Nvidia (NVDA) Earnings Preview: Fiscal Q4 2024
By: Melissa Otto, CFA
Nvidia Corp. (NASDAQ: NVDA) will report fiscal Q4 2024 results on Wednesday, February 21, 2024, after the market close. Here are the key numbers that we’re watching.
Figure 1: Nvidia – consensus expectations for Q4 2024, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (February 14, 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 Q4 2024 earnings preview
According to Visible Alpha consensus, total revenues of $20.5 billion expected for Q4 2024 have not moved much from Q3 in November 2023. 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 Q4 increase from a mere $4.9 billion in January 2023 to its current projection of $16.9 billion, up nearly 3.5x. 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.
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 Q1 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 $18.3 billion in revenues in Q1 2025. For FY 2025, Visible Alpha consensus for this segment has increased an additional $5 billion to $84 billion since the Q3 release in November 2023. However, the estimates range from $65.4 billion to $121.2 billion.
The stock has traded up an incredible 43% since last quarter’s November release, and is up nearly 400% since January 2023. Could the Q4 release provide the next positive catalyst for the stock or are the expectations largely priced in for now?
Figure 2: Nvidia consensus estimates
Source: Visible Alpha consensus (February 14, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on February 13, 2024.
The longer-term outlook for AI
Jensen Huang, CEO of Nvidia, and Sam Altman, CEO of OpenAI, joined Omar Al Olama, the UAE’s Minister of AI, for lively discussions about the future of AI at the World Governments Summit in Dubai, UAE.
Figure 3: Nvidia CEO Jensen Huang and OpenAI CEO Sam Altman
Source: World Governments Summit in Dubai (February 12-14, 2024)
Both Altman and Huang highlighted the magnitude of this new technology cycle. Huang explained that the move to accelerated computing is what will enable AI to scale and noted that advances will help costs come down for customers. He also highlighted that Nvidia is the only platform that democratizes AI, because the CUDA architecture has the ability to adapt. CUDA’s versatility enables Nvidia to be in every cloud and every data center all the way out to the edge and to autonomous systems for robotics and self-driving cars. Altman explained that in a few more years ChatGPT will be much better than it is now, and in a decade it should be remarkable.
Huang and Altman see a significant expansion in the addressable market that should continue to benefit Nvidia and Microsoft directly. As generative AI blossoms across enterprises and, longer-term, to heavy industry, what will be the true magnitude of Data Center growth over time?
Looking ahead to FY 2026, Nvidia’s Data Center segment revenue expectations are at $103.6 billion, an increase of $57 billion from FY 2024, according to Visible Alpha consensus. However, the estimates range from $76.7 billion to $197.4 billion, a difference of over $120 billion.
Figure 4: Nvidia’s key financial items
Source: Visible Alpha consensus (February 15, 2024)
Vision Pro, iPhone, and China: Apple’s Q1 Earnings and Outlook
By: Melissa Otto, CFA
Key Takeaways
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Vision Pro Demo Highlights
On Sunday, February 11, 2024, a friend and I participated in a Vision Pro demo at an Apple Store in NYC. The demo took 35 minutes and walked us through the functionality, navigation and uses.
After experiencing it myself and hearing the perspective of another user, the long-term investment opportunity is likely to come from the use of services within the Apple ecosystem. Accessing spatial videos taken on the iPhone that live in the Apple Cloud and immersive Apple Music, TV+, and Arcade with a Vision Pro may help to drive revenues of the higher margin services segment.
The placement of Alicia Keys’ performance in the Vision Pro demo and at the half-time show of the Super Bowl is probably not a coincidence. Giving users an immersive, front row seat to artists’ performances and sports events may enable Apple to grow its installed base and grab subscribers and revenues from YouTube TV and Netflix.
Figure 1: The Vision Pro
The Vision Pro headset feels like a heavy snorkel mask. It weighs heavily on the crown of the nose and face, making it uncomfortable to wear for extended periods.
Source: Apple Store NYC (February 11, 2024)
Figure 2: Vision Pro demo
Syncing exact eye movement with the awkward pinching gesture is critical to navigating the Vision Pro experience.
Source: Apple Store NYC (February 11, 2024)
Figure 3: Vision Pro highlights
Source: Apple Store NYC Vision Pro demo (February 11, 2024)
Q1 and the Outlook
1. What happened with iPhone sales and what does the outlook look like?
Apple’s (NASDAQ: AAPL) fiscal Q1 2024 total company revenues came in slightly above consensus expectations at $119.6 billion, driven by better than expected sales of iPhone units. However, other product categories and the Greater China region were disappointing.
Going into earnings, analysts were expecting the company to guide Q2 2024 to be $96.4 billion, up 2%. However, Apple guided below expectations to down ~5%, driven mostly by a weaker outlook for iPhone and China. According to Visible Alpha consensus, analysts are now expecting $91.1 billion in Q2 and $397.3 billion for 2024.
There has been increasingly bearish sentiment on Apple due to its exposure to China and the slowing iPhone upgrade cycle. The current iPhone estimates for FY 2024 revenues have come back down to the November 2023 net sales levels of $200 billion, driven by the iPhone 15. For Q2, analysts now expect iPhone 15 units to be around 37 million in Q2, down from 40 million before the Q1 earnings release, and 143 million for 2024. For total iPhone units in 2024, analysts range from 208 million to 248 million, due to varying views about end demand, especially in China and other emerging markets.
The company highlighted again that the opportunity in India continues. However, it is unclear how big this market can be for Apple/iPhone. While India may not generate the same volume of revenues as China’s estimated $71.7 billion, it may still increase penetration and make a meaningful contribution to revenue over the next few years. This market may begin to break away from other emerging markets as penetration increases. The company also noted strength overall in several other emerging markets.
Figure 4: Expectations for FY 2024 and beyond
Source: Visible Alpha consensus (February 11, 2024). Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on February 9, 2024.
2. How did the Services segment perform and what’s next for this segment?
In Q1, Services performed in line with expectations, coming in at $23.2 billion, and given the much higher gross margin (71%), this segment has been helping to smooth out operating income.
For Q2 2024, Services are expected to deliver $23.3 billion, up 11% year over year, driven by cloud, music, and ads. For FY 2024, analysts currently forecast Services revenue to grow 11% to $94.6 billion, and another $22 billion to $116 billion by the end of FY 2026.
Cloud: For FY 2024, Apple is projected to generate nearly $10.0 billion in cloud sales. However, expectations of $10.7 billion for 2025 are not looking for much growth. Could the filming of spatial videos on the iPhone 15 for viewing in the Vision Pro help drive Cloud growth?
Apple Pay: For FY 2024, analysts, on average, are now projecting $2.3 billion, down from an expected $3 billion in sales last quarter.
Margins: Services currently generate a 71% gross margin, nearly double the 36% for the Products segment, and could shift Apple toward higher profitability. The company’s total operating profit is expected to grow 6% year over year in FY 2024 to $120.6 billion, driven by an increase in mix toward Services.
Growth: Apple’s significant installed base of 2 billion devices, with nearly 1 billion estimated to be iPhone, may be a great platform for growing ads, cloud, payments, and other content revenues (like music, games, and TV). It is worth noting that Apple has been relatively quiet about Generative AI and we wonder what will propel the next leg of growth in this segment.
3. What did Apple’s performance in China reveal?
In Q1, Greater China generated $20.8 billion in revenues, down 13% year over year and $1.3 billion below Visible Alpha consensus. While CEO Tim Cook noted his optimism for the China market, questions linger about the company’s performance in this market. There is some debate about what the region will deliver for sell-through units in FY 2024 and beyond.
Competition is likely to weigh on Apple in the China market, as sales are expected to drop 9% year-over-year to $16.3 billion in Q2. For FY 2024, analysts project China to deliver $69.6 billion in revenues, down 4% from 2023 levels. The verdict is still out on how China will perform beyond 2024. Currently, analysts expect China to return to 2022 levels in 2025 and then to begin to grow again by the end 2026, delivering $77.6 billion.
Figure 5: Apple’s key financial items
Source: Visible Alpha consensus (February 12, 2024)
Ads, Quest, and Capex: Meta’s Q4 and Outlook
By: Melissa Otto, CFA
Key Takeaways
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Meta Platforms (NASDAQ: META) reported earnings for Q4 2023 on Thursday, February 1, 2024. What happened during the release and earnings call, and what’s next?
1. What happened in Q4 and what is the outlook?
Ads and Quest deliver positive surprises: In Q4, Meta delivered $40.1 billion in sales and $16.4 in operating profit, in line with Visible Alpha consensus expectations. However, the Family of Apps segment surprised by delivering $1 billion better-than-expected revenue and expenses coming in lower, driven by strength across all verticals, including games and e-commerce. Even though Reality Labs costs were higher than expectations, revenues beat Visible Alpha consensus by over 30%, resulting in $1.1 billion, compared to the expected $811.9 million, driven by demand for Quest during the holiday season.
Q1 and 2024 guidance and expectations: Meta guided to $34.5-37 billion in total revenues, $2.5 billion ahead of the $33.2 billion consensus estimate pre-release, driven by continued strength in the Family of Apps business. Analysts now expect revenues to be $7.5 billion higher at $158.8 billion for 2024, as both monetization improves and Threads and Reels gain momentum.
For 2024, Meta guided to OpEx $94.0-$99.0 billion, in line with consensus of $96.7 billion, slightly higher than the $96.0 billion projected ahead of the earnings release. Meta expects higher infrastructure costs and payroll expenses to increase as the workforce moves toward more higher-cost technical roles to support its AI investments.
There is increasing debate about the direction of Reality Labs’ losses. The company expects Reality Labs’ operating losses to increase meaningfully year over year in 2024 as the company focuses on its product development efforts in augmented reality / virtual reality. Prior to the release, analysts expected -$17.8 billion in losses from Reality Labs in 2024. However, consensus estimates are now around -$18.7 billion, with the most conservative analyst forecast at -$23.6 billion, a 48% increase in losses year over year for 2024. Analysts are not in agreement about the level of losses from Reality Labs in 2024, with the range of analyst forecasts increasing significantly to -$8.5 billion to -$23.6 billion in losses, from $14 billion to $22 billion ahead of the quarter.
2. What drove ad revenues, and is this sustainable?
Meta delivered ad revenue of $131.9 billion, up 16% year-over-year in 2023, ahead of expectations and driven by online commerce, CPG, entertainment and media, and gaming verticals. According to CFO Susan Li, strong demand by advertisers in China (especially in gaming and ecommerce) aiming to reach people in other markets led revenue from China-based advertisers to grow to 10% of Meta’s overall revenue ($13.5 billion) and to contribute 5 percentage points to total worldwide revenue growth. This strength from China-based brands presents questions about the sustainability of this spending for Meta. Will Meta be able to grow the $13.5 billion in revenue from China-based firms in 2024 and 2025?
Ad revenue per DAU: Looking at the global breakdown of metrics, all market segments saw ad revenue per DAU increase year over year in 2023. The U.S. was up 10.0%, Europe 18.6%, Asia 6.7%, and RoW 12.1% year over year in 2023. Europe and the U.S. were likely driven by the strong performance of China-based advertisers. Consensus expectations are maintaining positive ad revenue per DAU growth for all geographies for the remainder of 2024, with Europe and the U.S. continuing to have an outsized impact on the metric for the company.
3. Where will CapEx start to have an impact?
While the company plans to focus its investments on AI and the metaverse, Meta expanded the high end of its CapEx guidance by $2 billion to $30-37 billion. This CapEx will likely continue to shift and grow going forward, as the company plans to further invest in infrastructure for AI and monetization.
CapEx ranges: Meta plans to invest in data centers and servers to support its AI ambitions. For 2024, the consensus CapEx increased from $33 billion ahead of the earnings release to $34.5 billion now, putting the CapEx/sales metric at 21.7%. The range of estimates has narrowed from $25.1-37.1 billion to $31.1-37.1 billion now. While Meta is not providing specific guidance beyond 2024, the company did highlight that it may have further needs for foundational research and product development in AI. For 2025, however, analysts expect $37.7 billion in CapEx, or 21% of expected sales. The range level and expected growth of CapEx are projected to be similar to 2023, but to grow to a range of $34.4 billion to $41.7 billion. Given Meta’s ambition in AI, could these CapEx levels begin to tick back up to 22% of sales?
Figure 1: Key financials for Meta
Source: Visible Alpha consensus (February 7, 2024)
12% margin by 2027? What’s next for Amazon’s AWS and Online Retail
By: Melissa Otto, CFA
Amazon.com (NASDAQ: AMZN) reported earnings for Q4 2023 on Thursday, February 1, 2024. What happened during the release and earnings call, and what are the key questions to focus on?
With total sales coming in at $170.0 billion, slightly above consensus, and operating profit at $13.0 billion, over 20% ahead of consensus, Amazon delivered a strong Q4, sending the shares up 8% following the release. In particular, Amazon delivered an 8% operating profit margin again this quarter, above the 6.4% expected by analysts.
The company released Q1 guidance of $138.0-143.5 billion in revenues and $8.0-12.0 billion in operating profit, inline with expectations of $142.4 billion in sales and $11.0 billion in operating profit. Since January 2023, Visible Alpha consensus for FY 2024 declined slightly from $645.1 billion to $640.7 billion in total sales, but increased from $38.8 billion to $54.4 billion in operating profit.
Driven by improvements in the North America online business and strength in AWS, analysts project Amazon’s total operating profit margin to grow to 8.5% in 2024, more than triple 2022’s 2.4% level, and rise to 10% by the end of 2025 and 12% by the end of 2027.
1. How did AWS perform?
AWS revenues were in line with expectations at $24.2 billion, but operating profit was $2.6 billion above consensus. This resulted in a 29.8% operating profit margin, which was 140 basis points ahead of the 28.4% expected according to Visible Alpha consensus, but driven mainly by headcount reductions. While this result is a notable improvement from Q4 2022’s 24% margin, it is 50 bps lower than Q3 2023’s 30.3% margin.
Since the Q4 earnings release, the consensus margin for AWS climbed to 31.0% starting from the second half of 2024, and is expected to remain at that level through FY 2027. For Q1 2024, however, the range is 25-33% and 28-33% for FY 2024. Longer-term, there is significant debate about both top-line growth and margin levels for the AWS business, which is likely driven by varying views on the pace of cloud migration and the development of GenAI applications.
AWS has picked up the pace on the AI front. CEO Andy Jassy pointed to Bedrock helping to fuel early traction in GenAI. Jassy explained that GenAI is and will continue to be an area of pervasive focus and investment across the company and believes it will “ultimately drive tens of billions of dollars of revenue for Amazon over the next several years.” (Visible Alpha’s AI Monitor tracks the pace of AI-exposed revenue growth, including Amazon’s AWS business.)
New Question: Will AWS margin remain at 30-31% levels in 2024-2025?
2. Is the advertising business continuing to show growth?
The Ads business continued its strength by growing 26% in Q4 to $14.5 billion and 24% in 2023 to $46.9 billion, in line with expectations, driven by sponsored products. Jassy reiterated that they are still in the early days for Ads and noted in the quarter that “streaming TV advertising continues to grow quickly.” CFO Brian Olsavsky further explained that the company is looking for ways to increase advertising in its streaming properties, including Fire TV, Prime Video, Free V and Twitch. Jassy also noted that Amazon is focused on improving its measurement and transparency, enabling brands to see the payback of their advertising spend.
Consensus expectations for ad revenue in 2024 are at $57.0 billion, with the most aggressive estimates at $60.0 billion, down from $70 billion expected in Q1 last year. Longer term, there is also debate about the magnitude of revenue growth for this business. By the end of 2026, analysts expect this business to generate $78.2 billion in revenues, but the range is from $67.1-91.0 billion.
New Question: Will Amazon be able to maintain more than a 20% CAGR for the Ads business going forward?
3. What’s supporting Amazon’s online margin improvement?
Both the North America and International online businesses saw sales and operating profit come in ahead of expectations again, delivering margin improvement. In 2023, Amazon delivered 500 bps of margin improvement in North America, going from 1.2% in Q1 2023 to 6.2% in Q4, and the company noted that there’s still more to go. According to Visible Alpha consensus, analysts project Amazon’s North America operating profit margin to remain at 6% for 2024. However, margin assumptions range from 4-8%, while top-line growth is estimated to remain consistent at 10%. This range continues to widen through 2027, with estimates from 6% to 14%.
Combined with the ongoing strength and success of advertising, the company has also made significant improvements to its regional fulfillment centers. The benefits of regionalization and advertising are projected to continue to enhance margins.
New Question: Will Amazon’s North America online business be able to generate a 10% operating profit margin by the end of 2025?
Figure 1: Key financials for Amazon
Source: Visible Alpha consensus (February 5, 2024)
Three Key Questions About Microsoft’s (MSFT) Fiscal Q2 2024 Earnings
By: Melissa Otto, CFA
Microsoft (NASDAQ: MSFT) reported earnings for fiscal Q2 2024 on Tuesday, January 30, 2024. What happened during the release and earnings call, and what are the questions to focus on?
1. What drove the margin surprises for the key segments in fiscal Q2 2024 and will these trends drive upside to the 1-2% point margin improvement guided to for 2024?
Both Productivity & Business Processes and Intelligent Cloud (including Azure) came in ahead of Visible Alpha consensus estimates for sales and operating profit.
Productivity & Business Processes: In Q2, the Productivity & Business Processes segment delivered $19.3 billion in revenue and $10.3 billion in operating profit, resulting in a 53% operating profit margin, ahead of the 50% that was expected based on Visible Alpha consensus. This was driven by Office 365 ARPU expansion in the Office Commercial business.
Microsoft guided to $19.3-19.6 billion in Productivity & Business Processes revenue for Q3 2024, in line with analysts’ estimates of $19.5 billion, driven by Total Office to be up 15%, which was ahead of the 12% expected based on consensus. In FY 2024, the segment is expected by analysts to grow to $77.8 billion in revenue, which would be up 12% year over year. Operating profit for this segment is projected to be $40.3 billion, generating an estimated 52% operating profit margin for 2024. Analysts expects the margin to remain at 52% through 2026.
New Question: Will Office 365’s ARPU growth continue in FY 2024?
Intelligent Cloud: Prior to the Q2 earnings release, analysts expected the Intelligent Cloud business (including Azure) to generate $25.3 billion in revenue for Q2 and $103.7 billion for FY 2024, and for operating margins to remain around 44% for FY 2024. In Q2, Intelligent Cloud delivered revenue of $25.9 billion and operating profit of $12.5 billion, ahead of expectations. This resulted in a 48% operating profit margin, well ahead of the consensus estimate of 44%, which was similar to the strength observed last quarter and up significantly from 41.4% in Q2 2023.
According to management, Azure took share again and got a boost from its AI advantage. Azure IaaS/PaaS delivered $14.7 billion in revenue, up over $1 billion quarter over quarter and up 34% year over year, better than expectations. This was driven by Azure OpenAI and a strong 6 points of growth from AI services. According to CEO Satya Nadella and CFO Amy Hood, most of the Azure number was driven by inferencing and reflects the application of AI at scale. The training of large language models has not shown up in the numbers (yet).
In line with Visible Alpha consensus, Intelligent Cloud Q3 guidance of $26.0-26.3 billion will continue to be driven by Azure. In the earnings call, Nadella stated that Microsoft has “great momentum with Azure OpenAI.”
In FY 2024, analysts now expect Intelligent Cloud to deliver $104.8 billion in revenue, up 19% year over year, and to grow to $124.7 billion by the end of FY 2025, up from pre-Q levels. Operating profit for this segment is projected to be $48.3 billion, generating an estimated 46% operating profit margin for 2024. Analysts expect the margin to dip down to 45% through FY 2026.
New Question: Will Azure’s growth and margins continue to accelerate in FY 2024?
2. CapEx continues to grow: Where is Microsoft investing?
The CapEx ramp that started last year has enabled the company to scale with new data center footprints. According to Hood, these data center investments support Microsoft’s cloud demand, including scaling their AI infrastructure. It is worth noting that Alphabet has only started to ramp CapEx this quarter, suggesting Microsoft has a lead in the AI race.
Microsoft’s CapEx in FY 2024 is expected to be $42.7 billion, up 10X from FY 2013, 5X from FY 2017, and 3X from FY 2019. CapEx for Q2 came in at $9.7 billion, up 55% year over year. CapEx as a percentage of revenue has ticked back down to 16% from 18% in Q1 2024.
The company guided to further increased sequential CapEx spending for cloud and AI infrastructure in FY 2024. For Q3, CapEx is expected to surge 71% year over year to $11.3 billion, making up 19% of revenues. Analysts expect total CapEx of $42.7 billion for FY 2024, up 52% year over year. This level of CapEx spend is likely to continue to support driving cloud revenue and Microsoft’s position with respect to AI.
According to Nadella, the easiest path for companies to adopt generative AI is via Copilot and the Cloud. Microsoft’s combination of its Copilots and its full-stack approach should help customers optimize GPU utilization and may provide a compelling competitive advantage.
New Question: What will be the impact of a fully scaled AI infrastructure?
3. What will it take for Microsoft’s market cap to hit $5 trillion?
A $5 trillion market cap assumes the stock price will hit $700. Based on Visible Alpha FY 2027 consensus, the top-end EPS estimate of $20.10 and the current 35X multiple puts the stock price in that territory. This top-end estimate assumes Intelligent Cloud will hit $192 billion in revenues at over 20% CAGR at a 45% margin, driven by Azure IaaS/PaaS hitting $145 billion on Azure AI growth by FY 2027. For the Productivity and Business Processes segment, it assumes over 15% CAGR in revenues to generate $121.8 billion at a 52% margin by FY 2027, driven by Office. Given the potential strength of fundamentals in these businesses and the early innings of AI growth, could these segments exceed current analyst estimates, significantly leading to a lower multiple?
In addition, this growth assumes little contribution from gaming. Currently, Activision is projected to add only $7 billion in revenues by FY 2027, contributing to the More Personal Computing segment. However, this segment is expected to generate an operating profit of only $23.5 billion by FY 2027, from $18.2 billion in FY 2024. Could the integration of Activision lead to significant gains over the next few years that exceed current expectations?
New Question: How long will it take the Activision Blizzard acquisition to add $10 billion to Gaming revenues?
Figure 1: Key financials for Microsoft
Source: Visible Alpha consensus (February 1, 2024)
Key Questions About Alphabet (GOOGL) Q4 2023 Earnings
By: Melissa Otto, CFA
Alphabet Inc. (NASDAQ: GOOGL) reported earnings for Q4 2023 after the market close on Tuesday, January 30, 2024. What happened during the release and earnings call, and what’s next?
Ads revenue was disappointing: Is the profitability of this business sustainable?
Alphabet reported earnings a bit below expectations for Q4 2023, driving the stock down more than 6% after the release. Alphabet’s core business of Search and YouTube delivered revenues in line with consensus expectations, while the Network search businesses together were -3% below expectations. On an FX-neutral basis, the ad segment only grew 2%, driven only by retail promotions and APAC. Looking ahead to Q1, the company noted on the earnings call that they expect the Ads business to continue to see consumer cost consciousness drive promotional activity.
Given the strong pace that AI is gaining momentum, there are questions about the sustainability of the Ads business model for Alphabet. Based on Visible Alpha consensus, analysts are expecting Google Advertising revenue to be $305 billion by FY 2026, up 28% from FY 2023 levels. Is this too aggressive?
Operating margin was disappointing: How much cost will be pulled out of the business?
The overall operating profit margin of 27.5% for Alphabet came in 60 basis points below Visible Alpha consensus expectations, driven by a combination of higher-than-expected losses in Unallocated businesses. Coming into the quarter, analysts were expecting Alphabet’s level of losses for the Other Bets and Unallocated segments to remain around $2.4 billion, but these surged to nearly $4 billion, driven by reduction in force costs. On the earnings call, the company noted a further $700 million severance expense in Q1.
Ruth Porat, President and Chief Investment Officer, explained that the company will continue to streamline operations, its real estate portfolio, and its vendor spend, supporting slower expense growth. It is worth noting that the company still has not announced a new CFO to replace Porat. Operating expenses currently hover around $90 billion, but are expected to continue to grow to $105 billion by FY 2025, according to Visible Alpha consensus. Research & Development and Sales & Marketing costs make up 80% of the company’s expense base. How will Alphabet continue to drive innovation and competitive positioning in the Ads and Search businesses while reducing costs?
The Cloud bounced in Q4: Will it hit $50 billion in revenues and an 11% margin in FY 2025?
The Cloud business showed quarter-on-quarter improvement with revenues that beat consensus by 2.7%, driving a 9% operating profit margin. In particular, the Cloud business appeared to benefit from cost optimizations getting worked through, combined with the early adoption of AI solutions.
Looking ahead, the revenue growth from the Cloud business is expected to be an outsized chunk of Alphabet’s total revenue growth for FY 2024, meaning it is growing at a much faster 20-25% pace than the 10% expected year-over-year growth for Alphabet’s core Search and YouTube revenue streams. Compared to last quarter, expectations for Cloud sales did not change much after the Q4 earnings release. Cloud revenues are projected to be $41 billion in FY 2024 and $50 billion in FY 2025. However, Visible Alpha consensus estimates for operating profit margin coming into the quarter jumped significantly after the earnings release from 6% to 9% in FY 2024 and from 9% to 11% in FY 2025. Is it too soon to assume that Cloud margin will remain at or above Q4’s 9% level?
Playing catch-up in AI: Cash decline and a CapEx surge
In order to catch up to competitors in the AI space, further investments and CapEx are required.
While the company has a strong cash position of $111 billion, it is worth flagging that this number is down nearly $10 billion from $120 billion in Q3, and its lowest level since FY 2018.
In Q4, CapEx jumped more than expected by $3 billion quarter-on-quarter to $11 billion, “driven overwhelmingly by investment in technical infrastructure, with the largest component for servers, followed by data centers,” according to Ruth Porat on the earnings call. Porat further explained that this uptick in CapEx reflects Alphabet’s “outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, Cloud enterprise customers, and governments globally and the long-term growth opportunities that it offers.”
In addition, Porat guided for CapEx to be “notably larger” in 2024, implying that investment is going to be pulled forward and seems to be chasing Microsoft. Microsoft’s CapEx started to surge meaningfully last year and is projected to hit $42 billion, which likely enabled it to take a lead in AI. Based on Visible Alpha consensus, Alphabet’s CapEx is expected to surge by $11 billion from $32 billion in FY 2023 to $43 billion in FY 2024, which now matches Microsoft’s CapEx levels. Longer term, too, Alphabet’s CapEx expectations jumped to $48 billion in FY 2026, up from $43 billion last quarter. Will Alphabet’s investments in AI start to give it an edge without burning more cash?
Figure 1: Key Financials for Alphabet
Source: Visible Alpha consensus (January 31, 2024)
Amazon.com (AMZN) Q4 2023 Earnings Preview
By: Melissa Otto, CFA
Amazon.com, Inc. (NASDAQ: AMZN) will report Q4 2023 results on Thursday, February 1, 2024. Here are the key numbers that we’re watching.
Figure 1: Amazon – consensus expectations for Q4, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (January 26, 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 Q4 2023 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q4 have come up slightly from the beginning of last year, from $163 billion to $166 billion, driven by strength in Amazon’s online retail and advertising businesses, while AWS expectations have come down. The focus will likely be on the Q4 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 4.3% now, ahead of Q4 earnings. Operating margin expectations for North America have remained at current levels since October. For 2024, the estimated margin ranges from 3.6% to 6.3%, with consensus at 5.1%. What will the company say about the outlook for the online business?
AWS margin came in at 30% last quarter, and has steadily increased back to the expected 28% level forecast at the beginning of last year for Q4 and 2024. There is, however, a significant range of estimates for the Q4 AWS margin into this week’s release, with analysts expecting from 24% to 31%.
The stock has traded up over 30% since last quarter’s October release, outperforming the S&P 500. Could the Q4 release provide the next positive catalyst for the stock?
Figure 2: Amazon consensus estimates
Source: Visible Alpha consensus (January 26, 2024). Stock price data courtesy of FactSet. AMZN’s current stock price is as of the market close on January 25, 2024.
Apple (AAPL) Q1 2024 Earnings Preview
By: Melissa Otto, CFA
Apple Inc. (NASDAQ: AAPL) will report fiscal Q1 2024 results on Thursday, February 1, 2024. Here are the key numbers that we’re watching.
Figure 1: Apple – consensus expectations for Q1, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (January 26, 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.
Apple Q1 2024 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q1 have come down from the beginning of last year, from $127 billion to $118 billion, driven by decreased optimism about the iPhone. Since November, total expected iPhone unit sales have remained lower at 75 million, driven by debate among analysts about the performance of the new iPhone 15 series during the holiday season. Expected Q4 iPhone units range from 70 million to 82 million, with most of the difference explained by variance in estimates for the iPhone 15 specifically, ranging from 41 million to 60 million units.
While iPhone sentiment has come down, expectations for the high-margin Services segment and for total operating profit have remained consistent since Q3 2023. Gross margin for the Services segment is over 70%, significantly higher than the 36% gross margin for Products. It will be interesting to hear what the company says in the earnings release about growth in Services and if this is enough to offset any sluggishness in iPhone sales.
The stock has traded up 9% since last quarter’s November release, underperforming other Big Tech stocks and the S&P 500. Could the Q1 release provide a positive catalyst for the stock?
Figure 2: Apple consensus estimates
Source: Visible Alpha consensus (January 26, 2024). Stock price data courtesy of FactSet. AAPL’s current stock price is as of the market close on January 25, 2024.
Meta Platforms (META) Q4 2023 Earnings Preview
By: Melissa Otto, CFA
Meta Platforms, Inc. (NASDAQ: META) will report Q4 2023 results on Thursday, February 1, 2024. Here are the key numbers that we’re watching.
Figure 1: Meta Platforms – consensus expectations for Q4, past earnings surprises, revisions, and CAGR
Source: Visible Alpha consensus (January 26, 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.
Meta Platforms Q4 2023 Earnings Preview
According to Visible Alpha consensus, total revenues expected for Q4 have remained at $39 billion and operating profit from the Family of Apps at $20 billion since Q2 2023, driven by solid performance. However, there is debate among the analysts into Q4 for the Family of Apps’ income from operations, with estimates ranging from $15.8 billion to $21.7 billion.
For 2024, expectations for operating income from the Family of Apps have increased from $71.9 billion last quarter to $73.6 billion ahead of Q4 earnings, driven by better efficiency in the business. In addition to the continued expected efficiencies in the Family of Apps segment, projected losses from Reality Labs have decreased further since last quarter for both 2024 and 2025, suggesting efficiency is expected to continue to have an impact here too. Will Meta be able to continue managing costs in 2024?
The stock has been an outperformer since last quarter, up more than 30%. What new information will come out of the Q4 release that could potentially maintain the positive momentum?
Figure 2: Meta consensus estimates
Source: Visible Alpha consensus (January 26, 2024). Stock price data courtesy of FactSet. META’s current stock price is as of the market close on January 25, 2024.
Three Key Questions About Netflix (NFLX) Q4 2023 Earnings
By: Melissa Otto, CFA
Netflix Inc. (NASDAQ: NFLX) reported Q4 2023 results on Tuesday, January 23, 2024. What happened in Q4 and what may be next?
In a pivot from the usual recorded interview, Netflix live streamed their earnings call on YouTube. Spencer Wang, vice president of finance, hosted the call and asked the co-CEOs questions. The discussion and debate from the earnings interview were around the growth of engagement and monetization and the potential for advertising to drive revenues while maintaining margin.
1. How is the landscape shifting for Netflix?
In previous quarters, Netflix shared a Nielsen chart showing a breakdown of major players’ share of TV screen time in the U.S., where YouTube has been leading. This quarter, however, in addition to the U.S. data they included Nielsen data from other key markets, including Brazil and Mexico, where YouTube leads by a substantial margin.
Given the recent WWE announcement and the newly livestreamed earnings call, is Netflix looking to provide more live events? While the company noted on their call that they prefer to build and not buy, could more partnerships be in the works?
Figure 1: Share of TV screen time
Source: Netflix Q4 Shareholder Letter (January 23, 2023)
New question: Going forward, how will live events play a role in Netflix’s content offering?
2. What happened in Q4 and how has the outlook changed?
Revenue
Q4 performance: Q4 year-over-year revenue growth of 12% was $115 million ahead of consensus estimates, driven by strong net adds. The company reported 13 million new subscribers, driven by both the U.S. and overseas regions. The UCan market added 2.81 million new subscribers, which demonstrated that its new paid-sharing program has worked. There is concern that password-sharing customers have been pulled forward, and could show a slowdown going forward.
Q1 2024 expectations: The company guided Q1 to 13% year-over-year revenue growth with revenue of $9.3 billion, in line with consensus estimates, and supported by the continued positive expected revenue impact of paid-sharing, growth of the ads business, and further monetization. Regarding pricing, the company will be providing a range of prices and plans.
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 2024. According to Visible Alpha consensus, analysts expect the company to generate revenue of $38.6 billion in FY 2024, up from expectations of $38 billion in January 2023.
Operating profit
Q4 performance: Netflix delivered Q4 operating profit of $1.9 billion and a 17% operating profit margin, almost $300 million ahead of consensus estimates coming into the quarter.
FY 2024 expectations: Looking ahead, the operating profit margin outlook for FY 2024 is now expected to be 24%, up from 22-23%, driven by the strength in Q4 continuing into 2024 and an assumption around a weaker dollar.
Longer-term: The company did not give a long-term margin target. Based on Visible Alpha consensus, operating profit margin is expected to grow from 24.1% in FY 2024 to 30% in FY 2027. Currently, consensus estimates project an improvement from FY 2024 in the operating margin, and for this to grow to 30% 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 26% to 33%.
New question: Is the longer-term pace of margin expansion too aggressive?
3. What additional visibility into the Ads business was provided in the Q4 release?
According to the company, in Q4, ads membership increased 70% quarter-on-quarter and accounts for 40% of new sign-ups, up from 30% last quarter. In the Q4 shareholder letter and earnings call, management highlighted that they aim to drive engagement to attract advertisers, which they expect to help the ads business continue to scale.
Netflix remains upbeat about the long-term opportunity, given the size of their user base. The company continues to have work to do on advertising business features, both to scale and to build out the technical capabilities, in order to create formats that brands will value. In particular, the company called out the need to continue improving the targeting and measurement they offer to their customers.
Long-term ad-supported revenue expectations: Currently, consensus estimates project total ad-supported revenue to expand to nearly $10 billion by the end of FY 2027, up over 15x from FY 2023 levels. There is a significant range of views on the magnitude of this growth. For FY 2027, analyst estimates range from $3.9 billion to $18.6 billion, which narrowed from $2.9 billion to $19.6 billion last quarter.
New question: How big can the ads business become?
Figure 2: Key financials for Netflix
Source: Visible Alpha consensus (January 25, 2023)
