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Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Amazon.com, Inc. (NASDAQ: AMZN) will report results next week. Here are the key numbers that we’re watching.

Earnings Preview Summary: Rotation?

Microsoft, Alphabet, and Amazon have enjoyed strong stock performance year to date. Going forward, consensus 2025 P/E multiples for these stocks are in the 22-32x range with consensus target prices expecting 5-15% further upside for these three mega caps. Performance in the quarter coupled with the outlook will likely determine the path of these three mega-cap tech stocks into the H2 2024. With the sentiment moving toward a September rate cut, the small caps have been rallying. Will investors rotate out of the mega caps and put money to work elsewhere or stay put?

Microsoft (MSFT) Q4 2024 Earnings Preview: AI to drive upside?

Figure 1: Microsoft – consensus expectations for Q4, past earnings surprises, consensus revisions, and CAGR

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Source: Visible Alpha consensus (July 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 Q4 have remained at $64.3 billion since April, 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 $105.5 billion for FY2024, driven by Azure.  The profitability of this segment is a source of debate among analysts. Currently, the Q4 2024 consensus of 12 analysts for the Intelligent Cloud business’s operating profit margin is 44.3%, but ranges from 42% to 46%, suggesting this segment may deliver a surprise in the Q4 release. This range however has narrowed by 200 bps since last quarter.

We are closely watching what the company will say about the outlook for AI and Copilot, as Microsoft’s FY 2024 CapEx numbers have continued to increase steadily since last year. According to consensus projections, CapEx estimates have climbed over $15 billion from $29 billion in January 2023 to currently $44.5 billion in FY 2024, up now over 3x from FY 2019 and ahead of both Meta’s (NASDAQ: META) and Alphabet’s (NASDAQ: GOOGL) estimated CapEx levels.

Microsoft stock has traded up 13.8% since the April earnings release, but is up 20.6% ytd, slightly outperforming the 19% delivered by the S&P 500. The consensus P/E for 2025 is 31x. Could the Q4 release and 2025 outlook drive more meaningful outperformance in the stock?

Figure 2: Microsoft consensus estimates

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

Alphabet (GOOGL) Q2 2024 Earnings Preview: What’s happening to margins?

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

GOOGL 1

Source: Visible Alpha consensus (July 17, 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 Q2 2024 have remained around $84 billion since last quarter, driven by resilience in its ad business. In addition, the Q2 consensus expectations for operating income and EPS remained around $26.5 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 Q2 or the full year. However, consensus EPS of $1.85/share ranges from $1.66 to $2.01 for Q2, 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. The margin turned positive in Q1 2023, but missed expectations in Q3 by 200 bps, coming in at 3% instead of 5%. More recently, the Q1 2024 Cloud margin came in at 9.4%, beating consensus by ~200 bps. Looking ahead to Q2 2024, analysts expect the Cloud business to generate a 9.5% operating profit margin, up 260 bps since last quarter. However, the 22 estimates range from 2.9% to 16.1% with 10 of the analysts estimating the margin to be over 10% and 4 analysts estimating it to be below 7%, signaling 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 over 10% in FY 2024, but ranges from 4.3% to 15%. Longer-term, the consensus Cloud margin is estimated to generate a 15% margin by the end of FY 2026, ranging from 9.5% to 20.6%. What will be the right margin level for Alphabet’s Cloud business?

Alphabet stock has traded up 19.6% since last quarter’s April release and up 33% in 2024, outperforming the S&P 500’s 19% return.  The consensus P/E for 2025 is 22x. The stock has remained resilient, driven by solid ad growth in its core business. However, questions remain about the profitability of the Cloud business and its Unallocated and Other Bets. Could the Q2 release provide more visibility into the trajectory of 2024 profitability and give shares a further boost?

Figure 2: Alphabet consensus estimates

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

Amazon.com (AMZN) Q2 2023 Earnings Preview

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

AMZN 1

Source: Visible Alpha consensus (July 18, 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.

Amazon Q2 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q2 have come up slightly from last quarter, from $147.8 billion to $148.6 billion, driven by strength in Amazon’s online retail business. Consensus expectations for AWS  have remained around $25.9 billion. The focus will likely be on the Q2 performance and 2024 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 an estimated 5.9% for Q2. Operating margin expectations for North America have edged higher since April, but are lower than the 6.2% margin initially targeted after Q1. For 2024, the estimated margin range increased from 3.6% to 6.3% last quarter to 5.3% to 7.6% now, with consensus at 6.3%, instead of at the top end of the range. What will the company say about the outlook for the online business?

AWS margin came in at 37.6% last quarter, and for Q2, has steadily increased up to an expected 32.2% level, up nearly 350 bps since early February. There is, however, a significant range of estimates for the Q2 AWS margin into next week’s release, with analysts expecting from 22% to 37%.

The stock has traded up 10% since late April and up 29% year to date, outperforming the S&P 500.  The consensus P/E for 2025 is 33x. Could the Q2 release provide the next positive catalyst for the stock?

Figure 2: Amazon consensus estimates

AMZN 2

Source: Visible Alpha consensus (July 17, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on July 16, 2024.

On June 24, U.S.-based Pool Corporation (NASDAQ: POOL), a distributor of swimming pool supplies and equipment, revised its 2024 earnings guidance amid slower demand during the swimming pool season. With peak selling season almost complete, the company now expects new pool construction activity to be down 15% to 20% in 2024 vs the prior year, with remodel activity down approximately 15%. Following the announcement, Visible Alpha consensus estimates show analysts have significantly revised estimates for Pool Corporation. For the upcoming second-quarter earnings, the company’s net sales are expected to decline by -5% year over year, with the company generating $1.8 billion in net sales, down -6.5% from the $1.9 billion estimated prior to the revised guidance.

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Pool Corporation is the largest distributor of Pentair’s (NYSE: PNR) pool equipment. Following the revised guidance by Pool, analysts have also revised their projections for Pentair’s pool segment, which accounts for approximately 34% of the company’s net sales. For the upcoming quarter, Pentair is now expected to generate $367 million in pool sales, down -2.2% from the earlier estimate of $375 million, before Pool Corporation’s revised guidance.  

Pentair is set to report second-quarter results on July 23, with Pool Corporation following on July 25.

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Netflix Inc. (NASDAQ: NFLX) will report Q2 2024 results on Thursday, July 18, 2024. Here are the key numbers that we’re watching.

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

Netflix 1

Source: Visible Alpha consensus (July 12, 2024). “Surprise” indicates the direction that specific line items beat or missed. “Revisions” show the trajectory of line items from a given date.

Netflix Q2 2024 Earnings Preview

According to Visible Alpha consensus, total revenues of $9.5 billion and operating income of $2.5 billion expected for Q2 2024 have slightly ticked up for sales but down for operating profit from last quarter, driven by consistent expectations for U.S. streaming. Since last quarter, ad-supported revenue has also inched up, but is down over 50% from January 2023. While there does not appear to be a shift in expectations from the April quarter, questions remain around the investments in the ad tier, increased competition, and its impact on paid sharing.

The stock has traded up around 7% to $652 since last quarter’s release, driven by the resilience in the company’s net adds. Will the outlook for the rest of 2024 support the upward trajectory of Netflix’s stock price?

Figure 2: Netflix – consensus revenues, operating income, EPS, and stock performance

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Source: Visible Alpha consensus (July 12, 2024). Stock price data courtesy of FactSet. Netflix stock price is as of the market close on July 11, 2024.

Amazon’s (NASDAQ: AMZN) AWS Financial Services Symposium 2024 took place on June 6, 2024 in New York City.

This event featured an array of organizations operating in the financial services space. The generative AI (GAI) theme was strong, bringing together topics about risk, data, infrastructure, LLMs, costs, hallucinations, and the challenges of scaling GAI.

Speakers were largely from the technology side of the enterprise and their presentations incorporated a perspective on the GAI tech stack. Most of the presenters agreed that LLMs are very useful, but were quick to highlight the high cost and complexity, especially for external-facing GAI solutions.

Key takeaways from AWS Financial Services Symposium 2024

  • Move to the cloud: Significant amounts of data still lives on-premises, especially within the financial services industry. However, the cloud seems to provide a better environment for working with LLMs, given the significant computing needs for GAI. AWS seems likely to benefit from the increasing transition by financial services enterprises to move more to the cloud.
  • ROI vs FOMO: Companies that do successfully implement and deploy use cases may make their organizations more productive and competitive. However, the ROI, given the high cost, seems to be driven more by FOMO than by quantifiable improvements to the business fundamentals.
  • The devil is the domain: Domain expertise seems to be an important component to successful deployment of GAI solutions to end users. These solutions cannot be developed in a technology silo. The customers’ or end-users’ distinct perspective needs to be included at each layer of the stack. Domain experts need to be leveraged to identify hallucinations and the integrity of the GAI interactions.

While financial services is only one vertical, the presentations and discussions provided a peek into the complexities of creating GAI products and solutions. Based on data shared by Deloitte at the Symposium, budgets are seeing a 2x to 5x increase from 2023, driven by spending on AI. AWS looks well-positioned to benefit from these trends and the overall increased transition to the cloud by enterprises, as GAI gains momentum.

Based on Visible Alpha consensus, AWS margin has steadily been increasing since last year. In particular, AWS margin for Q2 has ticked up over 120 basis points since April 30, 2024. The FY 2024 AWS margin is now expected to be 33.5%, up over 500 bps since January 2023. Will AWS margin continue to expand in 2025 and beyond?

Figure 1: Amazon consensus estimate revisions
Figure 1 Amazon consensus estimate revisions

Source: Visible Alpha consensus (June 11, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on June 10, 2024.

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
Figure 1 Apple Q2 2024 Earnings Preview

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
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
Figure 3 Amazon Q1 2024 Earnings Preview

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
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.

 

Netflix Inc. (NASDAQ: NFLX) will report Q1 2024 results on Thursday, April 18, 2024. Here are the key numbers that we’re watching.

Figure 1: Netflix – consensus expectations for Q1, past earnings surprises, revisions, and CAGR

Netflix Earnings Preview Q1 2024

Netflix Q1 2024 earnings preview

According to Visible Alpha consensus, total revenues of $9.3 billion and operating income of $2.4 billion expected for Q1 2024 have remained flattish from last quarter, driven by consistent expectations for U.S. streaming. Since last quarter, ad-supported revenue has also remained flattish at $135 million, but down over 50% from January 2023. While there does not appear to be a shift in expectations from the December quarter, questions remain around the investments in the ad tier, increased competition, and its impact on paid sharing.

The stock has traded up around 23% since last quarter’s December release and has remained higher (currently fluctuating above $600), close to its 52-week high of $639, driven by the resilience in the company’s net adds. Will the outlook for the rest of 2024 support the upward trajectory of Netflix’s stock price?

Figure 2: Netflix – consensus revenues, operating income, EPS, and stock performance

Netflix Consensus Estimates Q1 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

Amazon Key Financials

Source: Visible Alpha consensus (February 5, 2024)

Amazon.com, Inc. (NASDAQ: AMZN) will report Q4 2023 results on Thursday, February 1, 2024. Here are the key numbers that we’re watching.

Figure 1: Amazon – consensus expectations for Q4, past earnings surprises, revisions, and CAGR

Amazon com Earnings Preview

Source: Visible Alpha consensus (January 26, 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.

Amazon Q4 2023 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q4 have come up slightly from the beginning of last year, from $163 billion to $166 billion, driven by strength in Amazon’s online retail and advertising businesses, while AWS expectations have come down. The focus will likely be on the Q4 performance and 2024 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 4.3% now, ahead of Q4 earnings. Operating margin expectations for North America have remained at current levels since October. For 2024, the estimated margin ranges from 3.6% to 6.3%, with consensus at 5.1%. What will the company say about the outlook for the online business?

AWS margin came in at 30% last quarter, and has steadily increased back to the expected 28% level forecast at the beginning of last year for Q4 and 2024. There is, however, a significant range of estimates for the Q4 AWS margin into this week’s release, with analysts expecting from 24% to 31%.

The stock has traded up over 30% since last quarter’s October release, outperforming the S&P 500. Could the Q4 release provide the next positive catalyst for the stock?

Figure 2: Amazon consensus estimates

Amazon com Consensus Estimates

Source: Visible Alpha consensus (January 26, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on January 25, 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

Nielsen Share of Viewing Data

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

Netflix Consensus Expectations

Source: Visible Alpha consensus (January 25, 2023)

Amazon.com (NASDAQ: AMZN) reported earnings for Q3 2023 after the market close on Thursday, October 26, 2023. What happened during the release and earnings call, and what are the key questions to focus on?

With total sales coming in at $143.1 billion, slightly above the top end of guidance, and operating profit at $11.2 billion, over 40% ahead of consensus and 32% ahead of the top end of guidance, AMZN delivered a strong Q3, sending the shares up 5% in the after-market following the release. In particular, the operating income was $3.5 billion ahead of consensus estimates, delivering an 8% operating profit margin, significantly above the 5.5% expected by analysts.

The company released Q4 guidance of $160-167 billion in revenues and $7-11 billion in operating profit, in line with current expectations of $165.8 billion in sales and $10.1 billion in operating profit. For 2023, Visible Alpha consensus for AMZN moved up (from Q2 to now) from $562 billion to $571 billion in total sales and from $22 billion to $34 billion in operating profit.

Driven by improvements in the North America online business and stability in AWS, analysts project AMZN’s total operating profit margin to return to 6% in 2023, more than double 2022’s 2.4% level, and rise to 7% by the end of 2024 and 10% by the end of 2026.

1. How did AWS perform?

AWS revenues were in line with expectations at $23.1 billion in sales, but the operating profit was $7 billion, significantly outperforming. This resulted in a 30.3% operating profit margin, which was 580 basis points ahead of the 24.5% expected according to Visible Alpha consensus. Analysts had been projecting AWS revenues of $23.1 billion and operating profit of $5.6 billion in Q3. For Q4, analysts had been projecting AWS operating profit margin of 24.8%. However, this estimate has been revised up to 27.9%.

Since Q2, the consensus margin for AWS has remained at 24.4% for 2023, and there is now less debate about the future performance of AWS margin for 2023. For 2024, however, the range is from 22-30%. Based on comments from CEO Andy Jassy, most of the optimization will happen in 2023. However, Jassy explained that this is now getting offset by a shift to new workloads, suggesting a more upbeat outlook for the AWS business into 2024. He also reiterated this quarter that 90% of IT is still on-premises and more is likely to move to the cloud with their Generative AI (GAI) initiatives.

AWS has picked up the pace on the AI front. CEO Andy Jassy pointed to Bedrock helping to fuel early traction in GAI. Jassy explained that companies will want to leverage LLMs, but will need to customize the models and applications. Applications built on top of the LLMs will likely be key. Plugins available in ChatGPT4 provide a sneak peek into how companies and their customers may see GAI integrated into existing applications.

New Question: Will AWS margin remain at 30% next year?

2. Is the advertising business continuing to show growth?

Analysts had been expecting the Ads business to grow 22% in Q3 to $11.6 billion, and 22% in 2023 to $45.9 billion. Amazon delivered a nice beat in Q3 with $12.1 billion, up 26% year over year. Expectations for ad revenue by 2024 are at $55 billion, with the most aggressive estimates at close to $59 billion, down from $70 billion in Q1. The company reiterated that they are still in the early days for Ads.

New Question: How significantly will AI help grow ad revenues at AMZN 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, delivering margin improvement. The company has continued to show margin improvement, going from 1% in Q1 to 4% in Q2 and now 5% in Q3, in the North America online business, and the company noted that they still have more to go. Analysts project AMZN’s North America operating profit margin to be 4.2% for Q4, leading to an expected 4% for 2023. By the end of 2024, analysts expect a further 100-basis-point margin expansion in North America to 5%.

In addition, analysts had expected a -3% operating loss margin for the international business, but instead, it almost broke even. Analysts are currently not expecting this business to break even until the end of 2025, which may be too conservative given this quarter’s improvement.

The company has made significant improvements to its regional fulfillment centers and these are projected to continue to enhance margins. In addition, the company is also finding more efficiencies to support margin growth.

New Question: Will Amazon’s North America online business be able to generate a 10% operating profit margin by the end of 2026?

Figure 1: Amazon’s key financial items

Amazon

Source: Visible Alpha consensus (October 31, 2023)