp headwind slowed from 8% in early 2022 to 2.5% Q4 2022 and will turn into a growth tailwind in 2023 (per Meta’s Chief Marketing Officer Alex Schultz). Foreign exchange will soon revert back to a tailwind, green shoots on precisely identifying behavior patterns without Apple’s help to target ads are popping up, signs of competitive traction vs. TikTok are abundant, Reels monetization is maturing and WhatsApp monetization is ramping. All of these tailwinds are perfectly synchronizing to power what I think will be an aggressive comeback for Meta the company (and the stock). All eyes turn to its earnings report next week where I expect the tone to be much more optimistic than it has been in the past. We’ll see.

Miscellaneous:

• Expanded its relationship with the NBA to create 50 new VR basketball games.
• Meta is paying BuzzFeed to send content creators to the Family of Apps.

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3. Shopify (SHOP) -- Price Hikes & Leadership

a) Price Hikes

Shopify substantially raised the price of its Basic, Shopify & Advanced subscription plans. Specifically:

• Basic was hiked 34% to $39 per month.
• Shopify was hiked 33% to $105 per month.
• Advanced was hiked 33% to $399 per month.

If you listen carefully to Shopify leadership (& I never miss an interview or report), you will notice a theme of leadership calling its subscriptions “the best deal in commerce.” It frequently talks up “significant pricing power” and this is the first concrete sign we’ve gotten in a while of that pricing power being concrete.

Where does this pricing power come from? Two things. First is vendor consolidation. Shopify allows all important segments of operations to be run through 1 dashboard rather than several with manual, glitchy integrations stitching them together. Sidestepping these disparate integrations inherently fosters lower total cost of owning and maintaining a tech platform. Rather than forcing these hardcoded, cumbersome and time consuming integrations, Shopify uses its suite of light-weight, lightning fast APIs to power near-endless use cases & customization within its ecosystem. It augments this efficiency-building cohesion with automation tools to make merchants even more efficient and profitable.

This boost to business segment interoperability offers another interesting perk: When Shopify has data on customers and marketing tools in one place, or has merchant banking data to feed its credit issuance, it can do things like sharpen audience targeting or loan underwriting to make merchants more successful. These are just two examples of unique utility that trailblazes the evident pricing power we’re now seeing.

Finally, Shopify’s 10%+ share of U.S. e-commerce uniquely presents marketplace-like economies of scale via demand aggregation. Shopify uses this scale to pass on savings to merchants in areas from shipping, advertising, working capital access, interchange fees and more. And unlike other marketplaces, it offers these perks while letting merchants keep full control of their brand and data. Try doing that on Amazon

To gain a sense of the magnitude of these cost savings, , consider the following case studies:

1. Bombas saved 1% of revenue on platform costs with immediate return on investment (ROI) by switching from Magento to Shopify.
2. NYDJ lowered its total cost of ownership by 65% by migrating from the Salesforce Commerce Cloud to Shopify.
3. Doe Beauty saved $360,000 (2.5% of revenue) by switching from a custom build to Shopify
4. Staples saved 50%+ in platform costs by going with Shopify for its online store over the commerce clouds at Salesforce, Oracle and SAP.
5. Olly switched from a custom build to Shopify to save 1% of revenue ($60,000) in platform costs.
6. Duradry re-platformed from WooCommerce to enjoy a 30% increase in marketing efficiency.
7. Bike & Outdoor Company switched from a custom build to Shopify to lower monthly platform costs by 60%.
8. Skin Nerd switched from WordPress to Shopify to save $45,000 in annual app & developer fees.
9. Laird re-platformed from BigCommerce to Shopify to enjoy $60,000 in annual savings.

These are just a few examples. While these dollar amounts may not sound significant, the savings certainly move the needle for smaller merchants and dwarf the size of the Shopify fee increase. When you’re paying $5,000 per year or less for Shopify’s non-Plus plans, this tangible value equates to ROI metrics that are truly elite.

The hikes provide Shopify with a compelling choice: It can simply let the high margin subscription revenue flow down to the bottom line to bolster profitability. It could also use the funds to allocate to big projects it’s working on like Shopify Fulfillment Network.

And as a nice complement to this piece of news, Deutsche Bank upgraded Shopify this past week due to an accelerating pace of big brand migration and more market share gains. It called out many of the factors I discussed in last week’s issue. Maybe their analysts read my newsletter.

b) Leadership

After just 15 months in his role, CTO Allan Leinwand is leaving Shopify due to “personal reasons.” This marks continued C-suite churn for the company which is not devastating but also not a good sign.

4. Airbnb (ABNB) -- Cautious Note

Gordon Haskett downgraded Airbnb this week. I don’t care about the downgrade, but I do care about the reasoning. The firm sees 2023 and 2024 demand estimates as being “overly aggressive” and thinks they could fall unless trends in listings and occupancy rates improve from here. Selfishly -- considering this is a new position for me -- I would welcome a bit of stock price weakness that would accompany a modest demand guide as opening the door for building out my position.

5. SoFi (SOFI) -- Earnings Expectations

While some fintech stocks in my portfolio such as Upstart will likely continue to struggle until macro brightens more, SoFi should be just fine. Its customer cohort is quite affluent and consumer bank comps like Bank of America (which caters to a similar demographic) delivered stable results and a strong outlook. That bodes well for SoFi.

So? I expect more of the same rapid growth and margin expansion that we’ve gotten used to since this firm went public. Its top of funnel should be robust with its lofty APYs, its loan book health should be resilient based on high credit quality, its access to funds should be strong with the bank charter in hand and capital market funding supply durable, and Galileo’s/Technisys’s structural growth tailwinds should continue to blow.

Yes, the Student Loan Moratorium extension will be a 2023 headwind. But still, we’ve already been told by leadership to expect 35%+ growth with significant operating leverage regardless of if the moratorium lasts through the end of the year. Furthermore, it already overcame this headwind for the last 2+ years while the segment was a much more important contributor to results than it is today. What will the stock do post earnings? No clue. But I’m optimistic about yet another beat and raise for this company. I will cover the entire report on Monday.

6. PayPal (PYPL) -- Germany & Big Banks

a) Germany

Germany’s Cartel regulators filed claims against PayPal Europe to stop its alleged unfair limits on competition. The complaints center on rules preventing merchants from selling their products less expensively if its customers use a different payment provider. This news simply means an investigation will take place. Most of these investigations result in lengthy timelines and all bark, no bite. We shall see if this is any different. I will not be concerned about this unless it becomes much more advanced than it is today.

b) Big Banks

The banks behind peer-to-peer payment provider Zelle are now working on a digital wallet to compete with PayPal, Apple, Google, Block and others in the space. To be frank, I see tech giants and Cash App as a pressing risks for PayPal. Slick and function-rich technology is really not the strong suit of legacy banks. See Goldman Sachs’s Marcus as a recent example.

7. Olo (OLO) -- Large Brand

Olo landed Captain D’s and its 556 locations as its newest brand client. Importantly, the large chain is starting with four modules which is more than double an average client. Among the four purchased products is Olo’s newest module -- Olo Pay -- which quadruples its take rate per order. This budding product has consistently been part of new client wins. Not only is this more evidence that Olo Pay is gaining momentum with large brands… and not only will also be a decent boost to results… but it also shows that Olo is continuing to win in the Quick Service Restaurant (QSR) category which presents its largest market opportunity in the industry. Really good news.

8. Match Group (MTCH) -- Leadership Changes

New CEO Bernard Kim announced several Match Group leadership changes this past week:

• Current CFO & COO Gary Swidler will be the new President & CFO of Match.
• Will Wu is the new CTO (new role for Match).
  • He was the VP of Product at Snap where he “spearheaded Discover and Chat” before taking this position.
  • He will focus on “incubating, launching and scaling new features and technologies.”
• Malgosia Green will move from CEO of Plenty of Fish to CEO of Match Asia (new role) where “she will oversee Pairs, Hyperconnect & Asia go to market.”
• Hesam Hosseini will move from CEO of “Match and Affinity Brands” to the new CEO of “Evergreen and Emerging Brands” (new role).
• Hinge Founder/CEO will now report directly to Kim. No role change.
• Kim is still the CEO of Tinder as he continues to look for his replacement there.

Kim was a harsh critic of Match’s execution when he took over control of the company last year. Hopefully this team will execute more to his liking to foster the kind of success he delivered while running Zynga. His track record for building wildly successful app-based businesses is strong.

9. Around the Market -- Earnings Season

a) Microsoft (MSFT) -- FY Q2 2023 Earnings Snapshot

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This Quarter’s Results vs. Expectations:

• Missed revenue estimates by 1% & missed its guide by 0.4%.
  • Productivity & Business beat guidance by 1.2%.
  • Intelligent cloud beat guidance by 0.5%.
  • Personal computing (PC) missed guidance by 3.4%.
• Beat non-GAAP EBIT estimates by 2% (GAAP missed by 3.8%).
• Beat non-GAAP EPS estimates of $2.31 by $0.01.

Key Context

• Azure grew 31% (38% FX neural vs. guide of 37% FX neutral) vs. 46% YoY (42% FX neutral).
• Cloud Gross Margin expanded 200 basis points (bps; 1 bps = 0.01%) YoY as energy costs fell and its accounting structure was tweaked.
• Its recently announced round of layoffs hit income statement margins during the quarter.
  • Headcount grew 19% YoY but that’s mainly via M&A as QoQ growth was < 1%.
• Cash flow was hit as expected by a $2.4B cash tax payment (the result of a law change).

Balance Sheet Data:

• Returned $9.7B to shareholders vs. $9.7B QoQ & $10.9B YoY.
• Nearly $100B in cash, equivalents & investments & $44B in long term debt.

Next Quarter Guidance:

• $51 billion revenue guide for next quarter missed estimates by 3.2%.
  • Also guided to Azure growth in the low 30% range.
• $20.5 billion EBIT guide for next quarter missed estimates by 4.6%.

Notes from the Call:

CEO Satya Nadella told us that “organizations are exercising caution & optimizing cloud usage given macro uncertainty” and so Microsoft is “aligning cost structure with growth." He mentioned budding AI use cases as keys for making companies more efficient during these hectic times. Specifically, he pointed to ChatGPT’s rapid growth (where Microsoft just invested more to become the exclusive cloud provider) and how 200+ clients including KPMG are using the integrated solution.

PC demand was by far the most notable macro-related headwind. We are still comparing vs. the end of a large demand pull-forward and personal computing hardware is more cyclical than the rest of its operations. This was the source of the slightly underwhelming results & guide.

Some macro headwinds seem to be easing with foreign exchange headwinds set to slow from 500 basis points this quarter to 300 basis points next.