Meta Connect 2024
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
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
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
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
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
Oracle CloudWorld 2024
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
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
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
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.
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 $15.7 trillion to global GDP by 2030. Based on analysis from Insider Intelligence and ITU, Oracle highlighted that the adoption curve of AI has been much faster than smartphones and PCs.
This analysis and the outlook provided at CloudWorld suggest that momentum for generative AI adoption by enterprises may continue to be stronger than current expectations. Based on Visible Alpha consensus, Oracle estimates for its Cloud businesses have been grinding back to levels initially expected in early FY24. Could there be a catalyst in Q2?
Oracle’s Q2 Estimates
Macro and Mega Cap Tech: Meet Mrs. Watanabe
Introduction
I went to Japan this August for two weeks. In addition to meeting the intense heat, I sat down with many high-level executives, bureaucrats, and investors to discuss Japan’s future. I have been investing in Japan for many years and was surprised by my observations.
With a very favorable Yen/$ rate, it was refreshing how inexpensive everything Japanese seemed to be in dollar terms. In contrast, imported items, especially from the U.S., were pricey in Yen. Therefore it is no surprise that foreign tourists, especially from the U.S. have increased significantly, helping drive economic activity in the notoriously low-growth market. Japan is importing inflation and consumption.
As the Yen weakened and the dollar strengthened, it was also no surprise that Japan’s $1.8 trillion pension fund, GPIF, has benefited from its 25% allocation to foreign equities benchmarked to MSCI ACWI. This large position benefited from significant exposure to the U.S. and a 20% concentration in U.S. mega-cap technology stocks over the past few years.
In addition, U.S. imports of computers and accessories have jumped on the back of the AI boom. U.S. companies have likely been taking advantage of the strong dollar and making investments in next-generation technology at better dollar prices, which has probably helped Japanese exporters.
Mrs. Watanabe is a term used to describe Japan’s foreign exchange investors collectively. This group is notorious for taking large positions to benefit from currency and macro moves. Given the extreme currency moves from the past two years, concerns loom about how Mrs. Watanabe and other investors may start to reposition their portfolios. Asset allocation and currencies might shift dramatically as the Fed looks poised to start a path of rate cuts in the U.S.
The Dawn of the AI Revolution
Mega-cap U.S. technology stocks have been a dominant market force since early 2023, driving a significant portion of the upside to U.S./Global indices. At the end of 2022, the Fed’s rate hikes to tame inflation were well underway, supporting dollar strength. Shares bottomed and many of the largest technology companies cut costs and trimmed their headcount in early 2023, while investing in the next generation of AI. Since then, the AI revolution has taken the markets by storm. Companies, like Nvidia (NASDAQ: NVDA) and Super Micro Computer (NASDAQ: SMCI), have seen their share prices explode, on the back of the massive surge in CapEx by cloud service providers.
Figure 1: Share Price Performance from January 2023 to July 2024
Top AI-exposed U.S. Technology Stocks
According to the S&P Global Market Intelligence economics team, “imports of computers and computer accessories, collectively, have increased by 60% since December to all-time highs. These two categories, along with semiconductors, account for about half of the 7% increase in nominal imports since December. This is related to massive investments U.S. high-tech companies are making in AI and businesses and consumers upgrading.”
In addition, U.S. technology companies are likely taking advantage of the strong dollar to make these investments. These companies may be able to procure and import next-generation computers and accessories from Japan at lower dollar prices.
Figure 2: Imports of Computers
AI-exposed Companies at Crossroads: Squaring Revenues and CapEx
Since January 2024, SMCI + NVDA have driven over $100 billion in upward revisions to AI-exposed revenues. While these two companies have been a driving force behind the AI theme, Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Dell (NYSE: DELL), and Microsoft (NASDAQ: MSFT) have seen estimates increase this year. Expectations have risen and the investment community has been grappling with how best to assess the risk and reward of the AI theme.
Figure 3: AI-exposed Revenue Revisions at Top U.S. Technology Firms
While revenues are likely to benefit from AI exposure, the cost structure and cash flow of these technology companies has changed. Compared to previous years, expected operating expense growth slowed for most of the top AI-exposed firms since early 2023. Companies overhauled talent and reevaluated their cost structures. However, CapEx growth expectations outpaced opex since 2023, as these same companies significantly ramped investment in next-generation GAI infrastructure. With CapEx increasing at a faster pace than AI-exposed revenues, there is concern that the revenue growth from GAI may not materialize with the current expectations.
At the moment, these stocks appear to be at a nexus, as analysts debate whether or not expectations will grind higher on the broad adoption of Generative AI (GAI), especially as Apple (NASDAQ: AAPL) has now entered the race. The world is waiting to see if GAI will deliver on its promises of higher productivity in ways that will generate revenues and an ROI that will justify the significant CapEx investments.
Figure 4: CapEx Growth Relative to Sales Growth Expectations
Shifting U.S. Macro Tides from July 2024
Since the beginning of July 2024, many of the mega-cap U.S. technology stocks that had been outperforming started to see underperformance, especially those most geared to the AI growth story. Mega-cap technology stocks missing expectations in their earnings releases and outlooks were punished in the most recent quarter. Many questions started to emerge about the drivers of the performance and the direction of expectations and upside going forward.
Figure 5: Share Price Performance from July 2024 to September 2024
Compounding the complexity of these investment dynamics, the macro backdrop has started to shift and has added to the already fragile situation with the U.S. mega-cap technology stocks. S&P Global Market Intelligence projects September 2024 for the first U.S. rate cut. In the U.S., inflation expectations have come down and there are concerns about the resilience of the labor market, which has contributed to some weakness in the dollar. This dollar decline may impact the investment in AI, as imports of computers and accessories may become more expensive in U.S. dollar terms going forward.
Figure 6: S&P Global Market Intelligence U.S. Outlook
The Japan Factor: Significant Exposure to U.S. Mega Cap Tech
One factor that may be underappreciated by the market is the exposure of U.S. mega-cap tech to Japanese retail and institutional investors. As the Yen and Japanese growth receded over the past few years, Japanese investors were forced to look overseas for returns. This likely led to buying
in both well-known individual U.S. mega-cap technology stocks and the major U.S./global indices, which are heavily concentrated in the largest U.S. mega-cap technology stocks. Adding foreign exposure enabled Japanese investors to diversify their Yen assets both toward global growth and a strengthening U.S. dollar, as inflation surged in the U.S. This strategy has been overwhelmingly successful.
Since January 2021, the Yen has dramatically weakened from 103 to a peak low of 161 JPY for $1 USD and the S&P 500 returned around 50%, giving Japanese investors the double benefit of both stock outperformance coupled with an appreciating dollar. In addition, savvy investors have also leveraged this strategy by executing a carry trade by borrowing Yen at historically low rates and investing the proceeds in U.S. growth stocks.
Figure 7: Correlation of the Yen and the S&P 500 Index
In July, the Yen hit a low at 161/$, a level not seen in decades, leading to whispers that the Bank of Japan may move to reduce the inflation on imported goods. In addition, the weak Yen has led to a surge in exports and foreign tourists that helped drive growth and consumption in Japan’s historically anemic economy, which some suggested was leading to overheating. The U.S. saw a whopping 70% increase in tourists to Japan, which was likely driven by the weaker Yen.
Figures 8: Tourism and Key Economic Indicators
As rumored, the Bank of Japan raised interest rates for the first time in over ten years, surprising carry trade investors who did not believe it would happen. This rate move was followed by weaker-than-expected U.S. job growth, which led to a strengthening in the Yen. In addition, several key U.S. mega-cap tech earnings came in a bit below expectations leading to selling pressure. The combination of U.S. stocks and the currency both moving against carry trade investors forced selling in their positions, fueling volatility in global markets.
Since early August, the S&P 500 has stabilized, despite continued strengthening in the Yen. S&P Global Market Intelligence projects the Yen to continue to strengthen through 2026 and for the Bank of Japan to raise rates again in March 2025. This outlook may reignite volatility in U.S. mega-cap technology stocks and currency markets. However, this time it may not be prompted by a negative response to a carry trade gone wrong, but by a longer-term asset allocation decision by Japan’s retail and institutional investors.
Simply looking at the $1.8 trillion Japan Government Pension Fund (GPIF), 25% is allocated to the MSCI ACWI, approximately $450 billion. This index significantly outperformed the other asset classes, due to the 20% concentration in outperforming U.S. mega-cap technology stocks. GPIF’s approximately $90 billion exposure benefitted both from the AI theme and the strength of the U.S. dollar.
If the GPIF were to decrease its asset allocation to MSCI ACWI by 3%, that would lead to the selling of $10 billion in the U.S. mega-cap technology stocks concentrated in the MSCI ACWI.
While the exposure in GPIF is significant, it is only one example of the asset allocation impact. There is likely broad ownership of these U.S. mega caps across a variety of domestic Japanese retail and institutional investors, who have wanted to diversify their portfolios, benefit from dollar strength, and growth in the U.S. technology stocks. The full magnitude of the exposure to these stocks is difficult to aggregate and fully quantify. However, it is probably significant and may lead to future volatility.
Figures 9: Japan’s Government Pension Holds over $450 Billion in MSCI ACWI
Investment Assets and Portfolio Allocation
(Pension reserves managed by GPIF and the Pension Special Account)
GPIF Q1 2024 Asset Class Performance and MSCI ACWI Index Concentration
Cumulative Returns Since Fiscal 2001
Final Thoughts
As the U.S. tamed inflation, the global macro outlook has started to change. This month, the Fed is expected to start a series of cuts. As the world prepares for this policy shift, we are likely entering a period of a weaker dollar and slower U.S. growth. At the same time, expectations for U.S. mega-cap technology stocks have increased. Their concentration in U.S./Global indices remains significant and may lead to underperformance if these expectations are not met or exceeded. Further compounding these trends, global investors may have to revisit their existing asset allocation and position for the next two years of possibly stronger growth and currencies outside the U.S. As we move into the Q4 of this year and gear up for 2025, will the U.S. mega-cap stocks and the AI trade continue to outperform?
Dell’s Q2 2025 Earnings Review
Dell Technologies (NYSE: DELL) reported fiscal Q2 2025 results on Thursday, August 29, 2024. What happened during the release and earnings call, and what are the key points to focus on?
Dell’s Fiscal Q2 2025 Earnings Release
Dell delivered total revenues for Q2 of $25.0 billion, beating Visible Alpha’s consensus estimate of $24.1 billion by $0.9 billion, driven by strong demand for AI servers. The Infrastructure Solutions Group (ISG) segment saw its Q2 revenue surge to $11.6 billion, $1.0 billion ahead of the $10.6 billion consensus estimate coming into the quarter.
The company delivered a respectable AI server backlog of $3.8 billion in Q1, but it led to disappointment in the stock, due to the lack of ISG operating profit growth generated by an additional $1.7 billion in AI server shipments year over year. Dell explained on their earnings call that the headwinds the company saw in Q1 did not persist in Q2. In Q2, the company shipped $3.1 billion of AI servers and the AI server backlog remained at ~$3.8 billion. Training foundational models are still a large percentage of the pipeline. The company is ready to ship more AI servers in Q3, and this is included in the guidance.
The ISG segment’s non-GAAP gross margin came in at 33.2% in Q2, a bit below the consensus of 33.6% and down from 37.3% in Q2 2023. Despite this decline in gross margin, the ISG operating profit margin came in at 11%, ahead of the 10% expected. ISG’s operating profit was expected to generate nearly $1.1 billion in Q2 2024 but, instead, reported $1.3 billion, ahead of last year’s $1.05 billion. In addition, Dell expects the ISG operating margin to continue to improve in the H2.
Figure 1: Revisions of Dell estimates
The Outlook
Near-term growth
For fiscal Q3 2025, Dell guided to $24.0-25.0 billion in total revenue, in line with expectations of $24.7 billion for Q3. The ISG segment revenue is projected to make up $11.3 billion, and to see its margin improve quarter over quarter. The company called out improvements in the storage business and operating expense scaling. The ISG consensus margin for Q3 is expected to be 11.7%, up from 11.0% in Q2.
Long-term outlook
Dell guided FY 2025 revenues to $95.5-98.5 billion, up from $93.5-97.5 billion, in line with the $96.4 billion expected by analysts ahead of Q2. In addition, the company highlighted that ISG will deliver 11-14% long-term margins. Currently, Visible Alpha consensus is projecting ISG’s operating profit margin to jump from 8% in Q1 this fiscal year to over 12% by the end of fiscal year 2026.
Looking further out, analysts remain bullish on the demand for AI servers. Based on six sources, analysts expect to see AI server revenue generate $10.6 billion in FY 2025 and to expand to $13.8 billion in revenue in FY 2026. ISG revenue is expected to grow to $51.3 billion in FY 2026, with nearly all of the year-over-year increase coming from the AI servers. ISG profitability is expected to exceed 11.0% operating profit margin this year and to increase to 12.0% by FY 2026. How long will it take to return to the previous 13% levels?
According to Visible Alpha consensus, EPS is expected to grow nearly 20% from $7.86/share in FY 2025 to $9.39/share in FY 2026. Estimates range from $8.75/share to $10.09/share, putting the FY 2026 P/E consensus at 12x, and in the 11x-13x range.
DELL stock has traded down around 32% since last quarter’s May earnings release, but is up 4% since last week’s most recent announcement on August 29, 2024. Will the ramp in AI servers continue? Will ISG’s profitability return to beat expectations and be a catalyst in H2 2025?
Figure 2: Dell consensus estimates
Nvidia’s Q2 2025 Earnings Review
Nvidia Corp. (NASDAQ: NVDA) reported fiscal Q2 2025 results on Wednesday, August 28, 2024. What happened during the release and earnings call, and what are the key points to focus on?
Nvidia’s Fiscal Q2 2025 Earnings Release
Nvidia delivered total revenues for Q2 of $30.0 billion, beating Visible Alpha’s consensus estimate of $28.7 billion by $1.3 billion, driven by continued revenue growth of Nvidia’s Data Center segment. The segment saw its Q2 revenue surge to $26.3 billion, $1.3 billion ahead of the $25.0 billion consensus estimate coming into the quarter and capturing all of the beat to expectations.
This revenue surge has continued to be driven by strong demand for Hopper GPUs, particularly from cloud service providers. On the earnings call, the company highlighted that Hopper supply and availability have improved. Blackwell demand is well above supply and is expected to continue into next year.
However, the Data Center segment’s non-GAAP gross margin dipped to 78% in Q2, in line with consensus. This muted the magnitude of the surprise to the EPS line with non-GAAP diluted EPS of $.68/share, exceeding the consensus of $.65 by 4.6%, less than previous beats. In addition, Nvidia announced approval of a $50 billion buyback, which some viewed as a bearish sign.
Figure 1: Nvidia estimate trends
The Outlook
Near-term growth
For fiscal Q2 2025, Nvidia guided $1 billion ahead of expectations to $33.1 billion in total revenue, with analysts now projecting the Data Center segment to make up $29.1 billion, up from $28.0 billion. In addition, Nvidia guided total gross margin to continue to be around 75% levels, down 50bps from 75.5% last quarter, driven by a mix shift in the Data Center business.
Looking further out, analysts remain bullish on the Data Center segment. Since the Q2 release, analysts have increased their full-year Data Center revenue estimates by another $1 billion for FY 2025 to $110.6 billion, driven by continued optimism around GPU demand and the release of Blackwell. According to Visible Alpha consensus, Data Center revenues for FY 2026 are now expected to jump to $168 billion, up from $144 billion on May 22, 2024, with consensus EPS increasing over 15% to $4.10/share. It is worth noting that since last year, Data Center revenue revisions for Nvidia have increased by over $200 billion and reflect where current expectations are for the company’s outlook.
Figure 2: Nvidia Data Center revenue revisions
On the earnings call, the company highlighted that the new Blackwell production ramp has been pushed out and is now scheduled to begin in the fourth quarter and continue into FY 2026. In Q4, Nvidia expects to get several billion dollars in Blackwell revenue. He also noted that ”demand for Blackwell is incredible” and that it “provides 3-5x more AI throughput in a power-limited data center than Hopper”. While analysts debate the quarterly pace and timing of the B-series and GB-series ramps, the long-term expected growth is projected to add to revenues in FY 2026 and FY 2027.
P/E debate: The range of Data Center estimates
The range of estimates has continued to narrow for the Data Center business in FY 2025, suggesting the market has increased conviction in the direction of this segment this year. For FY 2026, however, the range of estimates has narrowed slightly but remains substantial, implying that there is still significant debate about Nvidia’s growth outlook. The top-end estimate expects $212.5 billion, up from $189.9 billion, while the low-end estimate is now at $144.4 billion, up from $119.5 billion, driven by differing views about GPU demand and the ramping pace of new GPUs.
Non-GAAP diluted consensus EPS for FY 2026 is now projected to be $4.10/share, up 15% from Q1 2025. But there is a nearly $2.60/share range in expectations, from $5.46/share to $2.84/share. Current FY 2026 P/E ratios range from 23X to 44X. For FY 2027, the range expands from 17X to 68X, driven by different assumptions about the timing and magnitude of Data Center revenue growth.
NVDA stock has traded down over 6% since the earnings release, and is up nearly 24% since the Q1 release on May 22, 2024. Will the ramp of Blackwell drive the Data Center business to beat expectations in Q4 and into FY 2026?
Figure 3: Nvidia consensus estimates
Long-term growth
Huang continued to emphasize that the industry is experiencing a major change. He expressed his optimism about the Data Center’s move to accelerated computing to create AI factories and noted that accelerated workloads will save power and cost. Leveraging Nvidia’s accelerated computing capabilities is enabling cloud service providers to provide a foundation for enterprises to begin integrating generative AI into their workflows. What will earnings look like in three years?
Nvidia’s Q2 2025 Earnings Preview
Nvidia Corp. (NASDAQ: NVDA) will report fiscal Q2 2025 results on Wednesday, August 28, 2024, after the market close. Here are the key numbers that we’re watching.
Figure 1: Nvidia – consensus expectations for Q2 2025, past earnings surprises, revisions, and CAGR
Nvidia’s Q2 2025 Earnings Preview
According to Visible Alpha consensus, total revenues of $28.7 billion expected for Fiscal Q2 2025 have not moved much from fiscal Q1 2025 earnings in May. 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 Q2 increase from a mere $8.8 billion in January 2023 to its current projection of $28.7 billion, up over 3x. 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 Q2 edged up slightly higher from $24.7 to $25.0, according to consensus. While the pace of analysts’ upward revisions to the Data Center segment has moderated since the Q4 release in late February, it will be important to see how Nvidia guides the market for Q2 and the rest of FY 2025, and to what extent higher pricing and volumes will be expected to continue. In particular, the outlook for Blackwell will likely be important. It is worth noting that the consensus gross profit for the Data Center segment for FY 2025 has decreased by $3 billion since last quarter, reflecting lower expectations for Q4 2025.
Currently, there is significant debate about the performance of the Data Center segment. Based on Visible Alpha consensus, this business is projected to generate $25.0 billion in revenues in Q2 2025. For FY 2025, Visible Alpha consensus for this segment has increased over $12.0 billion to $105.9 billion since the Q4 2024 release in February. However, the estimates now range from $99.2 billion to $120.8 billion, a significant narrowing from the February range of $65.4 billion to $121.2 billion. The FY 2026 expected Data Center revenue range from $128.8 billion to $215.3 billion remains significant, causing the expected FY 2026 consensus P/E to be 33x and to range from 23x to 45x.
The stock has traded up around 37% since the May release, and is up around 93% since the February release. Could the Q2 release provide the next positive catalyst for the stock or are expectations largely priced in for now?
Figure 2: Nvidia consensus estimates
Figure 3: Nvidia’s key financial items
Big Tech Earnings Reviews: Meta, Microsoft, Amazon & Apple
Big Tech companies — Meta (NASDAQ: META), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Apple (NASDAQ: AAPL) — reported their latest earnings. Here’s a recap of those earnings, some key takeaways, and the resulting shifts in analysts’ estimates, according to Visible Alpha consensus.
Summary of Earnings
For the mega-cap tech companies, this earnings season has been dominated by mixed results around the core businesses and investing in generative AI (GAI). The dynamics of juggling talent and investment in multiple layers of the stack have added complexity to the business fundamentals. The mega-cap firms are all, in their own way, enhancing aspects of infrastructure, building off the existing large language models (LLMs), and supporting an environment for creating new GAI apps. However, given the strong pace of both CapEx and OpEx spending, there has been some concern that revenues have not grown in tandem and expectations have become too high.
When will revenue growth begin to expand as rapidly as expenses?
CapEx and OpEx Snapshot
Earnings Overview: META, MSFT, AMZN, AAPL
Meta Platforms’ Q2 2024 Earnings
According to Visible Alpha consensus, total revenues for Q2 were in line with expectations at $39.1 billion, driven by solid performance in the Family of Apps segment, especially in the U.S. and Europe. However, operating profit exceeded expectations by around $350 million at $14.9 billion, driven by resilience in the Family of Apps.
The company’s revenue outlook for Q3 was in line with expectations, but full-year expense guidance was better than expectations. Consensus now expects the Q3 operating profit to be $15.9 billion, nearly $1 billion higher than pre-Q levels, driven by higher profitability at the Family of Apps. For 2024, post-earnings expectations for operating income from the Family of Apps have increased by almost $2.0 billion to $82.5 billion, driven by lower expenses in the business. In addition, the projected losses from Reality Labs for 2024 have remained flat since the earnings release.
In addition, CEO Mark Zuckerberg highlighted that the company will continue to invest in the infrastructure to support Generative AI because it is expected to drive marketing and customer engagement across the Family of Apps. CapEx came in below consensus for the quarter and is projected to be at the higher end of their initial FY guidance for H2 2024 and in line with expectations. On the earnings call, Meta explained that CapEx will further increase in 2025, but based on comments from the CFO, the company plans to remain flexible and disciplined around its spending.
META stock has been an outperformer year to date, up nearly 40%, but has pulled back a bit on the tech sell-off. Will Meta remain disciplined in H2 2024 and 2025 and remain resilient?
Meta Platforms Revisions
Meta Platforms Consensus Estimates
Microsoft’s Fiscal Q4 2024 Earnings
According to Visible Alpha consensus, total revenues for Q4 were in line with expectations, coming in at $64.7 billion, driven by the Intelligent Cloud segment, which made up over 45% of total revenues and over 50% of total operating income. The profitability of the Intelligent Cloud business beat expectations by over 100 bps in the quarter. Ahead of Q4 2024, a consensus of 14 analysts for the Intelligent Cloud segment’s operating profit margin was 44%, but Microsoft delivered a 45.1% margin, finishing out FY 2024 with a better-than-expected 47% margin.
In the earnings call, Management highlighted that AI and Cloud products will continue to drive growth. However, the high expectations projected initially seem to be coming down. For 2025, Azure’s post-earnings consensus revenue edged down slightly. In addition, the overall Intelligent Cloud margin is expected to decrease nearly 170 bps year-over-year to 45.4%. The operating profit margin for this business segment is projected to remain at 45-46% levels till the end of FY 2027. Will the generative AI investments continue to drive upside to fundamentals in 2025 or have growth and margins peaked in 2024?
CapEx numbers increased by more than $2 billion expected in Q4 2024 to $13.9 billion. According to consensus projections, CapEx estimates have climbed $13.6 billion from $45.4 billion in January 2024 to currently $59 billion for FY 2025, up significantly from FY 2019 and outpacing peers. Coming out of this quarter, the 2025 CapEx estimate has increased another $4.5 billion, moving from $54.4 billion to $59 billion. Since January 2024, the consensus CapEx estimate for FY 2026 has moved up from $48.3 billion to $62.4 billion, increasing over $14 billion and demonstrating the strong pace of investment for AI platforms and tools.
Microsoft stock has been up 8.6% year-to-date, but has been an underperformer post-earnings. Could the Q1 be a catalyst for the stock?
Microsoft Revisions
Microsoft Consensus Estimates
Amazon’s Q2 2024 Earnings
Total revenues for Q2 were over $2 billion below consensus, driven by lower revenues in North America and International retail, but were offset by better-than-expected performance at AWS.
The North American retail operating margin increased to 5.6%, but was below the consensus expectation of 5.9%. After the Q1, consensus moved to a more upbeat 6-7% level outlook for the rest of H2 2024, but after the Q2, those expectations have now come down, especially for Q3.
AWS margin came in very strong at 35.5% in Q2, well ahead of the consensus estimate of 29%, driven by a combination of managing costs and a change in the estimated useful life of their servers. For 2024, analysts are now expecting a 34.4% margin, up from 28.3% at the beginning of the year. The company expects AWS growth to continue, driven by high demand for GAI.
The company guided to revenue of $154-159 billion, in line with consensus of $158.4 billion, and to operating profit of $11.5-15 billion, which came in below consensus of $15.7 billion, disappointing shareholders. The stock traded down 10% after the Q2 release. Could the retail business surprise to the upside in the H2 2024 or have retail margins peaked this year?
CapEx continued to increase in the quarter. Consensus for 2024 is now expected to be $70 billion, up over $5 billion since Q1. CapEx is projected to increase in 2025 to $75 billion, up significantly from $52 billion in 2023.
Amazon Revisions
Amazon Consensus Estimates
Apple’s Fiscal Q3 2024 Earnings
Total revenues for Q3 were in line with Visible Alpha consensus of $94.3 billion. Revenues of $45.1 billion from iPhone in Q3 were down 1% year-over-year. Based on consensus, Q3 iPhone 15 units were in line at 35 million, with estimates ranging from 29 million to 38 million units. China continues to decline, but this has been well understood by the market.
Overall full-year iPhone revenue expectations have started to improve post-Q3 2024. Currently, Q4 is expected to deliver $45 billion in iPhone sales and $200 billion for 2024, a small increase post-Q2.
While iPhone sentiment has come down since the beginning of the year, expectations for the high-margin Services segment and for total operating profit have remained consistent. In Q3, the Services segment delivered $24.2 billion, up 14% year over year and slightly better than consensus. Gross margin for the Services segment was a solid 74%, significantly higher than the 35.3% gross margin for Products, which was down 130 bps sequentially. The company said that it continues to see increased customer engagement, with the Apple ecosystem supporting the future growth of the Services business. Based on consensus, Services is expected to hit $118 billion at the end of FY 2026, up over $22 billion from this year’s estimate of $96.4 billion.
Vision Pro delivered another set of results this quarter, in line with expectations. For the full year, consensus revenue estimates for the Vision Pro have ticked up from an initial consensus projection of around $900 million to a current $1.2 billion.
The stock has traded up 3% around the Q2 release, and up a strong 30% since the Apple Intelligence announcement at WWDC, outperforming the S&P 500. Could iPhone upgrades start to exceed expectations in the H2 2024 or will it be a 2025 story?
Apple Revisions
Apple Consensus Estimates
Big Tech Earnings Reviews: Netflix and Alphabet
Big Tech companies — Netflix (NASDAQ: NFLX) and Alphabet (NASDAQ: GOOGL) — reported their latest earnings in July 2024. Here’s a recap of those earnings releases, some key takeaways, and the resulting shifts in analysts’ estimates, according to Visible Alpha consensus.
Netflix and Alphabet: Is the Ad landscape shifting?
Netflix and Alphabet missed expectations in a few key areas, leading to stock price underperformance since the earnings releases. At Netflix, while Q2 was solid, the Q3 revenue guidance came in a bit below consensus. At Alphabet, YouTube revenues came in below consensus, while Other Bets and Unallocated losses increased more than expected in Q2, leading to lower Q3 estimates.
Based on data from the Kagan Media and Telecom Summit, the environment for Netflix and YouTube looks to be getting tougher. While consumers are not spending more time on digital media, they have been increasing the number of digital services used. In 2019, consumers used 5 services, but this increased by over 50% to now 8 services, driven by SVOD (Netflix, Disney+) and FAST (Tubi, Roku). Furthermore, the Instream Video Ad market is expected to grow increasingly more crowded. Could this potentially tougher landscape explain some of the issues facing Netflix and YouTube? Could Amazon and Meta’s earnings and outlooks also be impacted?
Netflix Q2 and Outlook
Q2 performance: Netflix Inc. (NASDAQ: NFLX) reported Q2 2023 results on Thursday, July 18, 2024. Q2 revenue of $9.6 billion was slightly ahead of consensus estimates, driven by strong net adds. The company reported 8 million new subscribers, driven by overseas regions. The UCan market added 1.45 million new subscribers, which was down 3.3%, while APAC and LATAM showed strong double-digit increases. Netflix delivered a Q2 operating profit of $2.6 billion and a 27% operating profit margin, slightly ahead of consensus estimates coming into the quarter.
While the Company raised guidance, its new revenue outlook for Q3 came in below expectations. Pressure seems to be coming from Paid Sharing and the Ad Tier. The stock has underperformed since reporting on July 18, 2024.
Q3 2024 expectations: The company guided Q3 to 14% year-over-year growth with revenue of $9.7 billion, a bit below consensus estimates of $9.8 billion. Revenues are expected to be supported by the continued paid-sharing, growth of the ads business, and further monetization. Operating margin is expected to be 28.1%, a bit better than expectations.
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.
Longer-term: Based on Visible Alpha consensus, the operating profit margin is expected to grow from 26% in FY 2024 to 32% in FY 2027. Currently, consensus estimates the operating margin to hit 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 36%. This margin growth is expected to take FY 2024 expected diluted EPS from $19.13/share to $33.33/share or 20x FY 2027 P/E.
Netflix consensus revisions
Netflix Ads Business
According to the company, in Q2, the Ads tier grew 34% quarter-on-quarter and accounts for 45% of new sign-ups and continues to scale. In the Q2 shareholder letter and earnings call, management highlighted that the Ad Tier enables lower prices and additional revenue and profit.
Netflix remains upbeat about the long-term opportunity, given the size of their 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 giving advertisers more effective ways to buy Netflix.
Long-term ad-supported revenue expectations: Currently, consensus projects total ad-supported revenue to expand to nearly $7.7 billion by the end of FY 2027, up nearly 4x from FY 2024 of $2 billion. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $3 billion to $16.5 billion.
Netflix consensus estimates
Alphabet’s Q2 and Outlook
Q2 performance: Alphabet (NASDAQ: GOOGL) reported Q2 2023 results on Tuesday, July 23, 2024. According to consensus, total revenues for Q2 2024 of $84.7 billion were in line, driven by strength in Cloud, resilience in Search, but softness in YouTube. The sentiment around profitability started improving from Q1, but Alphabet beat expectations for operating income by nearly $1 billion, delivering $27.4 billion. Stronger-than-expected profitability in both the Services and Cloud segments were positive. However, the losses in the Other Bets and Unallocated line came in higher than consensus at -$3.3 billion in Q2 2024, diluting some of the positive impact from Search and Cloud.
The combination of YouTube coming in below consensus and the Q3 outlook has caused shares to decline nearly 10% this week.
Q3 2024 and 2024 expectations: Revenues are expected to be $86.3 billion, driven by 11% year-over-year growth in Search and YouTube and 29% in Cloud. Expectations for YouTube came down from pre-quarter consensus of 15%, suggesting a softer outlook than originally projected. Based on commentary from the call, Alphabet is expected to see margin headwinds in Q3 as investments will be pulled forward. Consensus operating profit has started to decrease slightly, indicating we may see further downward revisions to Q3 profitability. In addition, the Other Bets and Unallocated losses are expected to remain at -$3.3 billion in Q3 and Q4 2024.
Consensus capex is at close to $13 billion for Q3 and Q4 2024 and is projected to be over $50 billion for FY 2024. There is some concern that the expected revenue growth of 11-13% outlook is not enough to justify the capex more than doubling, moving from $24.6 billion at the end of 2021 to an expected $50.8 billion at the end of this year.
The Cloud margin: We have been closely monitoring the profitability trend of the Cloud business. Ahead of Q2 2024, the consensus Cloud margin was 9.6%, but this business delivered a better-than-expected 11.3% margin in Q2 2024, driven by AI products and infrastructure. As a result of the strong margin this quarter, analysts revised up estimates. Since April the expected margin has now increased by nearly 300 bps. Consensus now expects the Cloud business operating profit margin to be 10.9% for FY 2024, driven by increased profitability, especially in Q4 2024. Longer term, the Cloud business is now projected to hit a 15% margin by FY 2026.
Alphabet revisions
Alphabet consensus estimates
Meta & Apple Earnings Ahead
Meta (NASDAQ: META) & Apple (NASDAQ: AAPL) will report results next week. Here are the key numbers that we’re watching.
Meta (META) Q2 2024 Earnings Preview
Meta Platforms – consensus expectations for Q2 2024, past earnings surprises, revisions, and CAGR
According to Visible Alpha consensus, estimated total revenues for Q2 have moved up to $38.3 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 $19.1 billion, up from last quarter, but there is some debate among analysts. Into Q2 for the Family of Apps’ income from operations estimates range from $16.6 billion to $20.3 billion. For 2024, expectations for operating income from the Family of Apps have ticked down to $80.6 billion from $81 billion since last quarter, driven by tempered views about efficiency in the business.
In addition to the continued expected efficiencies in the Family of Apps segment, projected losses from Reality Labs for 2024 have decreased further since last quarter, suggesting efficiency is expected to continue to have an impact here too. Will Meta be able to continue managing costs in 2025?
The stock has been flat since last quarter. What new information will come out of the Q2 release that could potentially be a catalyst?
Meta Platforms consensus estimates
Apple’s Fiscal Q3 2024 Earnings Preview
Apple – consensus expectations for Q3 2024, past earnings surprises, revisions, and CAGR
Total revenues expected for fiscal Q3 have ticked up from the beginning of last year, according to Visible Alpha consensus, from $84 billion to $84.4 billion, driven by slightly increased optimism about the iPhone. Expected Q3 iPhone 15 units range from 29 million to 37 million, with consensus at 34 million or 77% of total iPhone units. Currently, Q3 is expected to deliver $38.7 billion in iPhone sales and $199 billion in 2024. Overall full-year iPhone revenue expectations have trended up since early 2024. Could the new Apple Intelligence capabilities help to drive upgrades?
In addition to the slightly improved iPhone sentiment, expectations for the high-margin Services segment also edged up for Q3 and FY 2024. 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 Q3, analysts estimate 72,500 units to be sold, generating $300 million. For the full year, consensus revenue estimates for the Vision Pro have remained flat at $1.2 billion.
The stock has rebounded since last quarter trading up 30% since the Q2 release, outperforming other Big Tech stocks and the S&P 500. Could the Q3 release provide another positive catalyst for the stock?
Apple consensus estimates
The Visible Alpha AI Monitor: Start of a Rotation?
The Visible Alpha AI Monitor aggregates publicly traded U.S. technology companies, providing a comprehensive measure of the current state and projected growth of the core AI industry. This encompasses the AI-exposed revenues for companies that are building AI infrastructure and capabilities for both enterprises and consumers.
Since the beginning of July 2024, the smaller companies in the AI Monitor started to see strong stock price performance, while many of the mega-caps have seen underperformance. This recent performance dichotomy has raised questions about a possible rotation out of mega-cap technology stocks and into both other sectors and smaller-cap technology stocks. Sentiment around smaller companies may be shifting as investors look for firms with strong growth and cheaper valuations against the backdrop of the Fed potentially starting to cut rates. However, the mega-caps still dominate the upward revisions to AI-exposed revenues. Is this the start of a broader rotation? What will be the catalyst for upward revisions across a broader array of companies in the AI Monitor?
Investors may use the Visible Alpha AI Monitor to generate new ideas to capture growth emanating from the core AI industry, as well as to evaluate the potential AI exposure of technology stocks in their existing portfolios. We have identified specific line items that capture potential growth of AI-related revenues that are available in the Visible Alpha Insights platform (see the goals, objectives, and methodology of the AI Monitor towards the bottom of this page).
Key Takeaways
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The Visible Alpha AI Monitor: Generative AI Adoption
The generative AI (GAI) trend gained momentum in 2023 as Cloud Service Providers invested heavily. In 2024, the GAI theme is continuing to evolve and gain momentum. This year looks poised to be the year of GAI adoption in enterprises. Visible Alpha is observing GAI make a greater push into organizations and attempt to drive efficiency and growth, while enhancing the client experience. The verdict is still out on whether or not GAI will yield real value for businesses and support stronger fundamentals and earnings growth. However, the trend toward GAI adoption is undeniable.
AI growth and performance overview
AI Monitor Post-Q2
In 2023, eight out of the 10 largest AI-exposed revenue generators drove strong stock price outperformance, while more than 50% of the smaller-cap AI stocks underperformed. Post-Q1, AI-exposed revenues were expected to grow by nearly $330 billion, from $410 billion at the end of 2022 to $740 billion at the end of 2025, driven overwhelmingly by the Top 10 largest in the AI Monitor.
Post-Q2, AI-exposed revenues are now expected to be over $370 billion, from $410 billion at the end of 2022 to $780 billion at the end of 2025, continuing to be driven overwhelmingly by the Top 10 largest. Sequentially, AI-exposed revenue expectations increased a further $40 billion quarter-on-quarter, demonstrating the optimism the market is pricing into the future of AI.
AI-exposed revenue aggregations
Nvidia Continued to Dominate in H1 2024
The H1 2024 revenue growth of the Top 10 is driven by the $360 billion, up a further $50 billion in Q2, of upward revisions analysts have made to Nvidia’s AI-exposed data center and Super Micro Computer’s AI-exposed server and storage systems revenues, which contributed significantly to both the AI-exposed revenue concentration and stock performance of the AI Monitor. In the H1 2024, Nvidia, Super Micro Computer, and Dell have been the drivers of higher expectations for revenue growth in the AI Monitor.
In the H1 2024, Nvidia revenue growth estimates jumped by a further $84 billion from the beginning of the year, making up 63% of the upward revisions of the Top 10. Super Micro Computer’s AI-exposed revenue in H1 increased an additional $20 billion. How may these dynamics change through the rest of 2024? Will Nvidia continue to dominate the upward revisions? Will new players emerge in the Top 10?
AI-exposed revenue revisions summary
Revenue Revisions & Stock Performance Summary
Currently, the Visible Alpha AI Monitor universe of 66 publicly traded U.S. companies is 77% weighted to the 10 largest companies, with the remaining 23% dispersed among 56 companies.
On a market-cap-weighted and AI-exposed revenue-weighted basis, the Visible Alpha AI Monitor continued to be driven by substantial stock price outperformance (vs. the S&P 500 index) of the largest companies this year. In addition, the smaller companies continued to underperform (vs. the S&P 500 index), especially on an equal-weighted basis year-to-date.
On an equal-weighted basis, the AI Monitor would have generated a significantly lower return when compared to the market-cap and AI-exposed revenue-weighted aggregations this year, driven by the drag of a lower return generated by the smallest names.
AI Monitor aggregated stock return breakdowns
Post-Q2 YTD (as of 7/17/2024)
Post-Q1 YTD (as of 4/15/2024)
Top 10
Based on an analysis of the 10 largest players, 2025 revenue forecasts for AI-exposed revenue segments doubled from $44 billion in Q1 to now $88 billion at the end of Q2 2024. However, $55 billion of the 2025 increase is from Nvidia, $11.6 billion from Super Micro Computer, and a further $9.3 billion increase from Dell, all significantly higher from Q1. The declines in revenue estimates that the rest of the Top 10 has seen since January 2023 have largely stopped since the beginning of 2024. The downward revisions were driven by lower expectations for AWS, Google Cloud, and Qualcomm QCT. The estimates for these companies have now started to tick up, suggesting that the cuts to 2025 revenue expectations may have been too deep.
The Rest (smaller contributors)
The remaining list of 56 companies may serve as a good place for investors to discover new ideas by surfacing expanding new players. While smaller companies in aggregate have not performed as well as the Top 10, there have been some clear outperformers relative to the composite. From July 1, 2024, the stock price performance of smaller contributors saw a clear uptick with 17 companies up 10% or more. Is this trend sustainable for the H2?
Among the smaller firms, revenue growth expectations are very mixed. Strong double-digit revenue growth is expected at some firms, while others are seeing estimates decline. These dynamics may help investors identify emerging trends in the space.
In H1 2024, we have already seen that to be true with Zeta Global delivering strong outperformance (vs. the Russell 2000), which may help position this firm longer term as an up-and-comer in the space. Vertiv and Palantir are mid-caps with strong AI-exposed revenues and stock prices showing positive outperformance.
In contrast to these outperformers, more than half of the smaller companies in the AI Monitor substantially underperformed the Russell 2000 return of 11% YTD. This weakness may imply that these companies are under pressure and may be seeing compression in their valuations. This weakness may make some of these companies acquisition candidates by larger firms. Five9 and UiPath fell by more than 40% YTD in 2024.
AI Monitor detailed breakdown (YTD)
AI Monitor detailed breakdown (MTD)
Visible Alpha 2024 Watchlist: Companies to Watch in 2024
In 2024, we are watching the pace at which companies will be moving more of their data to the cloud and enabling innovation with AI. The AI Monitor aims to help users observe the pace of data migration to the cloud by highlighting companies and line items. In particular, we have been watching several companies since the beginning of the year, and have recently added Apple after the Apple Intelligence announcement at WWDC on June 10, 2024. Apple will get added to the AI Monitor next quarter.
We are closely tracking the performance of Oracle’s Cloud Services and Microsoft Azure’s Infrastructure and Platform as a Service business. Together, this partnership may bring more organizations to the cloud and position enterprises to integrate AI into their workflows. As enterprises shift to the cloud and look for end-to-end solutions to support working with generative AI, Dell looks well-positioned.
As more data goes into the cloud, we are also monitoring Snowflake’s growth. This stock is down over 30% since it delivered lackluster guidance and changed CEOs. Snowflake enables organizations to de-silo their data and compare/share it with other data sources across the enterprise, serving as a good starting point for leveraging AI across their enterprise. At a recent tech conference, Snowflake management said “the most common type of data going into Snowflake is CRM data.”
And as more customer relationship data moves to the cloud and into Snowflake for sharing between marketing, sales, and other teams, Zeta Global may benefit from the need to unify and understand customer interactions.
As companies large and small establish their data, cloud, and AI strategies, what new innovations and companies will drive AI-exposed revenues in 2024 and beyond?
- Apple (NASDAQ: AAPL) – (newly added for Q3)
- Dell (NYSE: DELL)
- Oracle (NYSE: ORCL)
- Microsoft (NASDAQ: MSFT)
- Snowflake (NYSE: SNOW)
- Zeta Global (NYSE: ZETA)
Apple
Apple entered the Generative AI (GAI) movement and announced its version of a new personal intelligence system, Apple Intelligence, at WWDC on June 10, 2024. In the keynote, Craig Federighi, SVP of Software Engineering, showcased the updates and highlighted the new partnership with OpenAI. Apple Intelligence is only available on iPhone15 Pro/Pro Max, select iPads, and Macs.
The success of Apple Intelligence has the potential to drive a hardware replacement cycle, which could be a catalyst for the broader adoption of GAI. Given the enormous installed base of iPhones, Pre-15 Pro users may be motivated to upgrade their earlier version phones to leverage the new Apple Intelligence capabilities. Based on Visible Alpha, analysts expect iPhone 15 unit sales to range from 126 million to 158 million with consensus at 144 million this fiscal year. How will Apple Intelligence help to drive GAI usage by consumers and enterprises?
Dell
Dell has been seeing strong demand for its AI servers. However, the stock reacted negatively to the commentary around the AI server backlog last quarter. An over-optimistic backlog expectation seemed to have been impacting Dell’s growth expectations. While the company delivered a respectable AI server backlog of $3.8 billion in Q1, the disappointment in the stock came from the lack of ISG operating profit growth generated by an additional $1.7 billion in AI server shipments year over year in Q1.
Recently, Dell also highlighted new, embedded-AI capabilities for laptops. There is some debate in the market about the enterprise adoption of AI and, if it does happen, what the pace of it will be. Some analysts are forecasting it to be broad and fast, while others question if the adoption will even happen. Will Dell’s next-generation, AI-enabled laptops help broaden adoption within enterprises?
Oracle and Microsoft: How will this partnership help to drive cloud migration and AI in 2024 and 2025?
Access to data will be a critical dimension to anything a customer wants to do with AI. Back in the fall of 2023, Oracle CTO Larry Ellison and Microsoft CEO Satya Nadella explained that their partnership will enable customers to co-locate the Oracle hardware and software within the Azure Data Center, which will be key for fine-tuning, pre-training, or meta-prompting a model for AI.
With a large portion of data still located on-premise, they believe this collaboration should encourage companies to move to the cloud by lowering latency and increasing security. Once the data is in the cloud, customers can begin to innovate with it. From the Azure portal, users can provision an Oracle database, then marry that to Open AI and, ultimately, to the library of Microsoft technology.
Both Microsoft and Oracle estimates have ticked up since January. Currently, analysts are expecting Microsoft’s June 2024 Azure revenue to be $74 billion and to more than double to $155 billion by June 2027, driven by the growth of Infrastructure and Platform as a Service businesses within Azure. While Microsoft has been a driver of the move to GAI, it has not seen the significant upward revisions observed at Nvidia. In addition, the company has tripled capex spending from FY 2020 to close to $45 billion. Similarly, Oracle’s May 2024 revenue from Cloud Services is projected to double from $20 billion to over $40 billion by May 2027. Given the partnership, when will Microsoft’s Azure and Oracle’s Cloud Services revenue lines begin to meaningfully outpace expectations?
Snowflake
Speaking at a tech conference in December, Snowflake CFO Mike Scarpelli echoed points around the cloud, data, and AI that were similar to Oracle and Microsoft. He explained that to reap the benefits of generative AI, companies are going to use it in the cloud, instead of on-prem. Therefore, organizations will need to ensure their data is clean and in the cloud for their large language models to be useful.
As companies look to integrate AI into their organizations, the market for the Snowflake product looks poised to reaccelerate over the next year. However, the stock has declined 30% since the disappointing guidance in March and the surprising CEO change. CEO Sridhar Ramaswamy brings the engineering lens to the role. The Q1 earnings call did little to reset expectations for Ramaswamy and the stock. Have expectations been corrected enough? Could Q2 be a positive catalyst for the stock or could there be another leg down?
According to Visible Alpha consensus, AI-exposed revenues are estimated now to be $4.1 billion in CY 2025, down from last year’s expectation of $4.5 billion levels. The FY 2026 expected gross margin declined from an initial expectation of 74.6% to now 72.9%, driven by the slower expected top-line growth. There is currently debate about the earnings outlook for the company. The Q2 performance will likely be important for new CEO Sridhar Ramaswamy’s first year in the job.
According to Scarpelli, the most common type of data going into Snowflake is customer relationship management data. Therefore, we wanted to highlight a smaller-cap company that is bringing AI innovations to their client’s marketing teams: Zeta Global.
Zeta Global
With a market cap of $4.4 billion, Zeta Global is a smaller-cap company that looks well-positioned to benefit from its exposure to AI. Through the Zeta Marketing Platform (ZMP), COO Steve Gerber’s vision is to leverage their proprietary AI and data tools to unify identity, intelligence, and omnichannel activation into a single platform. Having clean data in the cloud for data sharing within organizations may become an increasingly important driver as customers look to centralize data for AI applications. Zeta Global’s partnership with data-sharing platform Snowflake may play a critical role in supporting the company’s growth.
According to Visible Alpha consensus, Zeta Global’s AI-exposed revenues are estimated to surpass $1 billion by year-end 2025, from $709 million in CY 2023, as organizations adopt more advanced marketing technology.
Regulatory Backdrop
The regulatory backdrop can have an impact on the potential adoption and growth of AI. Increased regulatory scrutiny is one potential obstacle to scaling GAI applications in organizations. In addition, there may be more regulatory hurdles around acquisitions that could bring about consolidation in the space. In the fall of 2023, President Biden issued an Executive Order to “ensure that America leads the way in seizing the promise and managing the risks of artificial intelligence (AI).” The Order contained initiatives to strengthen AI safety and security, privacy protections, innovation, and competition, along with supporting consumers, workers, and equity. In January 2024, the agencies completed more than two dozen activities around AI talent, risks, and implications for the U.S. In addition, the White House has created a blueprint for an AI Bill of Rights (ai.gov).
As the government continues to focus on AI and its implications for the U.S., Stanford University released an update in April 2024 to its AI Index. The report captures the number of new AI-related regulations by the agency in 2023 and shows the surge in proposed bills. The trajectory of the proposed regulations suggests we may see more regulations in 2024 and 2025. In addition, a wider range of agencies may be looking to add specific regulations going forward.
Proposed AI-related regulations by agency in the U.S.
The year 2023 witnessed a remarkable increase in AI-related legislations at the federal level, with 181 bills proposed, more than double the 88 proposed in 2022.
Source: Stanford University AI Index 2024 (https://aiindex.stanford.edu/report/)
U.S. AI-related regulations by agency
The number of U.S. regulatory agencies issuing AI regulations increased to 21 in 2023 from 17 in 2022, indicating a growing concern over AI regulation among a broader array of American regulatory bodies. Some of the new regulatory agencies that enacted AI-related regulations for the first time in 2023 include the Department of Transportation, the Department of Energy, and the Occupational Safety and Health Administration.
Source: Stanford University AI Index 2024 (https://aiindex.stanford.edu/report/)
Final Thoughts
In H1 2024, Nvidia continued to lead in the space, comprising over 60% of the total upward revisions to CY 2025. Super Micro Computer was the best performer so far this year, up over 200%. Nvidia, Vertiv, and ARM were all up over 100% in H1 2024 and have emerged as this year’s big performers so far as the industry looks for scalable infrastructure solutions. The focus seems to be shifting from cloud service providers (CSPs) to scalable enterprise applications and broadening adoption for GAI. For many firms, however, it is not clear how they will participate in bringing GAI to enterprises and grow the impact of AI-exposure in their business models. Going forward, it will be interesting to see how Apple Intelligence influences the landscape.
In 2024, we are watching the pace at which companies will be moving more of their data to the cloud and enabling innovation with AI in enterprises. We are interested to see how the partnership between Oracle and Microsoft could help drive more organizations to the cloud and set up their enterprises for integrating AI into their workflows. Through its data sharing and analytics capabilities, Snowflake is likely to play a role in the rollout of the AI ecosystem. Snowflake’s clients seem to be increasingly aiming to de-silo their data and organizations to understand how best to serve their customer base. As more customer relationship data moves to the cloud and into Snowflake for sharing and AI, it will be interesting to see if Zeta Global will continue to benefit from these dynamics happening in different parts of the tech stack.
Will the recent small-cap winners continue to drive the Visible Alpha AI Monitor for the rest of 2024?
AI Monitor Goals and ObjectivesThe objective of the Visible Alpha AI Monitor is to show the investment community which companies are likely to drive AI going forward. As the world embraces AI and its applications to enterprise workflows and our daily lives, big questions exist about how AI’s impact on company business models will unfold over the next 3-5 years. AI can potentially free people from tedious gruntwork to enable more focus on critical workflows that require human creativity and analysis. A primary goal of the Visible Alpha AI Monitor is to show which U.S. companies and specific line items we are keeping an eye on as the embryonic AI theme emerges across company fundamentals and begins to scale broadly across the economy. We are monitoring how AI may be reflected in the numbers and which companies may be benefitting more or less. This universe attempts to be comprehensive and to show investors the dynamics of both the large and smaller U.S. players. Additionally, it aims to help investors identify new names that may be smaller and less covered, but potentially growing and emerging more quickly. AI Monitor MethodologyUsing Visible Alpha’s comprehensive database of detailed estimates pulled directly from sell-side analysts’ spreadsheet models, we have assembled an aggregation with a universe of 69 publicly traded companies that are contributing to the infrastructure and broad scaling of AI capabilities. This monitor aims to provide a current and future snapshot as to where AI-related revenues are and are not growing across each of these 69 companies, particularly the 10 largest. We have aggregated the revenues of specific business segments at firms that are driving the wider AI trend. For larger firms, we have attempted to pinpoint where in their revenue model AI is driving growth. For some smaller firms, we are simply incorporating 100% of revenues. The AI-exposed revenue lines we identify are intended to be used as a proxy for monitoring the growth of each company’s AI business. Given both the lack of discrete company disclosures and how intertwined AI and conventional technologies and services can be, these lines should not be taken as exact quantifications of AI revenues, but are, we believe, the best systematic approximation available. The AI Monitor provides three measures of stock performance for its universe. These metrics are meant to show the returns of various weighting schemes. The returns are calculated on both an equal-weighted and market-cap-weighted basis. The universe performance of the AI Monitor is also weighted based on AI-exposed revenues and calculated in aggregate. From 2024, the return calculations were standardized, and market-cap-weighted now reflects year-over-year changes. For Visible Alpha subscribers, details of these companies can all be found within the Visible Alpha Insights platform. Each company included in the monitor has coverage by at least four sell-side analysts. In addition, given the quickly evolving state of the AI space, these line items are subject to change and may shift significantly over time. We plan to refresh the data on an ongoing basis and provide regular updates. |