Visible Alpha Technology

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)

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)

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.

Microsoft Corporation (NASDAQ: MSFT) will report fiscal Q2 2024 results on Tuesday, January 30, 2024, after the market close. Here are the key numbers that we’re watching.

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

Source: Visible Alpha consensus (January 24, 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.

Microsoft Q2 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q2 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 $104 billion for FY2024, driven by Azure. The profitability of this segment is a source of debate among analysts. Currently, the Q2 2024 consensus of 14 analysts for the Intelligent Cloud business’s operating profit margin is 44%, but ranges from 41% to 47%, suggesting this segment may deliver a surprise in the Q2 release.

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 $13 billion from $29 billion in January 2023 to currently $42 billion in FY 2024, up 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 21% since the October earnings release, and is up 9% year-to-date, outperforming the S&P 500. Could the Q2 release help drive further growth and momentum in the stock?

Figure 2: Microsoft consensus estimates

Source: Visible Alpha consensus (January 24, 2024). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on January 23, 2024.