Microsoft, Alphabet, and Amazon: Earnings Previews

Earnings Preview Summary

Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Amazon (NASDAQ: AMZN) have seen mixed stock performance year to date. Going forward, consensus 2025 P/E multiples for these stocks are in the 20-30x range with consensus target prices expecting over 20% further upside for these three mega caps. This is an uptick from last quarter, as shares have pulled back. Performance in the quarter coupled with the outlook will likely determine the path of these three mega-cap tech stocks into the next quarter and next year. Will investors rotate out of the mega caps and put money to work elsewhere or stay put?

Microsoft (MSFT) Q1 2025 Earnings Preview: AI to Drive Upside?

Microsoft – Consensus Expectations for Q1, Past Earnings Surprises, Consensus Revisions, and CAGR

Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

According to Visible Alpha consensus, total revenues expected for Q1 have remained around $64 billion since the April quarter, driven by resilience in its core business segments. In particular, the Intelligent Cloud segment, which makes up over 40% of total revenues, is projected to remain solid, with consensus estimates now expecting $126.6 billion for FY2025, driven by Azure.  While Azure revenues are expected to generate $21 billion in Q1, the profitability of the Intelligent Cloud segment is a source of debate among analysts. Currently, the Q1 2025 consensus of 8 analysts for the Intelligent Cloud business’s operating profit margin is 45.9%, but ranges from 44% to 49%, suggesting this segment may deliver a surprise in the Q1 release. This range expanded by 100 bps since last quarter.

We are closely watching what the company will say about the outlook for AI and Copilot, as Microsoft’s FY 2025 CapEx numbers have continued to increase steadily since last year. According to consensus projections, CapEx estimates are projected to increase over $15 billion from $44.5 billion at the end of FY 2024 to $59.0 billion in FY 2025, up nearly 4x from FY 2020.

Microsoft stock has traded up 4.9% since the April earnings release, and is up 11.4% ytd, meaningfully underperforming the 23% delivered by the S&P 500. The consensus P/E for FY 2026 is 27x. Could the Q1 release and 2025 outlook begin to drive outperformance in the stock?

Microsoft – Consensus Estimate Revisions

Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.

Alphabet (GOOGL) Q3 Earnings Preview: What’s Happening to Margins?

Alphabet – Consensus Expectations for Q3 2024, Past Earnings Surprises, Consensus Revisions, and CAGR

Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Alphabet Q4 2023 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 2024 have remained around $86 billion since the April quarter, driven by resilience in its search business. In addition, the Q3 consensus expectations for operating income and EPS remained around $26 billion and $1.85/share since last quarter. Questions have been emerging about the impact of AI on its core business, but have not impacted consensus revenue estimates for Q3 or the full year. However, consensus EPS of $1.85/share ranges from $1.64 to $1.98 for Q3, driven by differing assumptions around costs. It will be interesting to hear what Alphabet says about the outlook.

We are closely monitoring the trend of the Cloud business. The operating profit margin has been trending better. Analysts expect the Cloud business to generate a 10.4% operating profit margin in Q3 2024, down 90 bps since last quarter. However, the 25 estimates range from 4% to 14%, signaling continued divergent views about the performance of this business.

For the full year, analysts are also split in their views. For the Cloud business, Visible Alpha consensus expects the operating profit margin to hit 11% in FY 2024, but ranges from 8.8% to 13.4%. Longer-term, the consensus Cloud margin is estimated to generate a 15.5% margin by the end of FY 2026, ranging from 10.8% to 20.5%. What will be the right margin level for Alphabet’s Cloud business?

Alphabet stock has traded down -9% since last quarter’s release and up 19.8% in 2024, underperforming the S&P 500’s 23% return. The consensus P/E for FY 2025 is 20x and 16x for FY 2026. Questions remain about the profitability of the Cloud business and its Unallocated and Other Bets. Could the Q3 release provide more visibility into the trajectory of 2025 profitability and give shares a boost?

Alphabet – Consensus Estimate Revisions

Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.

Amazon.com (AMZN) Q3 2023 Earnings Preview

Amazon – Consensus Expectations for Q3, Past Earnings Surprises, Revisions, and CAGR

Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

According to Visible Alpha consensus, Online store revenues expected for Q3 have come up slightly from last quarter, from $58.8 billion to $59.6 billion, driven by strength in Amazon’s North America online retail business. Consensus expectations for AWS expectations have remained around $27 billion. The focus will likely be on the Q3 performance and the remaining 2024 outlook for the North America and AWS margins and their impact on EPS. The critical Q4 holiday selling period will be an important read into the consumer that may set the tone for FY 2025.

The North America operating margin has increased significantly from a meager 1.1% at the beginning of last year to an estimated 5.7% for Q3 2024. Operating margin expectations for North America have ticked down 60 bps since August, due to debates about the retail business. The 6.2% margin initially targeted after Q1 dropped to 5.7%. For Q3, the estimated margin ranges from 4.0% to 7.8%, with consensus at 5.7%. The estimated Q4 margin is expected to be 6.5% and 5.9% for the FY 2024. What will the company say about the outlook for the North America online retail business and the impact of the Kuiper investments?

AWS margin came in at 35.5% last quarter, and is expected to decline quarter-over-quarter 230 bps. For Q3, expectations have steadily increased up to 33.2%, an increase of over 200 bps since the April quarter. There is, however, a significant range of estimates for the Q3 AWS margin into this month’s release, with analysts expecting from 30% to 37%. The debate around AI is fueling the different assumptions.

The stock has traded up 7.3% since late April and up 23.5% year to date, in line with the S&P 500.  The consensus P/E for FY 2025 is 32x and 25x for FY 2026. Could the Q3 release provide the next positive catalyst for the stock?

Amazon – Consensus Estimate Revisions

Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024. Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.