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

Earnings Preview Summary: Rotation?

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

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

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

MSFT 1

Source: Visible Alpha consensus (July 16, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

According to Visible Alpha consensus, total revenues expected for Q4 have remained at $64.3 billion since April, driven by resilience in its core business segments. In particular, the Intelligent Cloud segment, which makes up over 40% of total revenues, is projected to remain solid, with consensus estimates now expecting $105.5 billion for FY2024, driven by Azure.  The profitability of this segment is a source of debate among analysts. Currently, the Q4 2024 consensus of 12 analysts for the Intelligent Cloud business’s operating profit margin is 44.3%, but ranges from 42% to 46%, suggesting this segment may deliver a surprise in the Q4 release. This range however has narrowed by 200 bps since last quarter.

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

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

Microsoft consensus estimates

MSFT 2

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

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

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

GOOGL 1

Source: Visible Alpha consensus (July 17, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Alphabet Q4 2023 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q2 2024 have remained around $84 billion since last quarter, driven by resilience in its ad business. In addition, the Q2 consensus expectations for operating income and EPS remained around $26.5 billion and $1.85/share since last quarter. Questions have been emerging about the impact of AI on its core business, but have not impacted consensus revenue estimates for Q2 or the full year. However, consensus EPS of $1.85/share ranges from $1.66 to $2.01 for Q2, driven by differing assumptions around costs. It will be interesting to hear what Alphabet says about the outlook.

We are closely monitoring the trend of the Cloud business. The operating profit margin has been trending better. The margin turned positive in Q1 2023, but missed expectations in Q3 by 200 bps, coming in at 3% instead of 5%. More recently, the Q1 2024 Cloud margin came in at 9.4%, beating consensus by ~200 bps. Looking ahead to Q2 2024, analysts expect the Cloud business to generate a 9.5% operating profit margin, up 260 bps since last quarter. However, the 22 estimates range from 2.9% to 16.1% with 10 of the analysts estimating the margin to be over 10% and 4 analysts estimating it to be below 7%, signaling divergent views about the performance of this business.

For the full year, analysts are also split in their views. For the Cloud business, Visible Alpha consensus expects the operating profit margin to hit over 10% in FY 2024, but ranges from 4.3% to 15%. Longer-term, the consensus Cloud margin is estimated to generate a 15% margin by the end of FY 2026, ranging from 9.5% to 20.6%. What will be the right margin level for Alphabet’s Cloud business?

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

Alphabet consensus estimates

GOOGL 2

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

Amazon.com (AMZN) Q2 2023 Earnings Preview

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

AMZN 1

Source: Visible Alpha consensus (July 18, 2024). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Amazon Q2 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q2 have come up slightly from last quarter, from $147.8 billion to $148.6 billion, driven by strength in Amazon’s online retail business. Consensus expectations for AWS  have remained around $25.9 billion. The focus will likely be on the Q2 performance and 2024 outlook for the online retail and AWS margins and their impact on EPS.

The North America retail operating margin has increased significantly from a meager 1.1% at the beginning of last year to an estimated 5.9% for Q2. Operating margin expectations for North America have edged higher since April, but are lower than the 6.2% margin initially targeted after Q1. For 2024, the estimated margin range increased from 3.6% to 6.3% last quarter to 5.3% to 7.6% now, with consensus at 6.3%, instead of at the top end of the range. What will the company say about the outlook for the online business?

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

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

Amazon consensus estimates

AMZN 2

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

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

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

Netflix 1

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

Netflix Q2 2024 Earnings Preview

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

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

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

Netflix 2

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

Over the past several months, many large tech firms have highlighted AI strategies with new, embedded-AI capabilities for laptops and smartphones. 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. As we begin to move out of the COVID-era boom in hardware unit sales, will next-generation, AI-enabled laptops and smartphones serve as a catalyst for a new hardware replacement cycle in enterprises?

As the COVID-era hardware units approach the typical upgrade window of 3-5 years and organizations begin to plan for new unit purchases, will organizations upgrade their hardware to leverage the new AI features? Will these new AI features help drive greater revenue and profitability for smartphones and laptops in this next cycle?

Laptops

Based on a survey conducted by 451 Research (part of S&P Global Market Intelligence) for 2024, Dell, HP, and Lenovo were the top three laptops that organizations plan to buy. All three recently released new AI laptops. Could these new models be a catalyst?

Based on Visible Alpha consensus, these three laptop manufacturers are estimated to see unit sales 15-25% below the previous demand surge from COVID, while prices are expected to increase. Looking back to FY 2021-2022 when units peaked, can AI help drive upside to current unit expectations at higher price points?

Figure 1: Laptop purchasing survey
Figure 1 Laptop purchasing survey

Source: 451 Research, part of S&P Global Market Intelligence

Figure 2: Laptop outlook
Figure 2 Laptop outlook

Source: Visible Alpha consensus (July 1, 2024). Stock price data courtesy of FactSet. Current stock prices are as of the market close on June 28, 2024.

Smartphones

Based on a survey conducted by 451 Research (part of S&P Global Market Intelligence) for 2024, Apple and Samsung were the leading smartphones that organizations plan to buy. Apple just announced Apple Intelligence, which is only available on iPhone15 Pro/Pro Max, select iPads, and Macs. Samsung’s AI phone leverages Google.

Based on Visible Alpha consensus, Apple is estimated to see unit sales exceed the previous demand surge from COVID, with the most bullish estimates exceeding the previous peak by 20-30%. Analysts expect Samsung to hit the previous high of 273 million units by the end of FY 2027, with a few analysts estimating unit sales 10-20% above consensus. Looking back to FY 2021-2022 when units peaked, can AI help drive upside to current unit expectations and lead to further upward revisions?

Figure 3: Smartphone purchasing survey
Figure 3 Smartphone purchasing survey

Source: 451 Research, part of S&P Global Market Intelligence

Figure 4: Smartphone outlook
Figure 4 Smartphone outlook

Source: Visible Alpha consensus (July 1, 2024)

Apple (NASDAQ: AAPL) made a number of new announcements during its Worldwide Developers Conference (WWDC) keynote on June 10, 2024, most notably Apple Intelligence. What happened during the conference and what are analysts expecting?

Could Apple become a $5 trillion company?

The arrival of Apple Intelligence at WWDC demonstrated that Generative AI (GAI) is going to get embedded into our daily workflows. Moving beyond tech infrastructure, GAI is evolving into a broad trend likely to provide many productivity and entertainment benefits to consumers through Apple’s massive installed base and ecosystem. With Apple now firmly a part of the GAI movement, the popularity of its new tools and capabilities will likely dictate the magnitude of its earnings potential. The more users get hooked on GAI, the more likely they are to upgrade their hardware and subscribe to more lucrative services.

To get to a $5 trillion valuation, Apple needs to generate $180 billion in operating profit and $11.50/share in diluted EPS at a P/E of 30x. Only a few sources expect Apple to generate this level of profitability and not until the end of FY 2032. Currently, the consensus P/E ranges from 27-32x over the next few years and the target price is $210, implying no upside to the share price. If Apple gets the GAI trend right, could profitability come faster than current expectations and drive a wave of upward revisions over the next few years?

Apple Intelligence: Will this drive an upgrade cycle and grow Services?

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. Could Apple Intelligence help to drive a new replacement cycle for Apple hardware?

Figure 1: Apple Intelligence
Apple Intelligence

Source: WWDC (June 10, 2024)

ChatGPT and Apple Intelligence will integrate new GAI writing, summarization and image tools later this year. These new capabilities will also work with Siri and Apple’s iCloud. These enhancements have the potential to take GAI mainstream and become part of users’ daily lives. The popularity of these new tools and enhancements could be a catalyst for a new iPhone, iPad and Mac replacement cycle.

Figure 2: OpenAI Partnership: ChatGPT embedded into the iPhone
OpenAI Partnership: ChatGPT embedded into the iPhone

Source: WWDC (June 10, 2024)

Given the enormous installed base of iPhones, Pre-15 Pro users may be motivated to upgrade their earlier version phones and both expand and extend the pace of the new upgrade cycle. Based on Visible Alpha, analysts expect iPhone 15 unit sales to range from 126 million to 149 million with consensus at 139 million this fiscal year.

Figure 3: Apple iPhone 15 expectations
Apple Iphone 15 expectations

Source: Visible Alpha (June 18, 2024)

Figure 4: Apple Total iPhone expectations
Source: Visible Alpha (June 18, 2024)

Source: Visible Alpha (June 18, 2024)

In addition to a potential hardware replacement cycle, Apple Intelligence may help to fuel a surge in Services growth. Services sales are expected to grow 12% this fiscal year, up from 9% last year and to maintain that pace through FY 2026. However, if the new GAI tools gain in popularity and usage, more users may be inclined to subscribe to more Apple Services, like iCloud and Apple Pay. Increases in Services revenue is impactful to the bottom line, since this segment generates ~73% gross margin, nearly 2x the 37% gross margin of hardware products.

Figure 5: Apple Services expectations
Figure 5: Apple Services expectations

Source: Visible Alpha (June 13, 2024)

The success of Apple Intelligence has the potential to drive a hardware replacement cycle, in tandem with increased usage of lucrative Services. This possible dual impact to sales and operating profit may drive further earnings revisions over the next two years, if GAI takes off with consumers.

Figure 6: The Range of Apple expectations
Figure 6: The Range of Apple expectations

Source: Visible Alpha (June 13, 2024)

Vision Pro expands

Last year at WWDC, Vision Pro was the big announcement. However, this year, with the Generative AI (GAI) movement broadly driving momentum across the sector, the Vision Pro seems to have taken a backseat to Apple Intelligence. Apple announced Vision Pro roll outs to new international markets over the next month. There was also a significant software update and a growing number of apps. Based on several Visible Alpha sources, Vision Pro is expected to sell close 500,000 units and to generate nearly $2 billion in revenue by the end of FY 2025.

While it is still early days, the high price point and limited functionality have limited the growth expectations. How long will it take the Vision Pro itself to account for $10 billion in revenues? There is also a big question about what level of gross margin the new product will generate and what role it will play in driving more high margin services sales. Longer-term, will Apple Intelligence help drive growth of the Vision Pro?

Figure 7: Analyst estimates for Vision Pro
Figure 7: Analyst estimates for Vision Pro

Source: Visible Alpha (June 13, 2024)

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

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

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

Key takeaways from AWS Financial Services Symposium 2024

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

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

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

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

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

Dell Technologies (NYSE: DELL) reported fiscal Q1 2025 results on Thursday, May 30, 2024. What happened during the release and earnings call, and what are the key points to focus on?

Dell’s fiscal Q1 2025 earnings release

Dell delivered total revenues for Q1 of $22.2 billion, beating Visible Alpha’s consensus estimate of $21.5 billion by $0.7 billion, driven by strong demand for AI servers. The Infrastructure Solutions Group (ISG) segment saw its Q1 revenue surge to $9.2 billion, slightly ahead of the $9.0 billion consensus estimate coming into the quarter.

Based on three Visible Alpha sources prior to the earnings release, the AI server backlog was estimated at ~$3.5 billion. In addition, in their notes ahead of the quarter, a few analysts called out the potential for the AI server backlog to meet or exceed $4 billion on higher-than-expected orders. This backlog expectation seemed to create some over-optimism about Dell’s growth momentum. 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.

The ISG segment’s non-GAAP gross margin came in at 35.2% in Q1, a bit below consensus of 36.4% and down from 37.1% in Q1 2023. This decline in gross margin contributed to the miss on the ISG operating profit margin, which delivered an 8% margin, missing the 10% expected. ISG operating profit was expected to generate nearly $900 million in Q1 2024 but instead the company reported $736 million, almost flat with last year’s $740 million. This performance implied that the $1.7 billion surge in AI server orders year over year did not see enough profitability to offset the seasonally low profitability of the traditional storage and server lines in Q1.

Figure 1: Revisions of Dell estimates
Figure 1 Revisions of Dell estimates

Source: Visible Alpha consensus (June 3, 2024). Stock price data courtesy of FactSet. Dell’s current stock price is as of the market close on May 31, 2024.

The outlook

Near-term growth

For fiscal Q2 2025, Dell guided ahead of the expected $23.0 billion to $23.5-24.5 billion in total revenue, with analysts now projecting $24.1 billion for Q2. The ISG segment revenue is projected to make up $10.5 billion, up from $9.2 billion in Q1, and to see its margin improve quarter over quarter. The company called out expected improvements in the storage business and said that they expect ISG margins to expand to 11-14%. The ISG consensus margin for Q2 is expected to be 10.4%, down from 11.8% ahead of the release.

Long-term outlook

Dell guided FY 2025 revenues to $93.5-97.5 billion, in line with the $96.2 billion expected by analysts. In addition, the company highlighted that ISG will deliver 11-14% long-term margins. Currently, Visible Alpha consensus is projecting ISG 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 four sources, analysts expect to see AI server revenue generate $9.5 billion in FY 2025 and to expand to $13.4 billion in revenue in FY 2026.

ISG revenue is expected to grow to $47.8 billion in FY 2026, with nearly all of the year-over-year increase coming from the AI servers. ISG profitability is expected to return to 11.5% operating profit margin this year and to increase to 12.1% by FY 2026.

According to Visible Alpha consensus, EPS is expected to grow nearly 20% from $7.77/share in FY 2025 to $9.28/share in FY 2026. Estimates range from $8.25/share to $10.34/share, putting the FY 2026 P/E consensus at 14x, and in the 13x-16x range.

DELL stock has traded down around 22% since last week’s earnings release, but is up around 40% since the Q4 release on February 29, 2024. Will the ramp in AI servers continue? Will ISG profitability return to beat expectations and be a catalyst in FY 2025?

Figure 2: Dell consensus estimates
Figure 2 Dell consensus estimates

Source: Visible Alpha consensus (June 3, 2024). Stock price data courtesy of FactSet. Dell’s current stock price is as of the market close on May 31, 2024.

Nvidia Corp. (NASDAQ: NVDA) reported fiscal Q1 2025 results on Wednesday, May 22, 2024. What happened during the release and earnings call, and what are the key points to focus on?

Nvidia’s fiscal Q1 2025 earnings release

Nvidia delivered total revenues for Q1 of $26.0 billion, beating Visible Alpha’s consensus estimate of $24.7 billion by $1.3 billion, driven by continued revenue growth of Nvidia’s Data Center segment. The segment saw its Q1 revenue surge to $22.6 billion, nearly $1.5 billion ahead of the $21.2 billion consensus estimate coming into the quarter.

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 they are still supply constrained and expect this to continue into next year.

The Data Center segment’s non-GAAP gross margin remained at 79% in Q1, in line with consensus. This drove a beat on the EPS line with non-GAAP diluted EPS of $6.12/share, exceeding consensus of $5.60 by nearly 10%. In addition, Nvidia announced a 10-for-1 forward stock split effective June 7, 2024 and a quarterly cash dividend increased by 150% to $0.01 per share on a post-split basis.

Figure 1: Nvidia estimate trends
Figure 1 Nvidia estimate trends

Source: Visible Alpha consensus (May 28, 2023). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on May 24, 2024.

The outlook

Near-term growth

For fiscal Q2 2025, Nvidia guided $1 billion ahead of expectations to $28 billion in total revenue, with analysts now projecting the Data Center segment to make up $24.7 billion, up from $23.2 billion. In addition, Nvidia guided total gross margin to continue to be around 75.5% levels, driven by demand continuing to outstrip supply in the Data Center business.

Looking further out, analysts remain bullish on the Data Center segment. Since the Q1 release last week, analysts have increased their full year Data Center revenue estimates another $6.5 billion for FY 2025 to $104.7 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 $144 billion, up from $130 billion on May 22, 2024, with consensus EPS increasing over 10% to $35.62/share.

These upward revisions are likely in response to CEO Jensen Huang’s bullish commentary on the earnings call about the new Blackwell platform and the B-series and GB-series. Huang highlighted that Blackwell is in full production and will ramp in Q3 2025. He also noted that the company “will see a lot of Blackwell revenue this year.” While there is debate among analysts about 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 $189.9 billion, up from $182.6 billion, while the low-end estimate is now at $119.5 billion, up from $95.8 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 $35.6/share, up 20% from the Q1 2025. But there is a nearly $20/share range in expectations, from $28.3/share to $47.5/share, up from $20.1/share to $41.9/share last quarter. Current FY 2026 P/E ratios range from 22X to 38X. For FY 2027, the range expands from 19X to 59X, driven by different assumptions about the timing and magnitude of Data Center revenue growth.

NVDA stock has traded up around 12% since last week’s earnings release, and is up close to 58% since the Q4 release on February 21, 2024. Will the ramp of the new B-series and GB-series drive the Data Center business to beat expectations in FY 2025?

Figure 2: Nvidia consensus estimates
Figure 2 Nvidia consensus estimates

Source: Visible Alpha consensus (May 28, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on May 24, 2024.

Long-term growth

During the earnings call, Huang emphasized that the industry is going through a major change. He gave his optimistic view on the Data Center’s move to accelerated computing to create AI factories. In addition, he called out 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 five years?

Here is a look at the key highlights from Microsoft’s (NASDAQ: MSFT) recent conference, Microsoft Build 2024. The conference underscored how Microsoft is thinking about the future direction of AI for their business and the potential opportunities that lie ahead.

Key highlights from Microsoft Build 2024

At the Microsoft Build conference last week, CEO Satya Nadella reiterated that every aspect of the tech stack is changing. Then, he highlighted the key updates. These innovations seem to position Microsoft’s Azure well for future growth. Based on Visible Alpha consensus, the Intelligent Cloud business is projected to grow from $105.5 billion this year to $185.1 billion over the next three years. This strong growth is driven by Microsoft Azure revenue, which is expected to grow from nearly $75 billion this fiscal year to over $150 billion by the end of fiscal year 2027 and to generate a 45% operating margin.

Here are some of the key takeaways:

1) Smarter models are coming: Microsoft’s CTO and EVP of AI, Kevin Scott, and Open AI CEO, Sam Altman, took the stage and highlighted what’s next for Generative AI (GAI). GPT-4o, the latest multi-modal model trained on Azure, has text, audio, image and video. According to Scott, engaging with ChatGPT is going to get cheaper and faster. In a demo of the latest version of GPT-4o, users can interrupt the model and get it to pivot. This is an important step to advancing users’ interactions with the technology.

A GAI layer is going to be built into every product and service, according to Altman. The goal is to make it easy for users to engage with GAI. Based on Altman’s comments, ultimately, this is going to help the models be more robust, safer, and useful. It will also enable the model to get smarter, which will reduce the price and increase the speed.

Figure 1: Microsoft’s CTO and EVP of AI Kevin Scott and Open AI CEO Sam Altman
Figure 1 Microsoft’s CTO and EVP of AI Kevin Scott and Open AI CEO Sam Altman

Source: Microsoft Build (May 21, 2024)

2) Laptops for the AI era: In a special session on Monday, May 20, 2024, ahead of the Microsoft Build presentations, Microsoft introduced a new category of Windows PCs designed for AI: Copilot+ PCs. Pre-orders started last week and these new AI laptops will be available from June 18, 2024, starting at $999. According to Microsoft, Copilot+ PCs are notably faster than Macs and are “the most intelligent Windows PCs ever built.”

Based on Microsoft’s demo, Copilot+ PCs will enable users to easily find what has been worked on on a PC with Recall; to generate and refine AI images directly using Cocreator; and to translate audio from 40+ languages into English with Live Captions. These features are going to integrate GAI into core use cases.

Figure 2: Copilot+ PC = The AI Laptop
Figure 2 Copilot PC = The AI Laptop

Source: Microsoft Build (May 20, 2024)

3) Copilot stack enhancements: With every layer of the tech stack changing, Nadella gave an overview of these in his keynote. The improvements to Azure jumped out and are projected to enable cheaper and faster capabilities for training and inferencing.  According to Nadella, the Microsoft Azure end-to-end systems optimization from the data center to the network is designed to use less power and reduce the cost of AI. At the silicon layer, Microsoft can dynamically map workloads to the best accelerated AI hardware to produce better performance.

Microsoft’s end-to-end approach is helping Azure to scale. Over the past six months, Microsoft has added 30x supercomputing power to Azure. Microsoft’s partnership with Nvidia, which spans the entirety of the Copilot stack, will use both Hopper (H200) and Blackwell (B100 and GB200) to train and optimize both LLMs and small language models, according to Nadella.

Given the enhancements to the tech stack, how can more scale, automation, and efficiency in their tech stack support further revenue margins?

Figure 3: Microsoft Copilot
Figure 3 Microsoft Copilot

Source: Microsoft Build (May 21, 2024)

Figure 4: Microsoft consensus estimates
Figure 4 Microsoft consensus estimates

Source: Visible Alpha (May 28, 2024)

The bottom line

The potential for AI developers to create the next generation of must-have applications at scale has only just started. Over the next 4-5 years, there will likely be significant CapEx investment in data centers, development, and integration to ready the world for what’s to come next. The magnitude of the shifts is likely to blur the lines between cloud, chip, software, and search providers. Both workplaces and consumers are likely to win in the end with enhanced efficiency and productivity coupled with a better-curated workflow. Like it or not, AI is off and running.

At last week’s Google I/O developers conference, Alphabet (NASDAQ: GOOGL) unveiled new AI capabilities for Search. Is Google Search revenue growth sustainable in an AI world?

What’s next for Search?

Alphabet has long dominated the digital advertising revenue space through the strength of its Google Search. The company generated $175 billion from Search in FY 2023 or 57% of total revenue. Looking ahead, analysts expect Search to grow nearly $75 billion to reach $250 billion by the end of FY 2027, which drives the overall Services segment. Services still drive nearly 100% of the operating income for Alphabet.

With the expansion of ChatGPT, concerns have emerged about Google’s ability to maintain its dominant position in Search and with advertisers. There is discussion that users may prefer results that are more curated and do not force-rank sponsored links to the top of a user’s search results. Without the expected growth of Search, Alphabet’s Services operating income growth could be at risk, putting additional pressure on the company to increase the Cloud margin and reduce losses in its Other Bets and Unallocated segments to maintain its current valuation. Based on Visible Alpha consensus of 20x P/E and a $197 price target, Alphabet’s projected 2025 P/E ranges from 17x to 22x, depending on the earnings growth assumptions.

Figure 1: Consensus estimates for Alphabet
Figure 1 Consensus estimates for Alphabet

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

Search updates from Google I/O

According to Alphabet CEO Sundar Pichai, the greatest areas of investment and innovation are going to be in Search. In the Gemini era, AI is set to expand Search’s capabilities. This investment is likely needed for Alphabet to maintain its dominance in advertising. Questions are emerging about the sustainability of Google’s business model in Search as ChatGPT’s features and capabilities infringe on Google’s turf.

Liz Reid, VP of Search, highlighted that the volume of online facts and Google’s ranking system combined with Gemini will dramatically expand Search’s possibilities. AI Overviews rolled out on May 15, and Google will soon release planning, brainstorming, and troubleshooting with video capabilities. Will these enhancements be enough to keep users and ad revenues growing in line with current expectations?

Figure 2: Google’s new AI-generated search results
Figure 2 Google’s new AI generated search results

Source: Google I/O (May 15, 2024) – https://io.google/2024/

At both last week’s Google I/O conference and Google Marketing Live 2023, the Company showed prototypes adding images and AI-generated stories to its search results. We compared the results presented last year with what is currently available and was newly presented. Google seems to have pivoted a bit on their approach to AI integration (see Figures 3, 4, and 5).

Last year, Google highlighted that AI-generated stories would be coming soon. However, these have not materialized in the way initially showcased. Instead, the emphasis remains on surfacing “Sponsored” search results first. This is likely to preserve the premium that advertisers pay to appear at the top of the search ranking. When the questions are more generic, however, Google’s new AI Overview feature appears, returning a summary and a list of various unsponsored links. In ChatGPT-4, users can have an experience similar to Google, but without the sponsored links dominating the results. How will the Search results evolve and potentially impact the ad revenue model going forward?

Over the next few months, the company will focus on the integration of Gemini to Search. Going forward, the success of this integration may be a critical factor for Google, both to maintain its stronghold in Search and continue growing its advertising revenues to meet expectations.

Figure 3: Google’s 2023 AI-generated story capability
Figure 3 Google’s 2023 AI generated story capability

Source: Google Marketing Live (May 23, 2023)

Figure 4: Google’s current search results for Outdoor Activities in Maui
Figure 4 Google’s current search results for Outdoor Activities in Maui

Source: Google (May 16, 2023)

Figure 5: Google’s new AI overview results asking “What is Maui like?”
Figure 5 Google’s new AI overview results asking “What is Maui like”

Source: Google (May 16, 2023)

Nvidia Corp. (NASDAQ: NVDA) will report fiscal Q1 2025 results on Wednesday, May 22, 2024, after the market close. Here are the key numbers that we’re watching.

Figure 1: Nvidia – consensus expectations for Q1 2025, past earnings surprises, revisions, and CAGR
Figure 1 Nvidia consensus expectations for Q1 2025 past earnings surprises revisions and CAGR

Source: Visible Alpha consensus (May 15, 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 Q1 2025 earnings preview

According to Visible Alpha consensus, total revenues of $24.7 billion expected for fiscal Q1 2025 have not moved much from fiscal Q4 2024 earnings in February. 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 Q1 increase from a mere $5.1 billion in January 2023 to its current projection of $21.2 billion, up over 4x. 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 Q1 moved slightly higher from $20.6 to $21.2, according to consensus. While the pace of analysts’ upward revisions to the Data Center segment has stabilized since the Q3 release in late November, it will be important to see how Nvidia guides the market for Q2 and 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 $23.2 billion in revenues in Q2 2025. For FY 2025, Visible Alpha consensus for this segment has increased an additional $4.2 billion to $97.7 billion since the Q4 2024 release in February. However, the estimates now range from $87.5 billion to $117.5 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 $96.4 billion to $187.0 billion remains significant, causing expected FY 2026 P/Es to range from 20x to 45x.

The stock has traded up an incredible 83% since the November release, and is up around 35% since the February release. Could the Q1 release provide the next positive catalyst for the stock or are expectations largely priced in for now?

Figure 2: Nvidia consensus estimates
Figure 2 Nvidia consensus estimates

Source: Visible Alpha consensus (May 15, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on May 14, 2024.

Figure 3: Nvidia’s key financial items
Figure 3 Nvidia’s key financial items

Source: Visible Alpha consensus (May 15, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on May 14, 2024.

Also check out our latest AI Monitor for a view of Nvidia’s AI-exposed revenues and growth potential.