Visible Alpha Technology

Meta Platforms (NASDAQ: META), Microsoft (NASDAQ: MSFT), and Alphabet (NASDAQ: GOOGL) will report results this week. Here are the key numbers that we’re watching.

Figure 1: Meta Platforms – consensus expectations for Q1 2024, past earnings surprises, revisions, and CAGR

Source: Visible Alpha consensus (April 19, 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.

Figure 2: Meta Platforms consensus estimates

Source: Visible Alpha consensus (April 19, 2024). Stock price data courtesy of FactSet. META’s current stock price is as of the market close on April 18, 2024.

Meta Platforms Q1 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q1 have moved up to $36.3 billion, driven by better performance in the Family of Apps segment, especially in the U.S. and Europe. However, expectations for operating profit have remained at $17.7 billion since Q4 2023. There is some debate among the analysts into Q1 for the Family of Apps’ income from operations, with estimates ranging from $16.0 billion to $19.4 billion.

For 2024, expectations for operating income from the Family of Apps have remained at $81.3 billion since last quarter, driven by continued 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 an outperformer since last quarter, up more than 27%. What new information will come out of the Q1 release that could potentially maintain the positive momentum?

Figure 3: Microsoft – consensus expectations for Q3 2024, past earnings surprises, revisions, and CAGR

Source: Visible Alpha consensus (April 19, 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.

Figure 4: Microsoft consensus estimates

Source: Visible Alpha consensus (April 19, 2024). Stock price data courtesy of FactSet. MSFT’s current stock price is as of the market close on April 18, 2024.

Microsoft Q3 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 have remained around $61 billion since October, 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 around $105 billion for FY 2024, driven by Azure.

The profitability of the Intelligent Cloud segment is a source of debate among analysts. Currently, the Q3 2024 consensus of 14 analysts for the Intelligent Cloud business’s operating profit margin is 45%, but margin estimates range from 41% to 50%, suggesting this segment may deliver a surprise in the Q3 release. We are closely watching what the company will say about the outlook for AI and Copilot. Are the generative AI investments going to start to drive upside to fundamentals from this quarter?

CapEx numbers have continued to increase steadily since last year. According to consensus projections, CapEx estimates have climbed $15 billion from $28 billion in January 2023 to currently $43 billion for FY 2024, up 3x from FY 2019 and outpacing peers. We are also watching the Gaming segment, as the company fully integrates Activision. Analysts are expecting $5.1 billion in revenues this coming quarter and $21.3 billion for FY 2024. Will Microsoft start to invest more CapEx in the Gaming business?

Microsoft stock has traded down 1% since the last earnings release, but is up 8% year-to-date, outperforming the S&P 500. Could the Q3 release help drive further growth and momentum in the stock?

Figure 5: Alphabet – consensus expectations for Q1 2024, past earnings surprises, revisions, and CAGR

Source: Visible Alpha consensus (April 19, 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.

Figure 6: Alphabet consensus estimates

Source: Visible Alpha consensus (April 19, 2024). Stock price data courtesy of FactSet. GOOGL’s current stock price is as of the market close on April 18, 2024.

Alphabet Q1 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q1 2024 have remained around $79 billion since January 2023, driven by resilience in its ad business. The sentiment around profitability appears to be improving, as the Q1 consensus expectations for operating income and EPS have ticked up to $22 billion and $1.51/share since January 2024.

We are closely monitoring the trend of the Cloud business, given the volatility in this business. The operating profit margin, which turned positive in Q1 2023 and showed further improvement in Q2, missed expectations in Q3 by 200 bps, but ultimately delivered a 5% margin for the year. Looking ahead to Q1 2024, analysts expect the Cloud business to generate a 7.3% operating profit margin, down 140 basis points since January 2024. However, analysts expect the Cloud business operating profit margin to jump to 8.5% in FY 2024, driven by increased profitability in H2 2024. Longer term, the Cloud business is projected to generate a 13.7% margin by FY 2026. Is this expectation still too high?

Alphabet stock has traded up 3% since last quarter’s release and up 12% since the beginning of the year, outperforming the S&P 500. 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 Q1 release provide more visibility into the trajectory of 2024 profitability?

Alphabet Inc.’s (NASDAQ: GOOGL) Google Cloud CEO, Thomas Kurian, kicked off the latest Google Cloud Next conference and Alphabet CEO, Sundar Pichai, provided an introduction that set the stage for discussing the rapid pace at which generative AI (GAI) is moving. What was announced in the keynote and what are the implications relating to potential margin expansion for Google Cloud?

Figure 1: Alphabet CEO Sundar Pichai at Google Cloud Next ‘24

Source: Google Cloud Next (April 9, 2024)

Operating margin improvement

One of the key aspects of the Alphabet investment story is about Google Cloud continuing to improve its operating margin. This business broke even and generated a 5.2% operating profit margin in FY 2023, or $33 billion in revenue and $1.7 billion in operating profit. Based on Visible Alpha consensus, Google Cloud is now expected to generate an 8.5% operating margin, down from 9.1% in February, or $3.5 billion in operating income on $41 billion in revenue, by the end of FY 2024. However, there is significant debate about the Google Cloud business, with operating profit estimates ranging from $1 billion to $5.5 billion.

While the margin improvement for Google Cloud was positive in FY 2023, it remains far from the profitability of some of the company’s Cloud competitors, especially Microsoft. Microsoft delivered a 43% operating profit margin in its Intelligent Cloud business and Amazon’s AWS segment generated a 27% margin last year. In addition, Microsoft and Amazon AWS are each expected to see 200-300 basis points of margin improvement this fiscal year, according to Visible Alpha consensus.

At the Google Cloud Next 2024 conference, there seems to be a greater focus on showcasing how customers are using these new tools across various workflows. Kurian showed a spectrum of different agents with specific use cases for supporting customers, employees, and developers’ needs. Will the latest developments accelerate both revenue and operating profit growth in the Google Cloud business?

Figure 2: Google Cloud CEO Thomas Kurian introduces the CEO of Goldman Sachs

Source: Google Cloud Next (April 9, 2024)

Goldman Sachs CEO David Solomon made a guest appearance at the Next conference. Solomon highlighted how generative AI at the bank is enabling business growth, enhancing client experience, and increasing efficiency. He concluded by stating that it “will yield real value for the business.”

Agents

Google Cloud also showcased Gemini 1.5 Pro and Vertex AI. The focus was on developing agents in enterprises for sales, service, and operational functions. Kurian highlighted that the Vertex AI agent builder can now create human-like conversations, use natural language instructions to control the conversation flow, and improve response quality with vector search.

Figure 3: Google Cloud CEO Thomas Kurian introduces the spectrum of Agents

Source: Google Cloud Next (April 9, 2024)

Aparna Pappu, GM & VP of Google Workspace at Google Cloud, called out that companies are asking for cheaper AI-powered Google Meet and Chat to move away from Zoom, suggesting that the competition in the space may be intensifying. She highlighted that Google Meet outperformed Webex, Microsoft Teams, and Zoom in overall video and audio performance, and will cost $10/user/month. It is worth noting that Duet AI was charging $30/user/month last August. In addition, the company launched Google Vids, an AI-powered video creation app for Google Workspace.

These innovations are designed to add value to the user’s existing workflows by helping to make the user more efficient and productive with their existing tools. However, it is unclear how meaningfully these AI product innovations will drive revenues and profitability in the Google Cloud business segment, especially among small enterprise and individual users.

Google Cloud will need to deepen its monetization with all users to move the needle meaningfully on operating profit, which may prove challenging given Microsoft’s size and profitability in cloud and legacy workplace tools. Could these new Agents help to drive margin expansion for Google Cloud in FY 2024 and beyond?

Figure 4: Google Cloud consensus estimates

Source: Visible Alpha consensus (April 9, 2024). Stock price data courtesy of FactSet. Alphabet’s current stock price is as of the market close on April 8, 2024.

Figure 5: Alphabet’s key financial items

Source: Visible Alpha consensus (April 9, 2024). Stock price data courtesy of FactSet. Alphabet’s current stock price is as of the market close on April 8, 2024.

Final Thoughts

The development and adoption of GAI is in its infancy, but evolving quickly. Google Cloud seems poised to benefit from this technology shift. However, how the profitability of this business will ultimately shake out will be a critical long-term investment question for the stock. With the help of its Agents, will Google Cloud be able to carve out a more profitable place in the cloud landscape and move more quickly toward a double-digit operating profit margin?

Nvidia Corp. (NASDAQ: NVDA) hosted GTC (GPU Technology Conference) 2024, the company’s major AI conference for developers, in mid-March. Here are some of our key observations post-GTC.

Estimates continue to go up

Since GTC, analysts’ estimates have continued to grind higher. From January 1, 2023 to January 1, 2024, FY 2024 – FY 2027 aggregated Visible Alpha consensus expectations for Data Center revenues increased a whopping $250 billion, from $113 billion to $364 billion. Despite these enormous upward revisions, numbers are still moving up. From March 15, 2024, right before Nvidia’s GTC event kicked off on March 18, aggregated consensus increased a further $8 billion. Further optimism around the FY 2026 and FY 2027 outlook drove the bulk of the increases. What’s getting the investment community excited about the outlook?

Figure 1: Nvidia and Dell consensus estimates

Source: Visible Alpha consensus (March 27, 2024)

Figure 2: CEO Jensen Huang: Moving toward an Industrial Revolution = $100 trillion

Source: Nvidia GTC keynote with CEO Jensen Huang (March 18, 2024)

Birth of a new industry

According to CEO Jensen Huang at GTC, accelerated computing and Generative AI are moving the world to a new industrial revolution. While many of his comments echoed similar themes from his keynote at Computex 2023 in Taiwan last fall (see our report on that conference), he emphasized larger models, better performance and, ultimately, higher prices.

The move to accelerated computing is laying the groundwork and positioning heavy industry to scale innovative solutions in manufacturing. Omniverse Digital Twins will be able to simulate real world experiences and solutions that can help automotive and electronics manufacturers reduce risk and cost, while improving efficiency and creativity. The Omniverse enables everything to be manufactured digitally first.

Blackwell and Dell

Nvidia also announced the Blackwell platform at GTC. According to Huang, Blackwell will be “a very, very big GPU” for the Generative AI era. The combination of the FP4 Tensor Core, the new transformer engine, and the NVLink switch, which will enable GPUs to communicate with each other 10x faster, will support the proliferation of generative AI.

As organizations build out their chatbots and generative AI capabilities, Huang highlighted the need for an AI factory. In order to scale the generative AI capabilities across a full enterprise, firms are probably going to need to build AI factories. He then pointed to Michael Dell, CEO/founder of Dell, in the audience and explained that “nobody is better at building end-to-end systems of very large scale for the enterprise than Dell.” Has this been baked into Dell’s estimates?

Figure 3: CEO Jensen Huang: Blackwell

Source: Nvidia GTC keynote with CEO Jensen Huang, March 18, 2024

Longer-term, going higher?

For FY 2026, the range of estimates remains substantial and implies that there is significant debate about Nvidia’s growth outlook and whether the company will deliver the industrial revolution dream. The top-end estimate is currently at $182.6 billion, while the low-end estimate is at $95.8 billion for Data Center revenue. Non-GAAP diluted consensus EPS for FY 2026 is now projected to be $29.5/share, but ranges from $20.1/share to $41.9/share, with current P/E ratios at 39x to 19x. Will the gap close further and drive consensus estimates higher going forward?

NVDA stock has not reacted much since the GTC, but is up over 86% since the beginning of the year. Will the Data Center business continue to beat expectations in FY 2025 and continue to drive upside in the stock?

Figure 4: Nvidia’s key financial items

Source: Visible Alpha consensus (March 27, 2024). Stock price data courtesy of FactSet. Nvidia’s current stock price is as of the market close on March 26, 2024.