Amazon (AMZN) Q3 2023 Earnings Preview
By: Melissa Otto, CFA
Amazon.com, Inc. (NASDAQ: AMZN) will report Q3 2023 results on Thursday, October 26, 2023. Here are the key numbers that we’re watching.
Figure 1: Amazon – consensus expectations for Q3, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (October 24, 2023). “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 Q3 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q3 have come up slightly from the beginning of the year, from $139.6 billion to $141.6 billion, driven by increased optimism about the resilience of Amazon’s revenue for retail and AWS. There is some debate about the top line performance of the profitable advertising business, with analysts expecting between $11.0 billion to $13.7 billion.
The focus will likely be on the Q3 expectations for the retail and AWS margins. The North America retail operating margin has increased significantly from a meager 1.1% at the beginning of the year to 3.8% now, ahead of Q3 earnings. While margin expectations jumped substantially from April to July, operating margin expectations for North America have continued to grind higher since July, rising from 3.1% to 3.8%. AWS margin came down to 24% in August from 28% at the beginning of the year, and has since remained at 24%. There is, however, a significant range of analyst estimates for AWS margin into Q3 earnings, with analysts expecting from 22% to 29%.
The stock has traded down slightly since last quarter’s July release but is up over 50% year to date. Could the Q3 release provide the next positive catalyst for the stock?
Figure 2: Amazon consensus estimates
Source: Visible Alpha consensus (October 24, 2023). Stock price data courtesy of FactSet. Amazon’s current stock price is as of the market close on October 23, 2023.
Three Key Questions About Netflix (NFLX) Earnings in October 2023
By: Melissa Otto, CFA
Netflix Inc. (NASDAQ: NFLX) reported Q3 2023 results on Wednesday, October 18, 2023. What happened in Q3 and what may be next?
According to Visible Alpha consensus, total revenues expected prior to the Q3 release were $8.5 billion, down from $8.78 billion at the Q2 earnings release.
The stock was trading down around -25% from the Q2 release in July to the Q3 release, but reacted positively immediately after the Q3 release, rising 12% after hours and up strongly to open the following trading day. In our preview note, we asked, “Could the Q3 release provide a positive catalyst for the stock?” Indeed, it looks like the Q3 results were solid and the outlook better than expected.
The discussion and debate from the earnings interview were around the paid-sharing program and the potential for advertising to drive revenues while maintaining margin. In addition, the company noted that the SAG-AFTRA strike is continuing.
1. The SAG-AFTRA strike continues. What are the industry dynamics at work?
According to management, a conclusion is needed for the strike, but the issues are still getting worked through. A final request for a per-subscriber levy from the guild broke down the negotiations, resulting in the SAG-AFTRA strike continuing. In the earnings call, company management noted that talent metrics will become more transparent and about engagement.
It is worth reiterating the role of AI in the strike. Actors have been concerned about where and how their images are shown, especially AI-generated images used in advertising and endorsing products and services, which may explain why the Writers Guild of America (WGA) may have reached an agreement more quickly. According to the Center for Democracy and Technology, “AI can’t write or rewrite literary material, and AI-generated material will not be considered source material under the [agreement], meaning that AI-generated material can’t be used to undermine a writer’s credit or separated rights.”
Netflix highlighted the competitive environment and presented a market share chart (Figure 1 below), which shows how both Netflix and YouTube have remained at the top. However, YouTube has pulled ahead with a share that’s now 120 basis points higher than Netflix, up 60 bps from Q2. In this new era of AI, will YouTube have an advantage over Netflix and others, given Google’s substantial AI investments? Will the SAG-AFTRA strike and issues related to AI impact Netflix’s longer-term competitiveness?
Figure 1: Share of US TV Screen Time
Source: Netflix Q3 Shareholder Letter, October 18, 2023
New question: When and how will the strike conclude, and what concessions may Netflix make, especially related to AI?
2. What happened in Q3 and how has the outlook changed?
Revenue
Q3 performance: Q3 year-over-year revenue growth of 7.8% was in line with consensus estimates. There were no upside revenue surprises in Q3. However, the company reported 8.8 million new subscribers, driven mainly by overseas regions. The U.S. market added 1.75 million new subscribers, which demonstrated that its new paid-sharing program is working. While monetization for this program is happening, it has been at a slower pace than some of the more optimistic analysts originally expected. Paid sharing has been rolled out as planned in every region. According to Netflix’s Q3 shareholder letter, “The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention.”
Q4 expectations: The company guided Q4 to 11% year-over-year revenue growth with revenue of $8.7 billion, in line with consensus estimates, and supported by the continued positive expected revenue impact of the paid-sharing program. In addition, the company will be adjusting prices in the U.S., UK, and France. Total revenue expectations for FY2023 have remained around the current level of $33.7 billion since last quarter’s release on July 18, 2023.
FY2024 expectations: FY2024 expectations have decreased by $4.4 billion to $38.3 billion from $42.7 billion, indicating analysts remain more cautious on the FY2024 outlook for Netflix. The company noted that they expect a more balanced mix of member and ARM growth in FY2024, which should support the operating margin growth projected.
Operating profit
Q3 performance: NFLX delivered Q3 operating profit of $1.9 billion and a 22.4% operating profit margin, in line with consensus estimates coming into the quarter.
Q4 and FY2024 expectations: The company guided Q4 to a 14% operating profit margin, based on the company hitting the top-end of the FY2023 operating profit margin outlook of 18-20%. Looking ahead, the operating profit margin outlook for FY2024 is now expected to be 22-23%, above the 22% expected by analysts.
Longer-term: The company did not give a long-term margin target when asked on its call. Currently, consensus estimates project more than 800 bps improvement from FY2023 in the operating margin, and for this to grow to 28.2% by the end of FY2027, which may be aggressive given the investment likely required to scale the ads business. There is a significant 300-500 bps range in the margin assumptions beyond FY2024, which are also worth watching.
New question: What will be the longer-term pace of margin expansion?
3. What additional visibility into the Ads business was provided in the Q3 release?
According to the company, in Q3, ads membership increased 70% quarter-on-quarter and accounts for 30% of new sign-ups. In the Q3 shareholder letter and earnings call, management highlighted that they are confident in the Q4 outlook and expect monetization from continuing to scale the ads business.
There was a management change in the ads business and the company is optimistic about driving it to the next level, as scale is very important. Netflix remains upbeat about the long-term opportunity, given the size of their user base, and expects the ads business to be a multi-billion dollar opportunity. The company has a lot of work to do on advertising business features, both to scale and to build out the technical capabilities, in order to create formats the brands will value. It will be worth watching both operating expenses and CapEx related to the expansion of the ads business going forward.
Long-term ad-supported revenue expectations: Currently, consensus estimates project total ad-supported revenue to expand to over $7 billion by the end FY2027, up 10x from expected FY2023 levels. However, there is a large range of views on the magnitude and the trajectory of this growth. For example, in FY2025, analyst estimates range from $2 billion to $8.5 billion, with consensus at $5.3 billion. However, this range only increases in FY2027 from $2.9 billion to $19.6 billion.
Figure 2: Key Financials for Netflix
Source: Visible Alpha consensus (October 19, 2023).
Netflix (NFLX) Q3 2023 Earnings Preview
By: Melissa Otto, CFA
Netflix Inc. (NASDAQ: NFLX) will report Q3 2023 results on Wednesday, October 18, 2023. Here are the key numbers that we’re watching.
Figure 1: Netflix – consensus expectations for Q3, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (October 16, 2023). “Surprise” indicates the direction that specific line items beat or missed. “Revisions” show the trajectory of line items from a given date.
Netflix Q3 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q3 have come down slightly from the beginning of the year, from $8.6 billion to $8.5 billion, driven by a decline in expectations for U.S. streaming. However, Q3 expectations for operating income have increased from $1.7 billion at the beginning of the year to $1.9 billion ahead of Q3 earnings.
The stock has traded down -25% since last quarter’s July release and has remained lower (currently around $355-360) from a high of $483 ahead of the July release, driven by concerns around the actors’ and writers’ strikes and the paid-sharing program in the U.S. Could the Q3 release provide a positive catalyst for the stock?
Figure 2: Netflix – consensus revenues, operating income, EPS, and stock performance
Source: Visible Alpha consensus (October 16, 2023). Stock price data courtesy of FactSet. Netflix stock price is as of the market close on October 13, 2023. “Ad-supported revenue – Advertising – UCAN Streaming” is a new line item that recently started to be modeled by analysts.
Novartis Drug to Face Generics and Price Cuts; Salesforce Expands Margins; Sleep Country Wakes Up With Acquisitions
By: Visible Alpha Research & Innovation Lab
In our weekly round-up of the top charts and market-moving analyst insights: Novartis’ Entresto (NYSE: NVS) faces generic competition & Medicare price cuts in the U.S.; Salesforce (NYSE: CRM) mitigates its revenue slowdown with margin expansion; and Sleep Country Canada (TSX: ZZZ) expands its portfolio amid a growth slowdown.
Novartis’ Entresto Facing Generic Competition & Medicare Price Cuts in the U.S.
Novartis’ (NYSE: NVS) Entresto is one of 10 prescription drugs that initially fall under the Inflation Reduction Act (IRA) of 2022, which allows Medicare to negotiate lower prices directly with drug companies. Entresto is prescribed for patients with heart failure to help reduce the risk of death and hospitalization. The expected reduction in U.S. prices will take effect from 2026.
In the case of Entresto, however, generic competition is expected to be a greater threat than lowered pricing for U.S. revenue from 2025 onward. Analysts expect generic competition to begin taking effect between 2025 and 2027.
Novartis has thwarted attempts by generic makers of Entresto since 2019, utilizing patent infringement lawsuits. Notably, the company has settled with several generic companies regarding a U.S. launch date for Entresto generics. Novartis has guided investors to model 2025 as a reasonable timeline to assume generic competition. Even though one Entresto patent will expire in 2025 based on a recent court decision, other key Entresto patents could survive through 2027.
Salesforce to Mitigate Revenue Slowdown with Margin Expansion
Salesforce (NYSE: CRM) has seen its revenue growth slow down significantly over the last year as economic challenges prompted many companies to tighten their spending. Analysts expect the company’s total revenue to increase by 11% in 2024, a notable slowdown from its 18.3% growth in fiscal 2023 and the 24.7% surge in fiscal 2022.
According to Visible Alpha consensus, however, Salesforce’s margins are expected to continue to expand. Analysts expect the company to generate an operating margin (GAAP) of 13.5% in 2024, up from 3.3% in fiscal 2023, and 2.1% in fiscal 2022.
The growth in profitability is on the back of several measures the company has implemented over the past year. Salesforce laid off about 10% of its workforce in early 2023, halted all major acquisitions, and has also reined in its operating expenses. The company’s selling and marketing expenses, a major expense line for the company, are projected to decline by -5.2% in 2024, while total operating expenses are projected to fall by -2.8%.
Sleep Country Canada Expands Portfolio Amid Growth Slowdown
Analysts expect Canadian specialty sleep retailer Sleep Country Canada (TSX: ZZZ) to see total growth improve starting in 2023, following a sharp decline in 2022, according to Visible Alpha consensus. The company has seen total growth slow down since last year due to reduced consumer spending on big-ticket discretionary items. Total growth combines the percentage increases in same-store sales and sales from new stores.
In an effort to enhance its portfolio, the omnichannel specialty sleep retailer has been on an acquisition spree since 2021. Earlier this year, the company acquired the Canadian operations of mattress retailer Casper Sleep, and late last year, it acquired the direct-to-consumer sleep brand Silk & Snow. Additionally, in 2021, Sleep Country Canada made investments in Hush Blankets and Sleepout, a start-up curtain company.
Three Key Questions About Amazon.com (NASDAQ: AMZN) Earnings in August 2023
By: Melissa Otto, CFA
Amazon.com (NASDAQ: AMZN) reported earnings for Q2 2023 after the market close on Thursday, August 3, 2023. What happened during the release and earnings call, and what are the new questions to focus on?
With total sales coming in at $134.4 billion and operating profit at $7.7 billion, AMZN beat their Q2 guidance for revenues of $127-133 billion and operating profit of $2.0-5.5 billion.
The company released Q3 guidance of $138-143 billion in revenues and $5.5-8.5 billion in operating profit, ahead of pre-Q expectations of $138 billion in sales and $5.5 billion in operating profit. For 2023, Visible Alpha pre-Q consensus for AMZN ticked up from $557 billion to $562 billion in total sales and operating profit from $20 billion to $22 billion. After the Q2 earnings release, analysts now expect total 2023 revenues of $570 billion and operating profit of $29 billion.
1. Is AWS bottoming?
AWS performance stabilized coming into Q2. The results came in slightly better than expected at $22.1 billion in sales and $5.4 billion in operating profit, resulting in a 24.4% operating profit margin, which was 60 basis points ahead of Q1 levels of 23.8% and 170 basis points ahead of the 22.7% expected according to Visible Alpha consensus. Analysts had been projecting AWS revenues of $22 billion and operating profit of $5 billion in Q2. For H2, analysts had been projecting AWS operating profit margin of 24%.
The consensus margin has increased 40 basis points to 24.4% for 2023, and there is now less debate about the future performance of AWS margin. For 2023 and 2024, the range has narrowed from 21-29% to 23-26.6%. Based on comments from CEO Andy Jassy, the company continues to see that customers want to optimize costs in the cloud. However, Jassy explained that this is beginning to be offset by a shift to new workloads, suggesting a more upbeat outlook for the AWS business.
While AMZN has lagged other big tech players on the AI front, CEO Andy Jassy pointed to adding more CapEx to support Large Language Models (LLM) and Generative AI (GAI). He noted that 90% of IT is still on-premises and more is likely to move to the Cloud with GAI initiatives. Jassy explained that companies will want to leverage LLM, but will need to customize the models and applications for privacy and security. Applications built on top of the LLMs will be key. Plugins available in ChatGPT4 provide a sneak peek into how companies and their customers may see GAI integrated into workflows. It is worth noting that net sales to retail third-party seller services beat by over $1 billion, delivering $32.3 billion. This business line may be one area that will benefit from GAI.
New Question: When will customer optimization wind down and shift fully to new workloads over the next few quarters?
2. Is the advertising business continuing to show growth?
Analysts had been expecting the Ads business to grow 16% in Q2 to $10 billion, and 17% in 2023 to $44 billion. Amazon delivered a nice beat with $10.7 billion, up 22% year-over-year. Expectations for ad revenue by 2024 have been at $50 billion and have now increased to $54 billion, with the most aggressive estimates at close to $60 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 brand/product search continue to help grow ad revenues at AMZN going forward?
3. What’s supporting Amazon’s 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 generated significant margin improvement, going from 1% in Q1 to 4% in Q2, in the North America online business, and noted that the operating profit margin has returned to 4-6% pre-pandemic levels, but they still have more to go. Analysts project AMZN’s North America operating profit margin to be 3.7-3.8% for H2, leading to an expected 3.2% in 2023. By the end of 2024, analysts expect a further 100-basis-point margin expansion in North America to 4.2%
The company has made significant improvements in optimizing 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. Driven by improvements in the North America online business and stability in AWS, analysts project AMZN’s total operating profit margin to return to 5% in 2023, more than double 2022’s 2.4% level, and to rise to 6.4% by the end of 2024.
New Question: Will Amazon be able to generate a 10% operating profit margin in 2026?
Three Key Questions About Netflix (NASDAQ: NFLX) Earnings in July 2023
By: Melissa Otto, CFA
Netflix Inc. (NASDAQ: NFLX) reported Q2 2023 results on Wednesday, July 19, 2023. What happened in Q2, what is the outlook for Q3, and what are the new questions to focus on?
Overall, Q2 came in light and Q3 guidance came in below consensus, similar to what happened in Q1. According to Visible Alpha consensus, total revenues expected for Q3 have come down by $250 million, from $8.78 billion to $8.53 billion.
The stock has traded down more than -11% since last week’s release. Last quarter, the stock traded down -10% after hours, but then came back on optimism around revenue and subscriber growth. However, this quarter we have not yet seen any significant rebound. The stock has remained lower around $430 from a high of $483 on Wednesday ahead of the release.
The discussion and debate from the earnings interview are around the paid-sharing program and the potential for advertising to drive revenues while maintaining margin and cash levels. In addition, the company noted that the recent strike is not an outcome they wanted.
1. Generative AI images and video are at the heart of the SAG-AFTRA strike. What are the industry dynamics at work?
According to management, a conclusion is needed for the strike, but the issues are still getting worked through. It is worth highlighting the role of AI in the strike. Actors are concerned about where and how their images are shown, especially AI-generated images in advertising and endorsing products and services.
Multimodal AI and text-to-image generative AI are quickly becoming better, making it easier for companies to train models and generate images/videos from text descriptions. The improvement of text-to-image generated AI is potentially threatening the value that a celebrity brings to an endorsement. If potential advertisers leverage the new generative AI image generators, instead of images and videos directly from a celebrity, then there are big questions about how this will impact the cost to the advertisers and the potential income to the entertainers.
In tandem with this capability to generate images/video, celebrities are also concerned about their personal brands and the potential risks of having their images appear in places they do not want them. As it relates to Netflix, it could have an impact on a show’s image and the perception of the content if actors show up in ad campaigns via generative AI that the actor and/or Netflix do not approve of.
New question: When and how will the strike conclude, and what concessions may Netflix make?
2. What happened in Q2 and how has the outlook changed?
Revenue: Q2 year-over-year revenue growth of 3% was in line with guidance, but a bit below consensus estimates. There were no upside revenue surprises in Q2 around the new paid-sharing program, as some analysts were suggesting into the quarter. While monetization for this program is happening, it is at a slower pace than some of the more optimistic analysts expected. In addition, Netflix Q2 revenue guidance of $8.2B came in a bit below consensus of $8.5B. Consensus expectations for Q4 are increasing, as analysts see the revenue impact of the paid-sharing program move further out.
Total revenue expectations of $34.3 billion for FY2023 have come down $600 million to $33.7 billion since July 18, 2023 (before the release), with several of the most bullish analysts revising down their revenue expectations. FY2024 expectations have increased $100 million to $42.7 billion from $42.6 billion, indicating analysts remain upbeat on the 2024 outlook for Netflix.
Operating profit: Coming into Q2, consensus was expecting a 20% operating profit margin, ahead of the 19% guidance. NFLX’s operating profit margin came in better at 22%. The company guided Q3 to a 22% operating profit margin, which was a bit better than the 21.5% consensus estimate. The FY2023 operating profit margin outlook of 18-20% remains in line with guidance, but analyst estimates have moved upward from 19.2% after the Q1 release to 19.7% after the Q2 release.
New question: How will the strike and the focus on growing advertising revenues impact margins going forward?
3. Did the new paid-sharing program updates in the Q2 release reveal anything new?
NFLX pushed out the broader rollout of the paid-sharing program in Q1 to Q2, which will push revenue and membership growth to the second half. In the Q1 earnings interview, NFLX highlighted that they are significantly optimistic about advertising and that margins for this business look promising.
In the Q2 shareholder letter, management highlighted that they are confident in the outlook and expect monetization to increase from the paid-sharing launch and for this acceleration to be weighted to Q4. In the Q2 interview, management explained that when Netflix drops the basic tier, consumers tend to either take the ads plan or move into the standard plan.
Netflix is seeing good demand off a small base for ads, but the company has a lot of work to do on advertising business features both to scale and to build out the technical capabilities. It will be worth watching both operating expenses and capex related to the expansion of the ad business going forward.
Netflix highlighted the competitive environment and presented a market share chart (Figure 1 below), which shows how both Netflix and YouTube have remained at the top and taken share from competitors. However, YouTube has pulled ahead with a share that’s 60 basis points higher than Netflix. In this new era of AI, will YouTube have an advantage over Netflix and others, given Google’s substantial AI investments? Will Netflix look at making an acquisition to remain competitive?
Figure 1: Share of U.S. TV Screen Time
Source: Netflix Shareholder Letter (July 19, 2023)
New question: How will analysts model this new business and what will be the range of estimates over the next few quarters?
References: https://ir.netflix.net/financials/quarterly-earnings/default.aspx
Shell Powers Up Renewables; AB InBev to See U.S. Decline; WHSmith Targets Growth in Airports
By: Visible Alpha Research & Innovation Lab
In our weekly round-up of the top charts and market-moving analyst insights: Shell (LSE: SHEL) looks to power up renewables; analysts see declines in North America sales volume for AB InBev (EBR: ABI); WHSmith’s (LSE: SMWH) travel division is expected to see strong revenue growth.
Analysts Expect Shell to Power Up Renewables
Shell (LSE: SHEL) is expected to raise its investment in renewable energy and low-carbon projects in accordance with the EU’s carbon emission regulations. To achieve net-zero emissions by 2050, Shell plans to invest $10-15 billion between 2023-25 in developing low-carbon energy solutions such as biofuels, hydrogen, EV charging, and carbon capture & storage.
In 2023, according to Visible Alpha consensus, analysts expect the company to allocate $9.2 billion to its downstream business, $8.1 billion to its upstream business, $4.8 billion to integrated gas, and $3.1 billion to renewables.
Analysts Expect Declining North America Sales Volume for AB InBev
Analysts expect North America sales volume for AB InBev (EBR: ABI), the company behind Budweiser and Bud Light beer brands, to decline by 9% year over year in 2023, according to Visible Alpha consensus.
The U.S. is expected to account for this sharp decline, with U.S. sales volume projected to fall by 10%. The strongest sales volume growth in 2023 is projected to occur in the Asia-Pacific region at 7%, followed by the Middle Americas (Central America, Mexico, Caribbean) at 1%.
Travel Division to Propel WHSmith’s Revenue Growth, Say Analysts
UK-based books and convenience retailer WHSmith (LSE: SMWH) is expected to continue seeing revenue growth driven by its travel division (airports, train stations, motorway service areas, and hospitals).
According to Visible Alpha consensus, the retailer’s travel segment revenue is expected to increase by 44% in 2023 compared to the previous year. The British retailer is expanding its travel division, with focused store expansions outside of the U.K., especially in North America.
ChatGPT-4 Plugins: Gateway to Increased Sales at Amazon and Expedia?
By: Melissa Otto, CFA
Generative AI chatbots have taken the world by storm, but who will benefit from their usage? The market is full of debate about how these chatbots may disrupt search, user behavior, payments, and productivity. On top of this, the FTC has begun an investigation into how ChatGPT and OpenAI may threaten the privacy and data of consumers. Given the surge of interest and investment in generative AI, we focus here on a few examples of how AI chatbots may start to impact company fundamentals.
In this report, we show Expedia (NASDAQ: EXPE) and Amazon.com (NASDAQ: AMZN) revenues that may begin to benefit from generative AI chatbots. Visible Alpha has identified some of the critical line items in a company’s financial model to monitor, which may provide an early read into the trends. The dispersion of estimates and number of sources can reveal debates and changing trends in a company’s fundamentals, which can help to uncover potential new alpha not yet fully captured in the stock price.
What are plugins?
According to OpenAI, plugins connect ChatGPT to third-party applications. These plugins enable ChatGPT to interact with APIs defined by developers, enhancing ChatGPT’s capabilities and allowing it to perform a wide range of actions. Plugins enable ChatGPT to do things like:
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- Assist users with actions; e.g., booking a hotel, shop for food, buy clothing
- Retrieve real-time information; e.g., sports scores, stock prices, the latest news
- Retrieve knowledge-base information; e.g., company docs, personal notes
Source: https://platform.openai.com/docs/plugins/introduction (July 6, 2023)
Companies in the consumer space may benefit from the capabilities of generative AI to assist users with actions by reducing noise and presenting users with specific goods and services they want to buy. Public and private companies, like Instacart, Shop.com, Shop, Amazon.com, Expedia, Kakaku.com, DoorDash and Kayak all currently have plugins on ChatGPT-4.
Background of capabilities
Users can access ChatGPT-3.5/4 and Google Bard generative AI tools by PC or mobile. The user’s experience is different depending on where and how the prompt is made. On a PC, ChatGPT-4’s beta version offers more capabilities than on mobile and seems to offer more capabilities than Google Bard, due to the many beta plugins available in ChatGPT-4 on a PC. Currently, ChatGPT-4 subscribers can access all of the plugins, but there is a waitlist for developers. According to OpenAI, “if you are a developer who has ChatGPT Plus and you are interested in making a plugin, you will need to fill out a form and join a waitlist.”
Through its beta features, ChatGPT-4 allows users to enable up to three plugins at a time on a PC. There are currently hundreds of plugins in ChatGPT-4 available for users to save and then enable as part of the three that can be run in their chats. Through ChatGPT-4, users can align their plugins to the type of prompt they are making. For example, if a user wants to book a hotel, they can start a new chat, then directly enable the Expedia plugin. In the chat, the user then adds a prompt, “hotel and flight Maui”, for example. ChatGPT-4 will automatically pick up the Expedia plugin and sync with ChatGPT-4 on PC, but not on mobile like Bard can with Google Search.
Figure 1: ChatGPT-4 Expedia plugin prompt and results
Source: ChatGPT-4 with Expedia plugin (July 11, 2023)
The user can then simply link directly and make a purchase. The Expedia plugin also surfaces prices, reviews, duration and details, which help keep the user in the specific plugin/application. How will this plugin impact revenues and operating profit at Expedia?
Figure 2: Expedia’s revenue breakdown
Source: Visible Alpha consensus (July 12, 2023)
Bard seems to have better basic functionality on mobile, given its sync to Google Search and also more timely data, since ChatGPT results do not automatically incorporate information beyond September 2021 (enabling a specific plugin is required). For example, an iPhone user can ask Bard for hotel recommendations and then directly access a link to booking.com to make the reservation in a mobile environment. In ChatGPT on mobile, this connection between the prompt results and a transaction can not currently be done. ChatGPT-4 users currently can not access the plugins on mobile.
If the user is looking to host a party or make a specific recipe, the Instacart plugin will automatically upload a shopping list to a cart to be purchased and delivered or picked up, in one seamless interaction. However, these actions still cannot be done on ChatGPT or Bard for mobile. Plugins are currently not available in Google’s Bard, but Bard does link to Google. At the Google I/O conference in May, the company announced that they will integrate Google applications/services and be adding “tools,” similar to plugins. It’s not clear yet exactly what the tools will do.
Amazon
With Amazon’s Prime Day occurring this past week, we wanted to think about the potential impact to Amazon’s numbers as the generative AI chatbots potentially take hold in the future. How may these impact consumer behavior and drive not only more spending, but also more efficient, faster spending?
Figure 3: ChatGPT-4 Amazon Gift Chooser plugin prompt and results
Source: ChatGPT-4 with Amazon Gift Chooser plugin (July 7, 2023)
Figure 4: Amazon revenue breakdown
Source: Visible Alpha consensus (July 11, 2023)
Currently, the retail third-party seller services segment is expected to expand by almost $100 billion from $118 billion at the end of 2022 to $216 billion by the end of 2027. This business is expected to make up 25% of Amazon’s total revenues by the end of 2027.
Impact to third-party seller services revenue: With greater curation, Amazon can align consumers more quickly to items they want or need to buy. Amazon’s plugin focuses on gift giving and may help drive third-party seller services revenues, including shipping, FBA, and commissions. Visible Alpha has a few sources modeling the third-party line items, including a break out of commission and FBA/shipping revenues. These estimates seem to be worth watching and may serve as a way to capture and gauge how generative AI may be influencing and growing their third-party segment.
Figure 5: Amazon third-party seller services revenue breakdown
Source: Visible Alpha consensus (July 11, 2023)
The profitability of this segment could expand as services revenues scale further, particularly in the North America market. North America operating profit margin is expected to expand 680 basis points and go from an operating loss at the end of 2022 to 6% at the end of 2027, surpassing historic highs of 5%, but still substantially below AWS’s operating profit margin of 28.5% at the end of 2022. Internationally, Amazon generated a -7% operating loss margin at the end of 2022 and is projected to improve it to 2% by the end of 2027. Can applications of generative AI help drive Amazon’s retail business in the U.S. and abroad to higher margins?
Figure 6: Amazon operating profit breakdown
Source: Visible Alpha consensus (July 11, 2023)
There is significant debate about the trajectory and size of these margin improvements in Amazon’s North America business. It will be interesting to see how chatbots may help to drive revenues from third party sellers. The most optimistic analyst is expecting the North America business to generate an ambitious 8% operating profit margin, over 200 basis points above consensus of 6% and $20 billion ahead of the $30 billion of operating profit expected by analysts by the end of 2027. The most conservative analyst is baking in a lower 4% operating profit margin and is expecting revenues to be $10 billion below consensus estimates of $30 billion.
Figure 7: Amazon operating profit margin dispersion
Source: Visible Alpha consensus (July 12, 2023)
The bottom line
ChatGPT-4’s plugins provide a sneak peek into the next generation of innovation to come. While it is early days, generative AI has the potential to make consumers and businesses more productive and effective with more comprehensive, curated responses. By syncing the results to actual products and services, ChatGPT-4 plugins may start to change consumer behavior, leading to potential changes in the digital advertising space, and how and where revenues are generated.
Coming into this earnings season, we are looking forward to hearing updates from companies about their generative AI strategies, chatbot impact, and where we may see AI start to impact the fundamentals of their business models. Will AI drive higher revenues, increase margins, and help companies overall become more profitable and productive?
Generative AI and the Online Travel Industry
By: Melissa Otto, CFA
AI and customer impact
The integration of generative AI presents significant opportunities for companies to get their products and services more quickly in front of customers that are actively looking to purchase. AI innovations may create an increasingly competitive search environment, as companies seek to optimize ad spend and ROI by targeting more specific segments with a curated offering aligned to customer interests.
Generative AI chatbots, like ChatGPT, expand the capabilities of what software can do by synthesizing business processes and integrating customer questions and needs into a workflow solution. Chatbots may emerge as a valuable and impactful way both to retain existing consumers and to pinpoint new customers. As these chatbots potentially evolve into virtual assistants, the monetization model of search, ads, and traffic may be disrupted.
Travel and AI
Online travel appears to be an ideal area for the innovations from AI to take hold and have a positive impact on revenues.
Figure 1: AI in Bing for travel
Source: Bing.com (June 28, 2023)
Travel-related searches in Bing and Google surface Expedia-sponsored recommendations at the top of search results list. However, further searches for flights and other travel services help users pinpoint the cheapest airfares in a region or country or for a specific time period, but then send the user to a different site away from Expedia to make the purchase.
For example, a user may search Google for “last minute flights to Europe” and discover a low-priced fare to Berlin, which may be purchased directly from the airline, e.g., united.com. Then, the customer searches in Google again to discover a hotel. In this case, the Berlin Ritz-Carlton could be booked through the official site or through various booking sites, like Priceline or Expedia, but with no meaningful price difference.
How can ChatGPT help online travel companies cross-sell and keep their customers spending within their site?
Figure 2: Hotel price comparisons in Google
Source: Google.com (June 27, 2023)
Expedia’s new ChatGPT bot and loyalty program
In Expedia’s (NASDAQ: EXPE) Q1 earnings call on May 4, 2023, CEO Peter Kern highlighted the company’s commitment to deploying AI and machine learning to the product “to enhance the customer experience and move towards Expedia’s North Star of true personalization.” The company has already launched the Expedia plug-in for ChatGPT, as well as ChatGPT in the Expedia iOS app. Expedia will also launch its loyalty program, One Key, in the U.S. in July and later this year globally, across its main brands.
According to Visible Alpha consensus, analysts are currently expecting Expedia to see its operating profit margin improve from 9% in 2022 to 15% by 2027. Excluding stock-based compensation, this margin improvement is driven by a 200-basis-point decline in selling/marketing costs and a 100-basis-point reduction in both technology/content and general/administrative costs as a percentage of revenue. We are watching the role that AI will play in both driving sales growth and supporting these cost reductions.
Figure 3: Expedia’s revenue breakdown
ChatGPT can help synthesize data and may encourage consumers to skip conducting multiple searches in one of the search engines and then switching to another site or application. If the customer books the Ritz-Carlton in Berlin through Expedia or a house through Expedia’s VRBO, they can leverage the ChatGPT plug-in available on the Expedia app for further details, but will not be linked directly to actually make reservations. Airbnb (NASDAQ: ABNB) will also integrate ChatGPT from next year, but will not have a loyalty program. The combination of ChatGPT and loyalty programs may incentivize consumers to book more parts of their trip within specific applications.
Visible Alpha tried out Expedia’s new ChatGPT capability in iOS. Within seconds, ChatGPT returned a detailed 6-day itinerary for a trip to Berlin. Excursions can then be purchased directly on Expedia in “Things to Do,” removing the need to return to Google or Bing to search for ideas and then be rerouted to another site to book the travel experience. ChatGPT can help companies directly offer and cross-sell more products/services to their customers. Loyalty incentive programs can then create stickiness in this evolving consumer behavior.
Figure 4: From ChatGPT on Expedia: Six days in Berlin
Generative AI to support more “experiences” bookings
Purchasing “experiences” has become an emerging growth category in the global travel industry. Leveraging its reviews and enhanced engagement, Tripadvisor’s (NASDAQ: TRIP) Viator experiences have seen strong demand that is expected to continue. According to Visible Alpha, analysts expect revenue from Viator to increase ~34% in 2023 and to reach $770+ million by the end of 2024. Trip Advisor also has plans to integrate generative AI plug-ins, which could add further upside to its Viator segment.
Figure 5: Tripadvisor’s revenue breakdown
Booking Holdings’ (NASDAQ: BKNG) Kayak enables add-ons of experiences to its traditional air/hotel packages and is also experimenting with a generative AI plug-in. Booking’s Advertising and other revenues are expected to generate $1.1+ billion by the end of 2024.
Figure 6: Booking Holdings’ revenue breakdown
Outside of the U.S., Trip.com (NASDAQ: TCOM) and TUI Group (LSE: TUI) will also leverage AI for booking experiences. In the UK and EU markets, TUI’s experiences growth through its Musement business (Other segments) is another example of a company leveraging both loyalty and AI.
Figure 7: TUI Group’s revenue breakdown
In Asia, Trip.com is seeing a reawakening in travel post-Covid with experiences bundled into packaged tours, showing a very strong rebound in expected growth in 2024.
Figure 8: Trip.com’s revenue breakdown
Industry summary
By the end of 2025, Visible Alpha’s global travel industry revenues are expected to expand by $35 billion from 2022-levels. In addition to Asia’s post-Covid reopening, generative AI tools and innovations have the potential to drive revenue growth for travel destinations and experiences.
Figure 9: Travel industry revenue breakdown and CAGRs
The bottom line
Online travel companies appear well-positioned to benefit from the integration of new generative AI plug-ins, like ChatGPT. Given the capabilities of chatbots to suggest itineraries and trip excursions, these tools may help online travel companies grow bookings from the traditional air and hotel segments, but also capture additional revenue from experiences. Loyalty programs may also play an important role in incentivizing the existing customer base to spend more within a dedicated online travel ecosystem.
The experiences segment remains an emerging category in the travel industry and could show substantial expansion longer term. Analysts expect Tripadvisor’s Viator to generate $1.2 billion in revenues by the end of 2027, up significantly from $493 million in 2022, but still small when compared to Booking’s accommodation revenue, estimated to be $25 billion by the end of 2027.
While ChatGPT provides a lot of useful information for travelers, users can not transact directly from ChatGPT. They still have to leave the ChatGPT tool to compare excursion vendors and make purchases. As ChatGPT’s capabilities advance, is the next step to link chatbot results within a site or application directly to the product offerings at sites like Viator or TUI’s Musement?
Netflix Ads; Alibaba’s Global Expansion; AMD’s Data Center; BYD’s EV Growth
By: Visible Alpha Research & Innovation Lab
In our weekly round-up of the top charts and market-moving analyst insights: Netflix’s (NYSE: NFLX) ad-supported tier expected to see rise in revenue and subscribers; Alibaba (NYSE: BABA) expands internationally; AMD’s (NASDAQ: AMD) data center segment projected to see significant rise in revenue and profitability; BYD’s (SZSE: 002594) EV focus expected to drive growth.
Netflix’s Ad-Supported Tier Expected to Support Revenue & Subscriber Growth
Netflix (NASDAQ: NFLX) is expected to experience a steady rise in both revenue and subscribers for its new ad-supported tier, according to analysts. The company launched this ad-supported plan late last year to help address password-sharing concerns.
According to Visible Alpha consensus, Netflix’s ad-supported tier for the U.S. & Canada (UCAN) is projected to generate $396 million in advertising revenue and $284 million in subscription revenue in 2023, along with an expected 6.2 million subscribers. Analysts expect UCAN ad-supported revenue from both advertising and subscriptions to exceed $5 billion by 2027.
Alibaba’s International Expansion Expected to Accelerate Growth
Analysts expect a robust 19% CAGR from 2023 to 2027 for Alibaba’s (NYSE: BABA) International Commerce revenue as the company forges ahead with its global expansion strategy, highlighted by the introduction of Tmall in Europe. Unlike AliExpress in Europe, Tmall will prioritize the sale of local brands to local customers.
Alibaba’s logistics subsidiary, Cainiao Logistics, also aims to expand internationally and has been constructing its own warehouses and recruiting delivery personnel across Europe and Southeast Asia.
In 2027, analysts project CNY 140 billion in International Commerce revenue, and CNY 103 billion in Cainiao Logistics services revenue, a 17% CAGR from 2023 to 2027. These emerging businesses are expected to grow at a faster pace than the core China Commerce segment that made up ~80% of revenue in 2022, but is expected to generate a lower 7% CAGR from 2023 to 2027, and to decline to 69% of revenue by 2027.
Analysts Expect AMD’s Data Center to Drive Revenue Growth
AMD’s (NASDAQ: AMD) data center segment is expected to see its revenue grow from $6.7 billion in 2023 to $12.2 billion in 2025. In addition, the profitability of the data center segment is projected to expand significantly from $1.6 billion in 2023 to $4.6 billion in 2025, taking the operating profit margin from ~24% to ~38%.
AMD recently announced the launch of its new high-performance MI300X chip, which the company describes as “the most advanced accelerator for generative AI.” This may help drive further growth in 2024 and beyond.
BYD’s NEV Focus to Drive Rising Revenue Expectations, Say Analysts
Chinese automaker and EV-specialist BYD (SZSE: 002594) is expected to increase its vehicle sales to 4.4 million units by 2025. This is a significant jump from the 1.8 million units sold in 2022 and projected 2.9 million units for 2023.
In 2022, the automaker made the strategic decision to discontinue the production of internal combustion engine (ICE) vehicles and instead focus exclusively on manufacturing hybrid and electric vehicles, also known as new energy vehicles (NEVs).
Analysts project BYD’s NEV segment revenue to grow 62% year-over-year in 2023, reaching a total of CNY 471 billion ($66 billion), up from CNY 290 billion ($41 billion) in 2022.
