Nvidia (NVDA) Earnings Preview: Fiscal Q3 2025
By: Melissa Otto, CFA
Nvidia Corp. (NASDAQ: NVDA) will report fiscal Q3 2025 results on Wednesday, November 20, 2024, after the market close. Here are the key numbers that we’re watching.
Nvidia – Consensus Expectations for Q3 2025, Past Earnings Surprises, Revisions, and CAGR
Source: Visible Alpha consensus (November 13, 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.
Nvidia’s Q3 2025 Earnings Preview
According to Visible Alpha consensus, total revenues of $33.1 billion expected for Fiscal Q3 2025 have continued to increase steadily since the beginning of the year. Overall growth continues to be driven by optimism about the strength of Nvidia’s Data Center segment. This segment has seen its expected top-line performance for Q3 increase from $20.8 billion in January 2024 to its current projection of $29.0 billion, up nearly 50%. This revenue surge has been driven by strong demand for its GPUs from cloud service providers, and the move to accelerated computing in the data centers for AI.
More recently, the Data Center segment’s expected revenues in Q3 edged up slightly higher from $28.5 to $29.0, according to consensus. While the pace of analysts’ upward revisions to the Data Center segment has moderated since the first half of this year, it will be important to see how Nvidia guides the market for Q4 and the rest of FY 2025, and to what extent higher pricing and volumes will be expected to continue.
Currently, there is significant debate about the performance of the Data Center segment. Based on Visible Alpha consensus, this business is projected to generate $32.5 billion in revenues in Q4 2025, with estimates ranging from $29.2 billion to $40.1 billion. For FY 2025, Visible Alpha consensus for this segment has increased nearly $1.0 billion to $110.5 billion since the Q2 release in August, a slowdown from the pace of revisions in the first half. However, the estimates now range from $106.4 billion to $119.2 billion, a significant narrowing from the February range of $65.4 billion to $121.2 billion.
In particular, the company’s commentary and outlook for Blackwell will likely be important in the Q3 earnings call. Blackwell revenue is expected to jump from $3-4 billion this year to $55.8 billion next year. Looking ahead, consensus expects FY 2026 Data Center revenue of $170.8 billion. The estimates for this line item range from $148.4 billion to $212.5 billion and remain a significant market debate, due to the questions around Blackwell’s ramp. It is worth noting that the consensus gross profit for the Data Center segment for FY 2026 has decreased by nearly $8 billion since last quarter, reflecting lower expectations for next year. In addition, for FY 2026 and FY 2027, consensus is projecting the operating profit margin to come down from this year’s peak of 66%. These dynamics in consensus estimates are causing the expected FY 2026 consensus P/E to be 36x and to range from 27x to 52x.
The stock has traded up 56% since the May release, and is up around 200% year-to-date. Could the Q3 release provide the next positive catalyst for the stock or are expectations largely priced in for now?
Nvidia Consensus Revisions
Source: Visible Alpha consensus (November 13, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on November 12, 2024.
Nvidia’s Key Financial Items
Source: Visible Alpha consensus (November 13, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on November 12, 2024.
Snowflake (SNOW) Earnings Preview: Fiscal Q3 2025
By: Melissa Otto, CFA
Snowflake Inc. (NYSE: SNOW) will report fiscal Q3 2025 results on Wednesday, November 20, 2024, after the market close. Here are the key numbers that we’re watching.
Snowflake – Consensus Expectations for Q3 2025, Past Earnings Surprises, Revisions, and CAGR
Source: Visible Alpha consensus (November 20, 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.
Snowflake’s Q3 2025 Earnings Preview
According to Visible Alpha consensus, total revenues of $859 million and operating income of $30 million are expected for Q3 2025. Operating profit expectations for the Q3 have moved up more than 10% from $27 million in August to now $30 million. However, these estimates are significantly lower than the initial estimates in January 2024. While expectations have come down for FY 2025, overall growth continues to be driven by the strength of Snowflake’s data platform and the potential network effects of moving more data there. The company made several AI-related announcements this week at its Build conference. It will be interesting to hear the company’s commentary on the outlook for their AI-related products in the earnings call.
Currently, there is debate about gross margin performance. Based on Visible Alpha consensus, the non-GAAP gross margin estimates range from 74% to 77% for Q3 2025. For FY 2025, Visible Alpha consensus for gross margin has moved up to 76% from 75% last quarter, but is still below the 77% previously expected at the beginning of the year.
The stock has been a significant underperformer this year and has traded down 7% since last quarter’s release, and by 37% since January 2024. Could the Q3 release provide a positive catalyst for the stock?
Figure 2: Snowflake Revisions
Source: Visible Alpha consensus (November 20, 2024). Stock price data courtesy of FactSet. Snowflake’s current stock price is as of the market close on November 19, 2024.
Big Tech Earnings Reviews: Alphabet, Meta, Amazon & Apple
By: Melissa Otto, CFA
Big Tech companies — Alphabet (NASDAQ: GOOGL), Meta (NASDAQ: META), 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 once again been dominated by mixed results around the core businesses and investing in the technology infrastructure to support 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 are not growing 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 (November 4, 2024)
Earnings Overview: GOOGL, META, AMZN, AAPL
Alphabet’s (GOOGL) Q3 2023 Earnings
According to Visible Alpha consensus, total revenues of $88.3 billion exceeded consensus expectations for Q3 2024, driven by resilience in its search business and strength in the Cloud segment. In addition, the Q3 consensus also exceeded expectations for operating income and EPS, coming in at $28.5 billion and $2.12/share, on the back of a stronger-than-expected cloud margin.
We have been closely monitoring the trend of the Cloud business. The operating profit margin has been trending better. Analysts expected the Cloud business to generate a 10.4% operating profit margin in Q3 2024, but the company reported a 17% margin, delivering a positive surprise and exceeding the top end of consensus estimates.
For the FY 2024 Cloud business, Visible Alpha consensus expects the operating profit margin to hit 13.9%, up from an 11% margin expectation prior to the earnings release. Longer-term, the consensus Cloud margin is estimated to generate a 20% margin by the end of FY 2026, with operating profit ranging from $7.8 billion to $17.9 billion. What will be the right margin level for Alphabet’s Cloud business?
Alphabet stock has traded up since last quarter’s release and up 22.5% in 2024, slightly outperforming the S&P 500’s return. The consensus P/E for FY 2025 is 19x and 16x for FY 2026. Questions remain about the profitability of the Cloud business and its Unallocated and Other Bets. Will the cloud margin continue its expansion in FY 2025?
CapEx has continued to increase reflecting investment in servers, data centers, and networking equipment. For 2024, the consensus now expects capex to be $51.5 billion, up from 50.7 billion, an increase of almost $15 billion since the beginning of the year. CapEx is projected to increase in 2025 to $58.7 billion, up significantly from $32.2 billion in 2023.
Alphabet – Consensus Estimate Revisions
Source: Visible Alpha consensus (November 5, 2024). Stock price data courtesy of S&P. GOOGL’s current stock price is as of the market close on November 2, 2024.
Alphabet – Consensus Estimates
Source: Visible Alpha consensus (November 5, 2024). Stock price data courtesy of S&P. GOOGL’s current stock price is as of the market close on November 2, 2024.
Meta Platforms’ (META) Q3 2024 Earnings
According to Visible Alpha consensus, total revenues for Q3 were slightly ahead of expectations at $40.6 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 $1.4 billion at $17.4 billion, driven by resilience in the Family of Apps and losses that were lower than consensus in Reality Labs.
The company’s revenue outlook for Q4 was in line with expectations, but with the top-end of guidance exceeding consensus by $1.7 billion. Consensus now expects the Q4 operating profit to be $20 billion, $630 million 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 over $3.5 billion to $84.1 billion since the July quarter, driven by higher ad revenue per DAU in the US and EU. In addition, the projected losses from Reality Labs for 2024 have increased only $500 million since July.
In addition, CEO Mark Zuckerberg highlighted that the company will continue to invest in servers and data centers to support AI, because it is expected to drive marketing and customer engagement across the Family of Apps. CapEx came in a bit above consensus for the quarter and is projected to climb in Q4 to $15.4 billion from $12.5 billion. On the earnings call, Meta explained that CapEx will further increase in 2025. Consensus now expects FY 2025 capex of $50.7 billion, up $3 billion from last quarter.
META stock has been an outperformer year to date, up over 60%. Will Meta remain disciplined in Q4 2024 and FY 2025 and continue to be an outperformer?
Meta Platforms – Consensus Estimate Revisions
Source: Visible Alpha consensus (November 4, 2024). Stock price data courtesy of S&P. META’s current stock price is as of the market close on November 1, 2024.
Meta Platforms – Consensus Estimates
Source: Visible Alpha consensus (November 4, 2024). Stock price data courtesy of S&P. META’s current stock price is as of the market close on November 1, 2024.
Amazon’s (AMZN) Q3 2024 Earnings
Total revenues of $158.9 billion for Q3 were over $1.5 billion above consensus, driven by higher revenues in North America and International retail. The International segment generated $35.9 billion in revenue, ahead of consensus by $1.5 billion, making up most of the top-line surprise. Revenues from Advertising and AWS were in line with consensus.
The North American retail operating margin increased to 5.9%, exceeding the 5.6% expected by consensus. After the Q3, the consensus margin for Q4 has edged up to 6.6%. Continued strength in Q4 is expected to drive a full-year margin of 6%, a significant improvement from last year’s 4.2%. This margin expansion was driven by improvement to their fulfillment network cost structure and inventory placement, leading to higher units per box. Similarly in the international segment, the operating margin hit 3.6%, almost 300 bps better than expectations ahead of the release. The international margin was also helped by strength in the UK and Germany and enhancements to the transportation network and their fulfillment centers. Looking further out, consensus expects the International margin to hit 5% by the end of FY 2026.
AWS margin came in very strong at 38% in Q3, well ahead of the consensus estimate of 33.2%, driven by a combination of a strong top line, managing costs, and a change in the estimated useful life of their servers. For 2024, analysts are now expecting a 36.6% margin, up from 34.6% last quarter. The company expects AWS growth to continue, driven by high demand for GAI.
The company guided to Q4 revenue of $181.5-188 billion, in line with the consensus of $186.4 billion, and to an operating profit of $16-20 billion, which was also in line with $17.5 billion coming into the Q3. Since the release, Q4 and FY 2025 consensus have increased further. The stock traded up 5% after the Q3 release. Could the retail business surprise the upside in Q4 or have retail margins peaked?
To support Amazon’s growing need for technology infrastructure, CapEx continued to increase further and for 2024, the consensus is expected to be $75 billion, up from 70 billion, an increase of over $10 billion since Q1. CapEx is projected to increase in 2025 to $85 billion, up significantly from $52 billion in 2023.
Amazon – Consensus Estimate Revisions
Source: Visible Alpha consensus (November 6, 2024). Stock price data courtesy of S&P. AMZN’s current stock price is as of the market close on November 5, 2024.
Amazon – Consensus Estimates
Source: Visible Alpha consensus (November 6, 2024). Stock price data courtesy of S&P. AMZN’s current stock price is as of the market close on November 5, 2024.
Apple’s (APPL) Q4 2024 Earnings
Total revenues of $94.9 billion for Q4 were in line with Visible Alpha consensus of $94.6 billion. Revenues of $46.2 billion from iPhone in Q4 were up 6% year-over-year. Based on consensus, Q3 iPhone units of 53 million were a bit better than expectations of 51 million. China continues to underperform and was flat this quarter, below the 5% growth expected by consensus.
Overall full-year iPhone revenue expectations of $209 billion have been moving around since the beginning of the year, suggesting debate in the market about the potential upgrade cycle. Currently, Q1 is expected to deliver $71.1 billion in iPhone sales, a small decrease since the earnings release.
While iPhone sentiment has ebbed and flowed since the beginning of the year, expectations for the high-margin Services segment and for total operating profit have remained relatively consistent. In Q4, the Services segment delivered $25.0 billion, up 13% year over year and close to consensus of $25.3 billion coming into the release. Gross margin for the Services segment was 74%, slightly below the 74.4% expected, but still solid. The 36.3% gross margin for Products, which was up 100 bps sequentially and 80 bps better than expectations. 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 $118.8 billion at the end of FY 2026, up over $22 billion from this year’s $96.2 billion.
Vision Pro delivered another set of results this quarter, a bit below expectations. For the FY 2025, consensus revenue estimates for the Vision Pro have remained at the current $1.2 billion.
The stock has traded down around the Q4 release, and up 16.9% since the beginning of the year, underperforming the S&P 500. Will users start to get excited about Apple Intelligence and drive iPhone upgrades that exceed expectations in FY 2025?
Apple – Consensus Estimate Revisions
Source: Visible Alpha consensus (November 5, 2024). Stock price data courtesy of S&P. AAPL’s current stock price is as of the market close on November 2, 2024.
Apple – Consensus Estimates
Source: Visible Alpha consensus (November 5, 2024). Stock price data courtesy of S&P. AAPL’s current stock price is as of the market close on November 2, 2024.
Meta and Apple: Earnings Previews
By: Melissa Otto, CFA
Meta (NASDAQ: META) Q3 2024 Earnings Preview
Meta Platforms – Consensus Expectations for Q3 2024, Past Earnings Surprises, Revisions, and CAGR
Source: Visible Alpha consensus (October 21, 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, estimated total revenues for Q3 have edged up to $40.2 billion, driven by better expected DAU performance in the Family of Apps segment across geographies, especially in the U.S. and Europe. On the cost front, expectations for operating profit have increased to $15.9 billion, up slightly from last quarter, but there is some debate among analysts. Into Q3 for the Family of Apps’ income from operations estimates range from $18.4 billion to $22.6 billion. For 2024, expectations for operating income from the Family of Apps have moved up from $80.6 billion to $82.8 billion since last quarter, driven by more robust views about the profitability of this business. In addition to the continued expected strength in the Family of Apps segment, projected losses from Reality Labs for 2024 have not changed since last quarter. Will Meta be able to continue growing revenue while managing costs in 2025?
The stock has been strong since last quarter, driven by wearables and AI announcements at Meta Connect. What new information will come out of the Q3 release that could potentially be a catalyst?
Meta Platforms – Consensus Estimate Revisions
Source: Visible Alpha consensus (October 21, 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. Stock price data courtesy of FactSet. META’s current stock price is as of the market close on October 18, 2024.
Apple (NASDAQ: AAPL) Q4 2024 Earnings Preview
Apple – Consensus Expectations for Q4 2024, Past Earnings Surprises, Revisions, and CAGR
Source: Visible Alpha consensus (October 21, 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.
Total revenues expected for fiscal Q4 have ticked down slightly from last quarter, according to Visible Alpha consensus, from $94.7 billion to $97.5 billion, driven by slightly decreased optimism about the iPhone. Expected Q3 iPhone units moved from 53 million to 51 million over the past quarter. Currently, Q4 is expected to deliver $45.2 billion in iPhone sales and $200.1 billion in 2024. Overall full-year iPhone revenue expectations for 2025 have jumped around since early 2024, as the market tries to figure out the demand trajectory. There are questions about whether the new Apple Intelligence capabilities may help to drive upgrades in 2025 and beyond.
In addition, expectations for the high-margin Services segment also edged up slightly for Q4 and FY 2025. 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 the role of Apple Intelligence.
Vision Pro will show results this quarter. In Q4, consensus of four analysts estimated 116,300 units to be sold, generating $451 million. For the full year, consensus revenue estimates for the Vision Pro have remained flat at $1.2 billion. As the company gears up for the important holiday shopping period, there are questions about whether Apple may make some announcements around updates to the Vision Pro.
The stock traded up 30% since the Q2 release in May, but has not reacted much since last quarter. Apple has underperformed other Big Tech stocks and the S&P 500 year to date. Could the Q4 release and FY 2025 outlook provide a positive catalyst for the stock?
Apple – Consensus Estimate Revisions
Source: Visible Alpha consensus (October 21, 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. Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on October 18, 2024.
Big Tech Earnings Reviews: Netflix
By: Melissa Otto, CFA
Netflix (NASDAQ: NFLX) reported its latest earnings results. Here’s a recap of those earnings, some key takeaways, and the resulting shifts in analysts’ estimates, according to Visible Alpha consensus
Netflix Beats Expectations
Netflix beat expectations in a few key areas, leading to stock price outperformance since the earnings release. At Netflix, while Q3 was solid, the Q4 and FY 2025 guidance came in above consensus, driving the stock price up over 8% since the release.
Q3 performance: Netflix Inc. (NASDAQ: NFLX) reported Q3 2024 results on Thursday, October 17, 2024. Q3 revenue of $9.8 billion was slightly ahead of consensus estimates, driven by a 15% increase in average paid memberships year-over-year. The company reported 5.1 million new additions. The ads plan accounted for over 50% of sign-ups in ads’ countries.
The UCan market saw 16% year-over-year revenue growth, driven by increases in paid memberships and ARM. In addition, APAC and EMEA showed strong double-digit increases. Latam revenue was up 9%, but there were some questions around the lack of paid net additions. Netflix delivered a Q3 operating profit of $2.9 billion and a 29.6% operating profit margin, ahead of consensus estimates coming into the quarter.
Q4 2024 expectations: The company guided Q4 to 15% year-over-year growth with revenue expected to be above $10 billion, a bit above consensus. Revenues are expected to be supported by continued net additions and monetization. Offering a range of pricing and plans combined with continuing growth in the ads business is expected to further increase monetization. Operating margin is expected to be 22.0%, over 100 bps better than expectations of 20.9%.
FY 2025 expectations: The company expects to grow revenues to $43-44 billion by increasing engagement trends and reducing churn with a more diverse entertainment offering. Gaming and the growth of ads could be key drivers in 2025. According to consensus, analysts expect the company to generate a 28.3% margin from revenue of $43.8 billion and $12.4 billion in operating profit in FY 2025.
Netflix Consensus Revisions
Source: Visible Alpha consensus (October 21, 2024). Stock price data courtesy of FactSet. NFLX’s current stock price is as of the market close on October 18, 2024.
Netflix Ads Business
According to the company, in Q3, the Ads tier grew 35% quarter-on-quarter and accounts for 50% of new sign-ups and continues to scale. In the Q3 shareholder letter and earnings call, management highlighted that the Ad Tier enables lower prices and additional revenue and profit. The Company stated in the earnings call that they expect that ads revenue will roughly double year-over-year and that they are currently seeing a 150% increase in our ads sales commitments.
Netflix remains upbeat about the long-term opportunity, given the size of its user base. The company continues to work on advertising business features, both to scale and to build out the technical capabilities. In particular, the company called out that they are scaling faster than their ability to monetize the growing ad inventory. This is creating a short-term drag on ARM. The company is working to balance building ads scale and revenue growth.
Ad-supported revenue expectations: Currently, consensus projects total ad-supported revenue to expand to over $7.5 billion by the end of FY 2027, up 4x from FY 2024 of $1.8 billion. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $2.8 billion to $16.2 billion.
Longer-term Outlook
Based on Visible Alpha consensus, the operating profit margin is expected to grow from 26.6% in FY 2024 to 32.1% in FY 2027. Currently, consensus estimates the operating margin to surpass 30% in FY 2026, and for this to exceed 32% by the end of FY 2027, which may be aggressive given the investment likely required to scale the ads business. There is significant debate among analysts with respect to FY 2027 margin estimates, which range from 29% to 34%. This margin growth is expected to take FY 2024 expected diluted EPS from $19.76/share to $35.07/share or 23x FY 2027 P/E and a consensus target price of $778.
Netflix Consensus Estimates
Source: Visible Alpha consensus (October 21, 2024)
Microsoft, Alphabet, and Amazon: Earnings Previews
By: Melissa Otto, CFA
Earnings Preview Summary
Microsoft (NASDAQ: MSFT), Alphabet (NASDAQ: GOOGL), and Amazon (NASDAQ: AMZN) have seen mixed stock performance year to date. Going forward, consensus 2025 P/E multiples for these stocks are in the 20-30x range with consensus target prices expecting over 20% further upside for these three mega caps. This is an uptick from last quarter, as shares have pulled back. Performance in the quarter coupled with the outlook will likely determine the path of these three mega-cap tech stocks into the next quarter and next year. Will investors rotate out of the mega caps and put money to work elsewhere or stay put?
Microsoft (MSFT) Q1 2025 Earnings Preview: AI to Drive Upside?
Microsoft – Consensus Expectations for Q1, Past Earnings Surprises, Consensus Revisions, and CAGR
Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.
According to Visible Alpha consensus, total revenues expected for Q1 have remained around $64 billion since the April quarter, driven by resilience in its core business segments. In particular, the Intelligent Cloud segment, which makes up over 40% of total revenues, is projected to remain solid, with consensus estimates now expecting $126.6 billion for FY2025, driven by Azure. While Azure revenues are expected to generate $21 billion in Q1, the profitability of the Intelligent Cloud segment is a source of debate among analysts. Currently, the Q1 2025 consensus of 8 analysts for the Intelligent Cloud business’s operating profit margin is 45.9%, but ranges from 44% to 49%, suggesting this segment may deliver a surprise in the Q1 release. This range expanded by 100 bps since last quarter.
We are closely watching what the company will say about the outlook for AI and Copilot, as Microsoft’s FY 2025 CapEx numbers have continued to increase steadily since last year. According to consensus projections, CapEx estimates are projected to increase over $15 billion from $44.5 billion at the end of FY 2024 to $59.0 billion in FY 2025, up nearly 4x from FY 2020.
Microsoft stock has traded up 4.9% since the April earnings release, and is up 11.4% ytd, meaningfully underperforming the 23% delivered by the S&P 500. The consensus P/E for FY 2026 is 27x. Could the Q1 release and 2025 outlook begin to drive outperformance in the stock?
Microsoft – Consensus Estimate Revisions
Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.
Alphabet (GOOGL) Q3 Earnings Preview: What’s Happening to Margins?
Alphabet – Consensus Expectations for Q3 2024, Past Earnings Surprises, Consensus Revisions, and CAGR
Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.
Alphabet Q4 2023 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q3 2024 have remained around $86 billion since the April quarter, driven by resilience in its search business. In addition, the Q3 consensus expectations for operating income and EPS remained around $26 billion and $1.85/share since last quarter. Questions have been emerging about the impact of AI on its core business, but have not impacted consensus revenue estimates for Q3 or the full year. However, consensus EPS of $1.85/share ranges from $1.64 to $1.98 for Q3, driven by differing assumptions around costs. It will be interesting to hear what Alphabet says about the outlook.
We are closely monitoring the trend of the Cloud business. The operating profit margin has been trending better. Analysts expect the Cloud business to generate a 10.4% operating profit margin in Q3 2024, down 90 bps since last quarter. However, the 25 estimates range from 4% to 14%, signaling continued divergent views about the performance of this business.
For the full year, analysts are also split in their views. For the Cloud business, Visible Alpha consensus expects the operating profit margin to hit 11% in FY 2024, but ranges from 8.8% to 13.4%. Longer-term, the consensus Cloud margin is estimated to generate a 15.5% margin by the end of FY 2026, ranging from 10.8% to 20.5%. What will be the right margin level for Alphabet’s Cloud business?
Alphabet stock has traded down -9% since last quarter’s release and up 19.8% in 2024, underperforming the S&P 500’s 23% return. The consensus P/E for FY 2025 is 20x and 16x for FY 2026. Questions remain about the profitability of the Cloud business and its Unallocated and Other Bets. Could the Q3 release provide more visibility into the trajectory of 2025 profitability and give shares a boost?
Alphabet – Consensus Estimate Revisions
Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.
Amazon.com (AMZN) Q3 2023 Earnings Preview
Amazon – Consensus Expectations for Q3, Past Earnings Surprises, Revisions, and CAGR
Source: Visible Alpha consensus (October 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.
According to Visible Alpha consensus, Online store revenues expected for Q3 have come up slightly from last quarter, from $58.8 billion to $59.6 billion, driven by strength in Amazon’s North America online retail business. Consensus expectations for AWS expectations have remained around $27 billion. The focus will likely be on the Q3 performance and the remaining 2024 outlook for the North America and AWS margins and their impact on EPS. The critical Q4 holiday selling period will be an important read into the consumer that may set the tone for FY 2025.
The North America operating margin has increased significantly from a meager 1.1% at the beginning of last year to an estimated 5.7% for Q3 2024. Operating margin expectations for North America have ticked down 60 bps since August, due to debates about the retail business. The 6.2% margin initially targeted after Q1 dropped to 5.7%. For Q3, the estimated margin ranges from 4.0% to 7.8%, with consensus at 5.7%. The estimated Q4 margin is expected to be 6.5% and 5.9% for the FY 2024. What will the company say about the outlook for the North America online retail business and the impact of the Kuiper investments?
AWS margin came in at 35.5% last quarter, and is expected to decline quarter-over-quarter 230 bps. For Q3, expectations have steadily increased up to 33.2%, an increase of over 200 bps since the April quarter. There is, however, a significant range of estimates for the Q3 AWS margin into this month’s release, with analysts expecting from 30% to 37%. The debate around AI is fueling the different assumptions.
The stock has traded up 7.3% since late April and up 23.5% year to date, in line with the S&P 500. The consensus P/E for FY 2025 is 32x and 25x for FY 2026. Could the Q3 release provide the next positive catalyst for the stock?
Amazon – Consensus Estimate Revisions
Source: Visible Alpha consensus (October 16, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024. Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 15, 2024.
Netflix (NFLX) Q3 2024 Earnings Preview
By: Melissa Otto, CFA
Netflix Inc. (NASDAQ: NFLX) will report Q3 2024 results on Thursday, October 17, 2024. 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 10, 2024). “Surprise” indicates the direction that specific line items beat or missed. “Revisions” show the trajectory of line items from a given date.
Netflix Q3 2024 Earnings Preview and Outlook
Q3 2024 expectations: Revenues are expected to be supported by continued paid-sharing, growth of the ads business, and further monetization. After the disappointment in Q2 2024, questions remain around the investments in the ad tier, increased competition, and its impact on paid sharing.
According to Visible Alpha consensus, the 28% margin is expected to be driven by total revenues of $9.8 billion and operating income of $2.7 billion in Q3 2024. These estimates have not changed much since last quarter. These projections are driven by consistent expectations for U.S. streaming and an uptick in ad-supported revenue. It is worth highlighting that since the July quarter, ad-supported revenue has moved back up to $549 million, but is still lower than the initial expectation at the beginning of FY 2024.
While there does not appear to be a meaningful shift in overall top-line and operating profit expectations from the July quarter, earnings estimates have moved up from $5.05/share to now $5.12/share.
The stock has traded up around 13% to $727 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?
Q4 2024 expectations: Currently, the Q4 2024 revenue is expected to be $10 billion. Revenues are expected to be supported by price increases, growth of the ads business, and further monetization. Operating margin is expected to be 21%, a year-over-year improvement of 400 bps.
FY 2024 expectations: The company expects to grow revenues by increasing engagement trends and reducing churn with a more diverse entertainment offering. Gaming and the growth of ads could be key drivers in H2 2024. According to consensus, analysts expect the company to generate a 26% margin from revenue of $38.7 billion and $10 billion in operating profit in FY 2024, which has not changed much since April 2024 and is in line with Netflix’s guidance.
Figure 2: The Direction of Key Netflix Estimates
Source: Visible Alpha consensus (October 10, 2024). Stock price data courtesy of FactSet. Netflix stock price is as of the market close on October 11, 2024.
Google Cloud Summit: A Preview of Google Cloud Margin Expectations
By: Melissa Otto, CFA
Alphabet Inc.’s (NASDAQ: GOOGL) Google Cloud CEO, Thomas Kurian, shared his thoughts on AI innovation at the Google Cloud Summit. Kurian emphasized the importance of supporting startups and highlighted several ways Google Cloud is doing this. He highlighted that Google Cloud is giving startups focused on building foundational models access, both, to the entire technology stack and the developer ecosystem. Kurian noted that it is not simply the chips, but also the software layer that is helpful and of interest to startups. He explained that there are a number of startups building applications on the platform. This should be a longer-term positive for Google Cloud’s growth.
Since last year, Alphabet has shifted gears on its AI strategy. Google Cloud has continued to show improvements. However, the size and profitability of Google Cloud still trails AWS and Azure. While innovations in the chips and the models have excited the market about the potential for GenerativeAI (GAI) applications, there has not been much innovation for the end user. Will startups drive the next generation of GAI applications and growth for Google Cloud?
Google Cloud CMO Alison Wagonfeld with CEO Thomas Kurian at Google Cloud Summit ‘24
Source: Google Cloud Summit (October 8, 2024)
https://cloudonair.withgoogle.com/events/summit-startup-24
Operating Margin Expectations
One of the key aspects of the Alphabet investment story is that Google Cloud continues to improve its operating profit margin. This business broke even and generated a 5.2% operating profit margin in FY 2023, or $33 billion in revenue and $1.7 billion in operating profit. Based on Visible Alpha consensus, Google Cloud is now expected to generate a 10.4% operating margin, up from 9.8% in July in Q3 2024. By the end of FY 2024, consensus now expects an 11% operating profit margin, or $4.7 billion in operating income on $42 billion in revenue. However, there is some debate about the Google Cloud business, with operating profit estimates ranging from $3.8 billion to $5.8 billion. Longer term, Google Cloud is expected to achieve a 15.5% operating profit margin by the end of FY 2026.
While the margin improvement for Google Cloud was positive in FY 2023 and H1 of FY 2024, it remains far from the profitability of the company’s main Cloud competitors. Microsoft delivered a 45.1% operating profit margin in its Intelligent Cloud business and Amazon’s AWS segment generated a 35.5% margin last quarter. However, it is worth noting that both Microsoft Intelligent Cloud and Amazon AWS are each expected to see margins pull back going forward, according to Visible Alpha consensus.
The Google Cloud innovations supporting startups are designed to add value to the user’s existing workflows by helping to make the user more efficient and productive with their existing tools. However, it is unclear how long it will take for these AI product innovations to drive revenues and profitability in the Google Cloud business segment, especially among small enterprise and individual users. Google Cloud will need to deepen its monetization with all users to move the needle meaningfully on operating profit, which may prove challenging given AWS and Azure’s size and profitability in cloud and legacy tools.
Google Cloud Consensus Estimates
Source: Visible Alpha consensus (October 8, 2024). Stock price data courtesy of FactSet.
Alphabet’s current stock price is as of the market close on October 7, 2024
Alphabet’s Key Financial Items
Source: Visible Alpha consensus (October 8, 2024). Stock price data courtesy of FactSet.
Alphabet’s current stock price is as of the market close on October 7, 2024
Final Thoughts
The development and adoption of GAI is in its infancy, but evolving quickly. Google Cloud seems poised to benefit from this technology shift. However, how the profitability of this business will ultimately shake out will be a critical long-term investment question for the stock. Will Google Cloud be able to carve out a more profitable place in the cloud landscape and move more quickly toward the 27% margin Amazon achieved last year for AWS?
Meta Connect 2024
By: Melissa Otto, CFA
Key Takeaways and Questions
- According to Visible Alpha consensus, Reality Labs’ sales are projected to hit $2.2 billion by the end of FY 2024, but losses are expected to continue.
- Priced at $299.99, will Quest 3S start to increase sales and reduce losses?
- Smart glasses are taking off.
- How long will it take for this category to grow sales and break even?
- Llama 3.2 is multi-modal.
- What impact could this have on Meta’s business model?
Meta Platforms (NASDAQ: META) hosted its Meta Connect 2024 conference on September 25-26, 2024. In the opening keynote speech, CEO Mark Zuckerberg highlighted new product innovations all geared toward making people feel closer and strengthening relationships. On the hardware side, the company showcased a faster, smoother Quest 3S VR headset and a prototype of an upgraded pair of smart glasses called Orion. In addition, Zuckerberg discussed the new Meta AI innovations.
Meta Quest 3S
Source: Meta Connect 2024 on September 25, 2024
Quest 3S Mixed Reality Headset
Meta’s Quest 3S mixed reality headset will ship on October 15 for $299.99, down from $499.99, a fraction of Apple’s $3,499. The game, Batman Arkham Shadow, will be included with Quest 3/3S this fall. Will these improvements and the $200 price drop help to stimulate sales this holiday season?
Improvements and optimization to the tech stack supported the Quest 3S mixed reality experience upgrade. The passthrough has also improved, but probably still trails Apple’s Vision Pro. Meta expanded its content and will integrate Dolby Atmos. Meta’s social apps have been rebuilt to benefit from the mixed reality experience. While gaming and consumer markets are important, Meta’s objective is to lay the groundwork for a general computing platform within the headset and to bring in many more users.
In addition to its core segments, Meta is also going after the enterprise market. Quest is going to be a natural extension of the PC. Meta has been working with Microsoft on remote desktop to take mixed reality to the workplace at scale.
How big could this opportunity be for Meta?
Orion
Source: Meta Connect 2024 on September 25, 2024
Smart Glasses
CEO Zuckerberg highlighted that smart glasses are taking off faster than expected. The next-gen smart glasses featured enhancements, including live translation and multi-modal integration to the AI assistant.
While these improvements to the Ray-bans are interesting, the next-generation augmented reality holographic glasses prototype, Orion, seemed to steal the show. A video showed Nvidia CEO Jensen Huang trying out Orion and commenting on the functionality and lightweight.
Orion and Nvidia
Source: Meta Connect 2024 on September 25, 2024
Implications for Reality Labs
With these new product releases, how they will help to drive revenues and reduce losses in this segment will be key. Reality Labs has been a meaningful drag on the company’s total operating profit margin with little visibility into when this drag will improve.
According to Visible Alpha consensus, Reality Labs’ sales expectations have been trending down. Since last quarter, analyst estimates for Reality Labs revenues have declined from $2.3 billion to $2.2 billion for FY 2024 and from $2.7 billion to $2.6 billion for FY 2025. In contrast, Analysts’ forecasts of operating losses at Reality Labs have improved from -$18.9 billion to -$18.5 billion in FY 2024 and from -$21.5 billion to -$19.9 billion in FY 2025. However, there is significant debate about the future level of losses for Reality Labs and a wide range of loss estimates.
The Stack
Source: Meta Connect 2024 on September 25, 2024
Llama 3.2
Meta featured its stack for its open-source Llama to support developers with a set of Reference APIs designed to help drive the adoption of the Llama models. To support Open Source AI, Meta also released Llama models which include small text (1B and 3B) for edge and mobile and multi-modal (11B and 90B) models.
The significantly declining cost was highlighted too. However, it is unclear how this will continue in the future with higher computing needs for future Llama upgrades.
Meta AI
Meta AI’s capabilities were in focus at the conference. Meta AI is an assistant to help answer questions and requests that will now be powered by Llama 3.2. CEO Zuckerberg called out that Meta AI has ~500 million users and will expand business AIs to companies.
Meta will roll out Meta AI Voice, translation, and enhanced multi-modal features that will enable users to share and ask questions in natural language. Meta AI will also expand to create content and images with AI.
Will these enhancements help to drive engagement in Meta’s family of apps, leading to higher sales in FY 2025?
META Segment Revenue and Income Consensus
Source: Visible Alpha consensus (September 26, 2024). Stock price data courtesy of FactSet. Meta’s current stock price is as of the market close on September 25, 2024
Oracle CloudWorld 2024
By: Melissa Otto, CFA
Oracle Corp. (NASDAQ: ORCL) hosted CloudWorld on September 12, 2024. Here are some of our key observations from the sessions.
Oracle CloudWorld
Oracle hosted CloudWorld on Thursday, September 12, 2024. There were a host of speakers from various divisions within Oracle. There was also a session with customers, including MGM Resorts, Nomura Research Institute, and Vodafone. The presentations aimed to bring the AI investment story to life and provide a comprehensive view of Oracle’s role and outlook.
The big news coming out of CloudWorld was the increase to its revenue target to over $66 billion, ahead of the consensus of $65 billion. Oracle maintained its EPS target for FY26. The company provided revenue and earnings estimates for FY29, highlighting its confidence and visibility in the direction. Currently, FY29 consensus expects revenue of $97 billion, below the >$104 billion Oracle highlighted. Will these estimates continue to move higher or does this indicate that consensus is somewhat skeptical of the outlook provided?
Oracle’s New Targets
Source: Oracle CloudWorld (September 12, 2024)
https://www.oracle.com/a/ocom/docs/corporate/financial-analyst-meeting-2024-kehring.pdf
Visible Alpha consensus estimates for revenue segments and EPS have moved up since September 9, 2024, indicating that analysts are increasingly more optimistic about the FY26 outlook.
The Direction of Oracle Estimates
Source: Visible Alpha consensus (September 24, 2024). Stock price data courtesy of FactSet. Oracle’s current stock price is as of the market close on September 23, 2024.
Clay Magouyrk, Executive Vice President of Oracle Cloud Infrastructure, gave a comprehensive look at the Cloud business. He called out that the important message to understand is that Oracle’s multi-cloud strategy is different because OCI is partnered with other cloud service providers. This enables the same level of service and quality.
Multi-cloud Approach
Source: Oracle CloudWorld (September 12, 2024)
https://www.oracle.com/a/ocom/docs/corporate/financial-analyst-meeting-2024-magouyrk.pdf
Doug Kehring, head of Operations at Oracle, highlighted the practicalities of the multi-cloud approach and how this focus is key to the revenue growth story. Based on data from 451 Research, he supported his strategy by highlighting that 98% of enterprises use two or more clouds. With the addition of AWS and Google Cloud this year, he expects the workload migrations to accelerate. This strategy will drive the sales and earnings growth for FY26 and beyond.
Source: Oracle CloudWorld (September 12, 2024)
https://www.oracle.com/a/ocom/docs/corporate/financial-analyst-meeting-2024-kehring.pdf
Looking Ahead
Back in the spring, Oracle shared a few interesting numbers from studies done by PWC and Grand View Research quantifying the impact of AI, estimating that AI’s predicted CAGR from 2023 to 2030 will be 37% and add $15.7 trillion to global GDP by 2030. Based on analysis from Insider Intelligence and ITU, Oracle highlighted that the adoption curve of AI has been much faster than smartphones and PCs.
This analysis and the outlook provided at CloudWorld suggest that momentum for generative AI adoption by enterprises may continue to be stronger than current expectations. Based on Visible Alpha consensus, Oracle estimates for its Cloud businesses have been grinding back to levels initially expected in early FY24. Could there be a catalyst in Q2?
Oracle’s Q2 Estimates
Source: Visible Alpha consensus (September 24, 2024)
