Visible Alpha Consumer Services

Apple (NASDAQ: AAPL) and Amazon (NASDAQ: AMZN) will report results next week. Here are the key numbers that we’re watching.

Apple’s Fiscal Q2 2024 Earnings Preview

Total revenues expected for fiscal Q2 have continued to come down from the beginning of last year, according to Visible Alpha consensus, from $103 billion to $90 billion, driven by decreased optimism about the iPhone. Expected Q2 iPhone 15 units range from 34 million to 40 million, with consensus at 36 million. Overall Q2 and full year iPhone revenue expectations have continued to trend down since January 2023. Currently, Q2 is expected to deliver $46 billion in iPhone sales and $199 billion for 2024.

While iPhone sentiment has come down, expectations for the high-margin Services segment and for total operating profit have remained consistent. Gross margin for the Services segment is over 70%, significantly higher than the 36% gross margin for Products. It will be helpful to hear what the company says in the earnings release about growth in Services and if this is enough to offset declines in iPhone sales.

Vision Pro will show its first set of results this quarter. In Q2, analysts estimate 127,000 units sold, generating $434 million. For the full year, consensus revenue estimates for the Vision Pro have ticked up recently from an initial projection of around $900 million to a current $1.1 billion.

The stock has traded down 10.7% since last quarter’s release, underperforming other Big Tech stocks and the S&P 500. Could the Q2 release provide a positive catalyst for the stock?

Figure 1: Apple – consensus expectations for Q2 2024, past earnings surprises, revisions, and CAGR

Source: Visible Alpha consensus (April 24, 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.

Figure 2: Apple consensus estimates

Source: Visible Alpha consensus (April 24, 2024). Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on April 23, 2024.

Amazon’s Q1 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q1 have come up slightly from Q4 2023, from $141.8 billion to $142.6 billion, driven by expected resilience in Amazon’s North America retail, advertising, and AWS businesses. The focus will likely be on the Q1 performance and outlook for the online retail and AWS margins, and their impact on EPS.

The North America retail operating margin has increased significantly from a meager 1.1% at the beginning of last year to 5% currently, ahead of Q1 earnings. Operating margin expectations for North America have been moving around since October, and considerable debate exists about the right level. For Q1 2024, the estimated margin ranges from 3% to 7%, with consensus at 5%. The current consensus 5% margin is slightly toned down from 5.3% earlier in the year. What will the company say about the outlook for the online business?

AWS margin came in at 27% last year and 29.6% last quarter. For Q1, analysts are expecting 29%. There is, however, a significant range of estimates for the Q1 AWS margin into next week’s release, with analysts expecting from 21-34%, an increase from the 24-31% range last quarter.

The stock has traded up 12% since last quarter’s release, outperforming the S&P 500. Could the Q1 release provide the next positive catalyst for the stock?

Figure 3: Amazon – consensus expectations for Q1 2024, past earnings surprises, revisions, and CAGR

Source: Visible Alpha consensus (April 24, 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.

Figure 4: Amazon consensus estimates

Source: Visible Alpha consensus (April 24, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on April 23, 2024.

Amazon.com (NASDAQ: AMZN) reported earnings for Q4 2023 on Thursday, February 1, 2024. What happened during the release and earnings call, and what are the key questions to focus on?

With total sales coming in at $170.0 billion, slightly above consensus, and operating profit at $13.0 billion, over 20% ahead of consensus, Amazon delivered a strong Q4, sending the shares up 8% following the release. In particular, Amazon delivered an 8% operating profit margin again this quarter, above the 6.4% expected by analysts.

The company released Q1 guidance of $138.0-143.5 billion in revenues and $8.0-12.0 billion in operating profit, inline with expectations of $142.4 billion in sales and $11.0 billion in operating profit. Since January 2023, Visible Alpha consensus for FY 2024 declined slightly from $645.1 billion to $640.7 billion in total sales, but increased from $38.8 billion to $54.4 billion in operating profit.

Driven by improvements in the North America online business and strength in AWS, analysts project Amazon’s total operating profit margin to grow to 8.5% in 2024, more than triple 2022’s 2.4% level, and rise to 10% by the end of 2025 and 12% by the end of 2027.

1. How did AWS perform?

AWS revenues were in line with expectations at $24.2 billion, but operating profit was $2.6 billion above consensus. This resulted in a 29.8% operating profit margin, which was 140 basis points ahead of the 28.4% expected according to Visible Alpha consensus, but driven mainly by headcount reductions. While this result is a notable improvement from Q4 2022’s 24% margin, it is 50 bps lower than Q3 2023’s 30.3% margin.

Since the Q4 earnings release, the consensus margin for AWS climbed to 31.0% starting from the second half of 2024, and is expected to remain at that level through FY 2027. For Q1 2024, however, the range is 25-33% and 28-33% for FY 2024. Longer-term, there is significant debate about both top-line growth and margin levels for the AWS business, which is likely driven by varying views on the pace of cloud migration and the development of GenAI applications.

AWS has picked up the pace on the AI front. CEO Andy Jassy pointed to Bedrock helping to fuel early traction in GenAI. Jassy explained that GenAI is and will continue to be an area of pervasive focus and investment across the company and believes it will “ultimately drive tens of billions of dollars of revenue for Amazon over the next several years.” (Visible Alpha’s AI Monitor tracks the pace of AI-exposed revenue growth, including Amazon’s AWS business.)

New Question: Will AWS margin remain at 30-31% levels in 2024-2025?

2. Is the advertising business continuing to show growth?

The Ads business continued its strength by growing 26% in Q4 to $14.5 billion and 24% in 2023 to $46.9 billion, in line with expectations, driven by sponsored products. Jassy reiterated that they are still in the early days for Ads and noted in the quarter that “streaming TV advertising continues to grow quickly.” CFO Brian Olsavsky further explained that the company is looking for ways to increase advertising in its streaming properties, including Fire TV, Prime Video, Free V and Twitch. Jassy also noted that Amazon is focused on improving its measurement and transparency, enabling brands to see the payback of their advertising spend.

Consensus expectations for ad revenue in 2024 are at $57.0 billion, with the most aggressive estimates at $60.0 billion, down from $70 billion expected in Q1 last year. Longer term, there is also debate about the magnitude of revenue growth for this business. By the end of 2026, analysts expect this business to generate $78.2 billion in revenues, but the range is from $67.1-91.0 billion.

New Question: Will Amazon be able to maintain more than a 20% CAGR for the Ads business going forward?

3. What’s supporting Amazon’s online margin improvement?

Both the North America and International online businesses saw sales and operating profit come in ahead of expectations again, delivering margin improvement. In 2023, Amazon delivered 500 bps of margin improvement in North America, going from 1.2% in Q1 2023 to 6.2% in Q4, and the company noted that there’s still more to go. According to Visible Alpha consensus, analysts project Amazon’s North America operating profit margin to remain at 6% for 2024. However, margin assumptions range from 4-8%, while top-line growth is estimated to remain consistent at 10%. This range continues to widen through 2027, with estimates from 6% to 14%.

Combined with the ongoing strength and success of advertising, the company has also made significant improvements to its regional fulfillment centers. The benefits of regionalization and advertising are projected to continue to enhance margins.

New Question: Will Amazon’s North America online business be able to generate a 10% operating profit margin by the end of 2025?

Figure 1: Key financials for Amazon

Source: Visible Alpha consensus (February 5, 2024)

Netflix Inc. (NASDAQ: NFLX) reported Q4 2023 results on Tuesday, January 23, 2024.  What happened in Q4 and what may be next?

In a pivot from the usual recorded interview, Netflix live streamed their earnings call on YouTube. Spencer Wang, vice president of finance, hosted the call and asked the co-CEOs questions. The discussion and debate from the earnings interview were around the growth of engagement and monetization and the potential for advertising to drive revenues while maintaining margin.

1. How is the landscape shifting for Netflix?

In previous quarters, Netflix shared a Nielsen chart showing a breakdown of major players’ share of TV screen time in the U.S., where YouTube has been leading. This quarter, however, in addition to the U.S. data they included Nielsen data from other key markets, including Brazil and Mexico, where YouTube leads by a substantial margin.

Given the recent WWE announcement and the newly livestreamed earnings call, is Netflix looking to provide more live events? While the company noted on their call that they prefer to build and not buy, could more partnerships be in the works?

Figure 1: Share of TV screen time

Source: Netflix Q4 Shareholder Letter (January 23, 2023)

New question: Going forward, how will live events play a role in Netflix’s content offering?

2. What happened in Q4 and how has the outlook changed?

Revenue

Q4 performance: Q4 year-over-year revenue growth of 12% was $115 million ahead of consensus estimates, driven by strong net adds. The company reported 13 million new subscribers, driven by both the U.S. and overseas regions. The UCan market added 2.81 million new subscribers, which demonstrated that its new paid-sharing program has worked. There is concern that password-sharing customers have been pulled forward, and could show a slowdown going forward.

Q1 2024 expectations: The company guided Q1 to 13% year-over-year revenue growth with revenue of $9.3 billion, in line with consensus estimates, and supported by the continued positive expected revenue impact of paid-sharing, growth of the ads business, and further monetization. Regarding pricing, the company will be providing a range of prices and plans.

FY 2024 expectations: The company expects to grow revenues by increasing engagement trends and reducing churn with a more diverse entertainment offering. Gaming and the growth of ads could be key drivers in 2024. According to Visible Alpha consensus, analysts expect the company to generate revenue of $38.6 billion in FY 2024, up from expectations of $38 billion in January 2023.

Operating profit

Q4 performance: Netflix delivered Q4 operating profit of $1.9 billion and a 17% operating profit margin, almost $300 million ahead of consensus estimates coming into the quarter.

FY 2024 expectations: Looking ahead, the operating profit margin outlook for FY 2024 is now expected to be 24%, up from 22-23%, driven by the strength in Q4 continuing into 2024 and an assumption around a weaker dollar.

Longer-term: The company did not give a long-term margin target. Based on Visible Alpha consensus, operating profit margin is expected to grow from 24.1% in FY 2024 to 30% in FY 2027. Currently, consensus estimates project an improvement from FY 2024 in the operating margin, and for this to grow to 30% by the end of FY 2027, which may be aggressive given the investment likely required to scale the ads business. There is significant debate among analysts with respect to FY 2027 margin estimates, which range from 26% to 33%.

New question: Is the longer-term pace of margin expansion too aggressive?

3. What additional visibility into the Ads business was provided in the Q4 release?

According to the company, in Q4, ads membership increased 70% quarter-on-quarter and accounts for 40% of new sign-ups, up from 30% last quarter. In the Q4 shareholder letter and earnings call, management highlighted that they aim to drive engagement to attract advertisers, which they expect to help the ads business continue to scale.

Netflix remains upbeat about the long-term opportunity, given the size of their user base. The company continues to have work to do on advertising business features, both to scale and to build out the technical capabilities, in order to create formats that brands will value. In particular, the company called out the need to continue improving the targeting and measurement they offer to their customers.

Long-term ad-supported revenue expectations: Currently, consensus estimates project total ad-supported revenue to expand to nearly $10 billion by the end of FY 2027, up over 15x from FY 2023 levels. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $3.9 billion to $18.6 billion, which narrowed from $2.9 billion to $19.6 billion last quarter.

New question: How big can the ads business become?

Figure 2: Key financials for Netflix

Source: Visible Alpha consensus (January 25, 2023)