McDonald’s Value Strategy to Boost Growth by 2025
By: Shankar Bose
McDonald’s Corporation (NYSE: MCD) reported its Q2 2024 earnings on July 28, 2024, failing to meet consensus expectations in the top and bottom-line estimates.
Source: Visible Alpha consensus (September 04, 2024)
For the first time since the COVID-19 pandemic, McDonald’s reported a negative growth in comparable sales across all divisions. Total comparable sales shrank -1.0%, missing Visible Alpha consensus estimates by 166 basis points (bps). As consumer traffic declined across all major markets, comparable sales across international developmental licensees & corporates (IDLC), international operated, and U.S. segments declined by -1.3%, -1.1%, and -0.7%, respectively, in Q2 2024. The fast-food giant reported second-quarter net income of $2.02 billion, down from $2.31 billion last year, while revenue remained relatively flat at $6.49 billion.
With the broader quick-service restaurant (QSR) industry expected to see continued weaker customer traffic due to broad-based consumer pressures, analysts have revised their forecasts for McDonald’s downward. According to Visible Alpha consensus, McDonald’s 2024 revenue estimates have been revised down to $26.1 billion, reflecting a 2.95% decrease from Q1 2024 estimates and a 1.84% drop from pre-Q2 earnings projections. Comparable sales estimates have also been reduced, with Visible Alpha consensus indicating a decline of 151 bps from pre-2Q estimates and a 296 bps drop from the estimates in Q1 2024.
Source: Visible Alpha consensus (September 04, 2024)
Despite the Q2 2024 results falling short of expectations and a sluggish near-term outlook, McDonald’s stock price—which had dropped 15% by July 26, 2024—has rebounded by nearly 14% since the Q2 2024 results were announced.
This recovery is largely attributed to McDonald’s new value-based pricing strategy. In May, the company introduced $5 “value meal” promotions in the U.S., similar to moves by competitors like Burger King of Restaurant Brands International (QSR). This initiative has resonated with inflation-sensitive consumers, with 93% of U.S. franchisees extending the offer into August. Although this deal had minimal impact on Q2 sales, McDonald’s is optimistic about increasing customer traffic and expects sales to improve in Q4 2024.
In international markets such as Australia, Germany, and France, McDonald’s has launched the McSmart platform, offering value meals with two sandwich options, fries, and a drink—similar to the U.S. $5 value meal that comes with a sandwich, a four-piece order of Chicken McNuggets, fries, and a drink. Additionally, McDonald’s plans to expand its global footprint by opening 10,000 new restaurants, aiming to reach approximately 50,000 restaurants by the end of 2027.
Looking ahead, analysts anticipate that these value-focused strategies will drive positive comparable sales growth for McDonald’s in 2025 and beyond. Visible Alpha consensus projects a 2.76% increase in comparable sales in 2025, compared to a modest 0.35% growth in 2024, with total revenue expected to rise by 5.1% year-over-year to $27.4 billion.
Clicks, Bots and Points: Airbnb vs. Expedia
By: Melissa Otto, CFA
AI and Customer Impact
The integration of generative AI has presented both significant opportunities and challenges for companies to lock in sales of their products and services more quickly and to address customer questions and complaints. At a micro level, AI innovations are emerging within companies as bots, summaries, curation, and personalization. Looking more broadly, AI is also enhancing search functionality and capabilities in new, subtle ways.
Generative AI chatbots, like ChatGPT, seem to be expanding an app’s capabilities by synthesizing business processes and integrating customer questions and needs into a workflow solution. While human interaction is still critical, chatbots are a useful port of entry. As these chatbots potentially evolve into virtual assistants, the monetization model of search, ads, and traffic may be disrupted, as lines blur.
Travel and AI
- Online travel appears to be a compelling area for innovations from AI to potentially give companies a competitive advantage. Integrating this technology to meet customer needs, speed up engagement, and improve productivity, all point to supporting stronger fundamentals at a time when the macro backdrop may be softening.
- In particular, applying AI to the vacation rental market is an area that looks particularly compelling. Over the past 12 months, both Expedia (VRBO) (NASDAQ: EXPE) and Airbnb (NASDAQ: ABNB) have integrated AI into their user experience. These AI enhancements look poised to support sales and customer loyalty.
- While the traditional search experience still surfaces sponsored links that are paid for by advertisers, AI seems to be improving the depth of information in the results. Expedia spends over 3.5x more than Airbnb on sales and marketing expenses and this is expected to continue to increase. This significant spending for its ads and surfaced properties seems to be benefiting from the AI enhancements in Bing and Google. Both vacation rentals and hotels pop up for Expedia, but do not surface Airbnb properties or ads. With Expedia ads and properties clearly surfaced in both traditional Google Search and Bing’s Copilot, could Expedia’s VRBO take share from Airbnb?
Figure 1: Places to stay in Berlin in Bing Copilot
In this search about places to stay in Berlin using Bing’s Copilot, the AI assistant returns a few detailed suggestions. Tripadvisor reviews are integrated into the descriptions. An Expedia ad appeared at the end of the Copilot summary. The Copilot offered other links to curate the search.
Source: Google.com (August 12, 2024)
Figures 3 and 4: Places to stay in Berlin in Google
In a similar Google Search about Berlin, an Expedia-sponsored ad appeared at the top of the results summary. Within the list of search results, both hotel and apartment (VRBO) are shown to users together. Google and Tripadvisor reviews are integrated into the property descriptions and shown on a Google map.
Source: Google.com (August 13, 2024)
Source: Google.com (August 13, 2024)
Expedia launched its OneKeyCash loyalty program, which rewards customers for spending within the Expedia ecosystem. The rewards can be particularly generous for longer VRBO rentals or long-haul flights. It is worth highlighting that Airbnb does not have a loyalty rewards program. This new incentive program may lure users to book through Expedia’s VRBO, instead of Airbnb, to get rewards. In addition, since VRBO properties surface in search results, a user that comes in randomly through search may be locked in with the rewards program.
In tandem with the OneKeyCash program, Expedia’s Virtual Agent seems focused on solving customer service issues. There are a number of pre-populated buttons with specific suggestions to direct the chat. Along with the actual rewards, this chatbot helps users answer questions and address feedback, which may help with sales retention and brand loyalty. One area that may be particularly beneficial is that users can address loyalty rewards issues via the Virtual Agent.
In addition to the Virtual Agent, Expedia’s ChatGPT travel assistant within its app gives users lots of information about destinations and enables them to curate details about their travel itineraries. However, users cannot make bookings through the travel assistant and must still transact in the actual Expedia app or website. Perhaps this will change in the future, as Expedia’s plugin within ChatGPT4 enabled users to create travel itineraries and link directly to book hotels, flights, and experiences.
Figures 5 and 6: Expedia’s Virtual Agent and Chat GPT Travel Assistant
Expedia’s AI Takeaways from Q2 2024
This quote from the earnings call captures the observations about AI, loyalty, and the company’s potential to drive growth going forward. In addition to the fundamental efforts Expedia is making to its own business model, it also appears to be benefiting from the AI-related innovations happening within the broader Search tools in Bing and Google.
On the Q2 2024 call, Expedia management explained,
“We’re capitalizing on our tech investments from the last few years, while at the same time, digging into what product capabilities and configurations we need to strengthen VRBO and the Hotels.com brands. We’re getting surgical in identifying drivers of repeat behavior in addition to loyalty and app usage, whether it’s burning OneKeyCash or adopting AI-enabled products like price predictions.”
According to Visible Alpha consensus, analysts are currently expecting Expedia to see its operating profit margin improve from 13% in 2022 to 17% by 2027, driven by 300bps of gross margin improvement. Excluding stock-based compensation, consensus expects Expedia to optimize the right mix of selling/marketing, technology/content, and general/administrative costs. We are watching the role that AI will play in both driving sales growth and supporting cost reductions at the gross and operating profit lines.
Figure 7: Expedia
Source: Visible Alpha consensus (August 12, 2024)
Airbnb’s AI Takeaways from Q2 2024
While Expedia has moved faster, Management at Airbnb is taking a different approach related to AI. In their earnings call, Management highlighted how the company is taking a longer-term perspective and developing an AI travel concierge application that is native to the model. Currently, both Expedia and Airbnb both appear to spend just over a $1 billion on technology and product development expenses. As the company seems to be prioritizing long-term development, questions emerge about how this may impact the company’s cost structure and outlook. Could this threaten the future trajectory of the FY 2027 consensus operating profit margin of 32%?
Airbnb’s acquisition of GamePlanner.AI may give the company an edge in developing its travel concierge app native to the model. There is debate about whether a travel concierge AI app will give Airbnb a competitive advantage further out or, ultimately, be a disadvantage given the time and, possibly, cost it may take to develop?
On the Q2 2024 Airbnb earnings call, management discussed their AI approach.
“And so what we need to do is we need to actually develop AI applications that are native to the model. No one has done this yet.
So that’s one of the things that we’re working on. And I do think Airbnb will eventually be much more than a search box where you type a destination, add dates, and find a listing. It’s going to be much more of a travel concierge. It’s having a conversation, learning, and adapting to you. It’s going to take a number of years to develop this. And so it won’t be in the next year that this will happen. And I think this is probably what most of my tech friends are also saying, is it’s going to just take a bit more time.”
According to Visible Alpha consensus, analysts are currently expecting Airbnb to see its operating profit margin steadily increase from 24% in 2022 to 32% by 2027, driven by 1400bps of gross margin improvement. Excluding stock-based compensation, consensus expects Airbnb to increase costs at a slower pace than revenues. How will the multi-year development cost for its AI initiative potentially impact the longer-term operating profit line?
Figure 8: Airbnb
Source: Visible Alpha consensus (August 13, 2024)
Final Thoughts
AI is driving better travel lodging results by synthesizing more information in Bing and Google for users. It seems to be compounding the need for advertisers to stay front and center with their ads and the user’s engagement with their products. As the race to remain relevant to travelers continues, Expedia’s VRBO and Airbnb are approaching AI and the customer experience differently.
With the travel outlook becoming more challenging, the combination of saving the customer time with AI tools and incentivizing them to remain loyal with rewards may give Expedia an edge. However, longer term, Airbnb’s travel concierge may reimagine online travel as we know it and bring a new generation of innovation to their business model, provided it does not cost too much or take too long. The situation is still in flux as these companies invest in AI initiatives and try to triangulate these efforts to grow their existing revenue and profit streams.
Big Tech Earnings Reviews: Meta, Microsoft, Amazon & Apple
By: Melissa Otto, CFA
Big Tech companies — Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Apple (NASDAQ: AAPL) — reported their latest earnings. Here’s a recap of those earnings, some key takeaways, and the resulting shifts in analysts’ estimates, according to Visible Alpha consensus.
Summary of Earnings
For the mega-cap tech companies, this earnings season has been dominated by mixed results around the core businesses and investing in generative AI (GAI). The dynamics of juggling talent and investment in multiple layers of the stack have added complexity to the business fundamentals. The mega-cap firms are all, in their own way, enhancing aspects of infrastructure, building off the existing large language models (LLMs), and supporting an environment for creating new GAI apps. However, given the strong pace of both CapEx and OpEx spending, there has been some concern that revenues have not grown in tandem and expectations have become too high.
When will revenue growth begin to expand as rapidly as expenses?
CapEx and OpEx Snapshot
Source: Visible Alpha consensus (August 6, 2024)
Earnings Overview: META, MSFT, AMZN, AAPL
Meta Platforms’ Q2 2024 Earnings
According to Visible Alpha consensus, total revenues for Q2 were in line with expectations at $39.1 billion, driven by solid performance in the Family of Apps segment, especially in the U.S. and Europe. However, operating profit exceeded expectations by around $350 million at $14.9 billion, driven by resilience in the Family of Apps.
The company’s revenue outlook for Q3 was in line with expectations, but full-year expense guidance was better than expectations. Consensus now expects the Q3 operating profit to be $15.9 billion, nearly $1 billion higher than pre-Q levels, driven by higher profitability at the Family of Apps. For 2024, post-earnings expectations for operating income from the Family of Apps have increased by almost $2.0 billion to $82.5 billion, driven by lower expenses in the business. In addition, the projected losses from Reality Labs for 2024 have remained flat since the earnings release.
In addition, CEO Mark Zuckerberg highlighted that the company will continue to invest in the infrastructure to support Generative AI because it is expected to drive marketing and customer engagement across the Family of Apps. CapEx came in below consensus for the quarter and is projected to be at the higher end of their initial FY guidance for H2 2024 and in line with expectations. On the earnings call, Meta explained that CapEx will further increase in 2025, but based on comments from the CFO, the company plans to remain flexible and disciplined around its spending.
META stock has been an outperformer year to date, up nearly 40%, but has pulled back a bit on the tech sell-off. Will Meta remain disciplined in H2 2024 and 2025 and remain resilient?
Meta Platforms Revisions
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. META’s current stock price is as of the market close on August 2, 2024
Meta Platforms Consensus Estimates
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. META’s current stock price is as of the market close on August 2, 2024
Microsoft’s Fiscal Q4 2024 Earnings
According to Visible Alpha consensus, total revenues for Q4 were in line with expectations, coming in at $64.7 billion, driven by the Intelligent Cloud segment, which made up over 45% of total revenues and over 50% of total operating income. The profitability of the Intelligent Cloud business beat expectations by over 100 bps in the quarter. Ahead of Q4 2024, a consensus of 14 analysts for the Intelligent Cloud segment’s operating profit margin was 44%, but Microsoft delivered a 45.1% margin, finishing out FY 2024 with a better-than-expected 47% margin.
In the earnings call, Management highlighted that AI and Cloud products will continue to drive growth. However, the high expectations projected initially seem to be coming down. For 2025, Azure’s post-earnings consensus revenue edged down slightly. In addition, the overall Intelligent Cloud margin is expected to decrease nearly 170 bps year-over-year to 45.4%. The operating profit margin for this business segment is projected to remain at 45-46% levels till the end of FY 2027. Will the generative AI investments continue to drive upside to fundamentals in 2025 or have growth and margins peaked in 2024?
CapEx numbers increased by more than $2 billion expected in Q4 2024 to $13.9 billion. According to consensus projections, CapEx estimates have climbed $13.6 billion from $45.4 billion in January 2024 to currently $59 billion for FY 2025, up significantly from FY 2019 and outpacing peers. Coming out of this quarter, the 2025 CapEx estimate has increased another $4.5 billion, moving from $54.4 billion to $59 billion. Since January 2024, the consensus CapEx estimate for FY 2026 has moved up from $48.3 billion to $62.4 billion, increasing over $14 billion and demonstrating the strong pace of investment for AI platforms and tools.
Microsoft stock has been up 8.6% year-to-date, but has been an underperformer post-earnings. Could the Q1 be a catalyst for the stock?
Microsoft Revisions
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. MSFT’s current stock price is as of the market close on August 2, 2024
Microsoft Consensus Estimates
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. MSFT’s current stock price is as of the market close on August 2, 2024
Amazon’s Q2 2024 Earnings
Total revenues for Q2 were over $2 billion below consensus, driven by lower revenues in North America and International retail, but were offset by better-than-expected performance at AWS.
The North American retail operating margin increased to 5.6%, but was below the consensus expectation of 5.9%. After the Q1, consensus moved to a more upbeat 6-7% level outlook for the rest of H2 2024, but after the Q2, those expectations have now come down, especially for Q3.
AWS margin came in very strong at 35.5% in Q2, well ahead of the consensus estimate of 29%, driven by a combination of managing costs and a change in the estimated useful life of their servers. For 2024, analysts are now expecting a 34.4% margin, up from 28.3% at the beginning of the year. The company expects AWS growth to continue, driven by high demand for GAI.
The company guided to revenue of $154-159 billion, in line with consensus of $158.4 billion, and to operating profit of $11.5-15 billion, which came in below consensus of $15.7 billion, disappointing shareholders. The stock traded down 10% after the Q2 release. Could the retail business surprise to the upside in the H2 2024 or have retail margins peaked this year?
CapEx continued to increase in the quarter. Consensus for 2024 is now expected to be $70 billion, up over $5 billion since Q1. CapEx is projected to increase in 2025 to $75 billion, up significantly from $52 billion in 2023.
Amazon Revisions
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on August 2, 2024
Amazon Consensus Estimates
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on August 2, 2024
Apple’s Fiscal Q3 2024 Earnings
Total revenues for Q3 were in line with Visible Alpha consensus of $94.3 billion. Revenues of $45.1 billion from iPhone in Q3 were down 1% year-over-year. Based on consensus, Q3 iPhone 15 units were in line at 35 million, with estimates ranging from 29 million to 38 million units. China continues to decline, but this has been well understood by the market.
Overall full-year iPhone revenue expectations have started to improve post-Q3 2024. Currently, Q4 is expected to deliver $45 billion in iPhone sales and $200 billion for 2024, a small increase post-Q2.
While iPhone sentiment has come down since the beginning of the year, expectations for the high-margin Services segment and for total operating profit have remained consistent. In Q3, the Services segment delivered $24.2 billion, up 14% year over year and slightly better than consensus. Gross margin for the Services segment was a solid 74%, significantly higher than the 35.3% gross margin for Products, which was down 130 bps sequentially. The company said that it continues to see increased customer engagement, with the Apple ecosystem supporting the future growth of the Services business. Based on consensus, Services is expected to hit $118 billion at the end of FY 2026, up over $22 billion from this year’s estimate of $96.4 billion.
Vision Pro delivered another set of results this quarter, in line with expectations. For the full year, consensus revenue estimates for the Vision Pro have ticked up from an initial consensus projection of around $900 million to a current $1.2 billion.
The stock has traded up 3% around the Q2 release, and up a strong 30% since the Apple Intelligence announcement at WWDC, outperforming the S&P 500. Could iPhone upgrades start to exceed expectations in the H2 2024 or will it be a 2025 story?
Apple Revisions
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on August 2, 2024
Apple Consensus Estimates
Source: Visible Alpha consensus (August 5, 2024). Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on August 2, 2024
Microsoft, Alphabet, and Amazon: Earnings Previews
By: Melissa Otto, CFA
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?
Microsoft – consensus expectations for Q4, past earnings surprises, consensus revisions, and CAGR
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?
Microsoft consensus estimates
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?
Alphabet – consensus expectations for Q2 2024, past earnings surprises, consensus revisions, and CAGR
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?
Alphabet consensus estimates
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
Amazon – consensus expectations for Q2, past earnings surprises, revisions, and CAGR
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?
Amazon consensus estimates
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.
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.
Netflix Q2 2024 Earnings Preview
By: Melissa Otto, CFA
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
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
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.
Spotlight on Amazon (AMZN): AWS Financial Services Symposium 2024
By: Melissa Otto, CFA
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
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 (AAPL) & Amazon (AMZN) Earnings Ahead
By: Melissa Otto, CFA
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.
Netflix (NFLX) Q1 2024 Earnings Preview
By: Melissa Otto, CFA
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 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
12% margin by 2027? What’s next for Amazon’s AWS and Online Retail
By: Melissa Otto, CFA
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)
