Celsius Energy Drink Boost; Booking Shifts to Merchant Revenue; Hubspot’s FCF to Expand; Ford Otosan Poised for Growth
By: Visible Alpha Research & Innovation Lab
In our weekly round-up of the top charts and market-moving analyst insights: Celsius Holdings (NASDAQ: CELH) is expected to see energy drink revenue surge in 2023; Booking Holdings (NASDAQ: BKNG) is projected to shift further from an agency model towards a merchant model; HubSpot Inc. (NYSE: HUBS) is poised to see strong revenue growth, improved margins, and a rise in free cash flow; and Turkey’s Ford Otosan (BIST: FROTO) is expected to see another strong year in 2023.
Celsius to See 70% Boost in Energy Drink Revenue in 2023
Celsius Holdings (NASDAQ: CELH) is expected to see energy drink revenue soar 70% in 2023 to over $1.1 billion, according to Visible Alpha consensus. The energy drink manufacturer has exhibited strong revenue growth over the past few years, having launched across the U.S. via Walmart in 2020 and signing a distribution contract with PepsiCo in 2022. The company’s revenue is expected to maintain strong growth in the forecasted years, though at a slowing pace as the market matures.
North America remains the company’s largest market with estimated revenue of nearly $1.1 billion (+74% YoY) in 2023, followed by Europe at $34 million (+10% YoY), and Asia at $5 million (+33% YoY).
Booking Expected to Generate Nearly $16B in Merchant Revenue by 2027
In 2023, approximately half of Booking Holdings’ (NASDAQ: BKNG) reservations are projected to be handled through the company’s payment platform as they continue to shift from their original agency model to a merchant model.
Based on Visible Alpha consensus, Booking is expected to generate nearly $10 billion in agency revenue (+11% YoY) and $9.6 billion in merchant revenue (+34% YoY) in 2023. Booking’s advertising and other revenues are expected to generate a little over $1 billion (+17% YoY) by the end of 2023.
By 2027, analysts expect the merchant model to generate $15.7 billion in revenue, or 53% of the company’s total revenue, while the agency model is projected to bring in $12.4 billion.
Strong Revenue Growth, Improved Margins to Expand HubSpot’s FCF
HubSpot Inc. (NYSE: HUBS), a CRM software developer, is anticipated to sustain double-digit revenue growth in the forecast period, though at a moderated pace, according to Visible Alpha consensus. Analysts project the company’s total revenue to reach $2 billion (+20.7% YoY) in 2023. Subscription revenue is expected to rise by 21%, and professional services and other revenue are estimated to grow by 7.3% year-over-year.
HubSpot is also expected to maintain profitability, with an estimated operating margin of 13.4% in 2023 and continued improvement in the forecast period due in part to better cost discipline. According to Visible Alpha consensus, free cash flow (FCF) is anticipated to rise by 25.7% in 2023, potentially supporting HubSpot’s growing financial health.
Turkey’s Ford Otosan Poised for Another Strong Year in 2023
Ford Otomotiv Sanayi A.Ş. (BIST: FROTO), otherwise known as Ford Otosan, the joint venture between Ford Motor (NYSE: F) and Turkey’s Koç Holding (BIST: KCHOL), is poised for substantial growth in 2023 according to Visible Alpha consensus.
Analysts expect automotive revenue of the Turkey-based auto manufacturer to surge 95% year-over-year in 2023, reaching an estimated TRY ₺334 billion (USD $12 billion). This outlook is underpinned by a projected 37% growth in the number of units sold, totaling 652K units in 2023. From 2023 to 2026, analysts expect Ford Otosan’s total automotive revenue to grow at a CAGR of 22%.
Three Key Questions About Meta Platforms’ (NASDAQ: META) Earnings in July 2023
By: Melissa Otto, CFA
Meta Platforms (NASDAQ: META) released Q2 2023 earnings after the close on July 26, 2023. Based on updates from the company’s earnings release and call, here are our three key questions.
Key Takeaways
- Reality Labs’ losses will increase year over year in 2023 and meaningfully in 2024.
- Sales guidance for Q3 exceeded expectations and suggests that 2023 analyst estimates may need to be revised up.
- Facebook International’s significantly lower ARPU level vs. U.S. ARPU presents an opportunity for further monetization.
1. How will Meta’s focus on efficiency impact Reality Labs?
Q2 operating profit: In Q2, Meta delivered $9.4 billion in operating profit, in line with Visible Alpha consensus expectations of $9.5 billion. The Q2 OpEx of $21.6 billion was in line with the $21.7 billion expected by analysts.
Revised 2023 OpEx guidance: Meta guided to $88-91 billion in total expenses, an increase from the previous guidance of $86-90 billion, but still below the range of $89-95 billion announced after Q4. The initial 2023 guidance given early in the year was $94-100 billion, highlighting how much this number has been moving around.
The consensus estimate for OpEx was $88 billion prior to the release, in line with the guidance levels and estimated OpEx levels of $45 billion for H2. Meta expects payroll expenses to increase as the workforce moves toward more higher-cost technical roles to support its AI investments.
Increased losses at Reality Labs: 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 -$15.2 billion in losses from Reality Labs, up 11% year over year from 2022 levels of -$13.7 billion. However, the most conservative analyst forecasted -$17.5 billion, a 28% increase in losses year over year for 2023. In 2024, analysts are not in agreement about the level of losses from Reality Labs going forward. While the consensus estimate is -$17.8 billion, analyst forecasts for Reality Labs show a significant range from -$14 billion to -$22 billion in losses for 2024.
Reality Labs is a meaningful drag on the company’s total operating profit margin with little visibility into when this drag will improve. However, expectations have continued to increase. After Q1, analysts expected $33 billion in 2023 operating profit, but prior to the Q2 release analysts projected $39 billion and a margin of 31%, driven by revisions to sales and OpEx during Q2. Given the new guidance and easy Q3 year-over-year comps, the revisions are likely to continue in H2 and may provide some momentum to fundamentals.
As of the time of the Q2 release, Meta’s operating profit margin is still off previous 2019 levels of 34%, compared to the 31% expected for 2023. Visible Alpha consensus is now projecting Meta’s margin to return to 34% in 2024. However, the company may choose to keep margins flat at 31% in 2024 as it increases expenses at Reality Labs.
2. How will ad sentiment shake out for the EU, APAC and the U.S.?
In Q2, total revenue came in at $32 billion, ahead of the $31 billion expected, driven by solid ad revenue growth. Ad revenues outperformed for all international segments, beating analyst estimates. International performance was ahead of expectations at $17.5 billion (vs. $16.8 expected) in Q2, with ROW leading. The U.S. and Canada performance was in line with expectations at $14.4 billion (vs. $14.3 billion expected) in Q2.
Ad revenue growth outlook: The company guided Q3 revenues to be $32-34.5 billion, ahead of the $31 billion expected by analysts, driven by a 3% FX tailwind. Sales guidance for Q3 exceeded expectations and suggests that 2023 estimates may need to be revised up. It is worth noting that Q3 2022 was particularly weak, making the comp easy.
In 2023, META’s ad revenues are projected to show only a 5% increase year over year to $126 billion, excluding FX. However, with FX impact, ad revenue is expected to grow to $129 billion, up 10% year over year. These numbers are likely to be revised upward, given the company’s new Q3 revenue guidance. Consensus is maintaining positive ad revenue growth for all geographies for the remainder of 2023 and for 2024.
3. Where will CapEx start to have an impact?
While the company plans to focus its investments on AI and the metaverse, Meta lowered its CapEx guidance to $27-30 billion from $30-33 billion due to cost savings and project delays in 2023, down significantly now from Q4 levels of $34-37 billion. This CapEx will likely shift and grow in 2024, as the company plans to further invest in infrastructure for AI and monetization.
CapEx ranges: For 2023, the CapEx estimates range has narrowed from $29.4-34.2 billion to $30.2-32.8 billion, implying increased agreement among analysts. However, for 2024, there is debate among analysts. The divergence in expected CapEx remains significant – from $25-37 billion.
Monetization: Facebook users overseas may be a positive going forward. Facebook ARPU for the U.S. and Canada was up quarter over quarter and year over year to $53.53 in Q2, while international markets remain well below that level, diluting the worldwide ARPU to $10.63.
In addition, Threads has had a strong start, but CEO Mark Zuckerberg noted that the company is not currently focused on monetization, but that there has been progress monetizing Reels. Can these investments in AI and monetization help drive higher Facebook ARPU outside the U.S. going forward?
CapEx as a percentage of sales: Back in the spring at the Morgan Stanley TMT conference, Meta noted that their CapEx/sales ratio would be coming down. Based on the lower CapEx and higher revenue trajectory, the trend is likely to continue in 2023. CEO Mark Zuckerberg called out Meta’s upcoming Connect conference planned in late September. He said that the company will highlight more details on the new product innovations, which may provide some direction of travel for 2024.
Based on Visible Alpha consensus forecasts earlier in the year, 2023 CapEx as a percentage of sales was expected to be 25.8% and is now projected to be 22%. With revenue forecasts remaining upbeat and a debate about CapEx levels, there is a significant range of estimates among analysts that make up the Visible Alpha consensus for 2024. Consensus forecasts indicate this ratio ticking back up to 23% for 2024. It will be interesting to see how and at what level this ratio bottoms out, but based on Visible Alpha consensus data, it looks like 2023’s ratio levels may be the trough.
References:
https://investor.fb.com/investor-events/event-details/2023/Morgan-Stanley-2023-Technology-Media–Telecom-Conference/default.aspx
https://investor.fb.com/investor-news/press-release-details/2023/Meta-Reports-Fourth-Quarter-and-Full-Year-2022-Results/default.aspx
Three Key Questions About Alphabet Inc. (NASDAQ: GOOGL) Earnings in July 2023
By: Melissa Otto, CFA
Alphabet Inc. (NASDAQ: GOOGL) reported better-than-expected earnings for Q2 2023 after the market close on Tuesday, July 25, 2023. What happened during the release and earnings call, and what are the new questions to focus on?
1. What happened with Google Cloud?
This business was profitable again this quarter and surprised the market again. In addition to strong revenue growth, the Cloud business delivered operating profit in Q2 resulting in a 5% operating profit margin. After Q1, analysts were expecting the Cloud business to generate -$1.2 billion in losses for the rest of the year. Coming into Q2, expectations were getting revised upward and moved to a $423 million profit for 2023, including a break-even result in Q2. However, Alphabet delivered $395 million in Q2, exceeding the consensus estimate of break even for the quarter, and approaching the current 2023 full-year expectation.
New Question: Will the Cloud business exceed $1 billion in operating profit in 2023 and 2024?
2. Will revenue growth continue to outpace expense growth?
Revenue growth exceeded expense growth this quarter and helped drive a higher-than-expected 29% operating profit margin. Alphabet remains focused on optimizing its cost structure and headcount. CFO Ruth Porat is moving into a new role, as President and Chief Investment Officer. Will she and her successor bring more discipline to the unprofitable businesses and to the company overall?
Analysts expected Alphabet’s operating profit margin to dip to 24% in Q1, but it came in higher at 25%, driven by Search and Cloud. This margin was projected to improve from Q2 to 27% levels for 2023, but ultimately came in at a better-than-expected 29% after the release. Currently, losses from Alphabet’s other bets and unallocated business lines are projected to be -$10 billion by the end of 2023. Based on Visible Alpha consensus projections, having these businesses break even could potentially add up to 12% upside to operating profit in 2023 and 8% in 2024.
The company noted that its CapEx came in lower in Q2 due to data center delays, but will continue to be higher for the rest of the year and into 2024, as it plans to step up investment in AI. The largest component came from servers for AI. It is worth noting that Microsoft’s CapEx has not only been outpacing Alphabet’s, but is expected to be $5 billion higher than Alphabet’s by the end of 2024, according to Visible Alpha consensus. Will Alphabet accelerate CapEx going forward?
New Question: When will Alphabet’s other bets break even?
3. Is the strength in Services sustainable?
Services revenue came in at $66 billion, up 7% quarter over quarter and 8% year over year, but the operating profit came in better than expected, up 8% quarter over quarter and 24% year over year, resulting in a 35% margin.
Coming into Q2, Search revenue was expected to generate $42 billion ($42.6 billion actual) for the quarter and $172 billion (now $174 billion) for 2023. Retail continued to support ad revenues in Search. Analysts now expect this business to be up 7% in 2023, up from 4% in Q1. Will this business continue to show increases for the remainder of the year?
YouTube revenue came in at -3% in Q1, but analysts have been expecting this business’s growth outlook to improve from Q2. In the Q2 release, YouTube delivered revenues of $7.7 billion, ahead of the $7.4 billion expected by analysts. CFO Ruth Porat noted a recovery in advertising at YouTube. This business is now expected to deliver $31.2 billion in 2023, up 7% year over year. Will the strikes impacting Disney and Netflix be a tailwind in H2 for YouTube?
Operating profit for Services beat expectations by over $2 billion in Q1. At the time of the Q2 release, analysts expected Q2 to deliver $22 billion, but it came in stronger at $23 billion.
For 2023, analysts are expecting Services to deliver $270.7 billion in revenue and $93.6 billion in operating profit, for a 34.5% operating profit margin. Given the performance in Search and YouTube, will expectations increase for H2 2023 and 2024?
New Question: Alphabet highlighted the focus on multi-modal AI. How will these innovations drive ad revenues going forward?
Three Key Questions About Microsoft (NASDAQ: MSFT) Earnings in July 2023
By: Melissa Otto, CFA
Microsoft (NASDAQ: MSFT) reported earnings for fiscal Q4 2023 after the market close on Tuesday, July 25, 2023. What happened during the release and earnings call, and what are the new questions to focus on?
1. What happened in Q4? (Hint: It’s all about the Cloud.)
Both Productivity & Business Processes and Intelligent Cloud (including Azure) came in slightly ahead of Visible Alpha consensus estimates for sales and operating profit.
In Q4, the Productivity and Business Processes segment delivered $18.3 billion in revenue and $9 billion in operating profit, resulting in a 49% operating profit margin, driven by strength in Office. For the full year, the segment delivered $69 billion in revenue and $34 billion in operating profit. Microsoft guided to $18-18.3 billion in Q1, in line with analysts’ estimates of $18.2 billion. In FY2024, Productivity & Business Processes is expected to grow to $77 billion, up 11.6% according to Visible Alpha consensus, with margins expected to be flat.
Prior to the Q4 earnings release, analysts expected the Intelligent Cloud business (including Azure) to continue to generate $88 billion in revenue for FY2023 and $102 billion for FY2024, and for operating margins to remain around 43% in FY2023 and FY2024. In Q4, Intelligent Cloud delivered revenue of $24 billion and operating profit of $10.5 billion, resulting in $88 billion in revenue and $38 billion in operating profit for FY2023, slightly ahead of expectations. According to management, Azure got a small boost from AI. Intelligent Cloud is expected to generate $23.5 billion (in line with guidance of $23.3-23.6 billion) in Q1 and to drive growth in FY2024. Microsoft noted that growth will be weighted to H2. The company will also increase CapEx to build out AI, but expects margins to remain flat.
CFO Amy Hood noted that Azure and other cloud services’ margins were lower, but that overall operating income grew 20% in Q4. In FY2024, Intelligent Cloud is expected to grow to $102 billion, up 16% year over year, and to $120 billion by the end of FY2025, according to Visible Alpha consensus. Some analysts are suggesting that the company can deliver better-than-expected growth in this business, with top-end estimates coming in closer to $105 billion in 2023 and $130 billion in 2025.
New Question: Will Azure’s growth and margin rebound in 2024?
2. CapEx is exploding: Where is Microsoft investing?
Microsoft’s CapEx levels by FY2025 are expected to be 10X from FY2013, 5X from FY2017, and 3X from FY2019. CapEx for Q4 came in ahead of expectations and was up 35% quarter over quarter to $8.9 billion, and 29% year over year to $28 billion for FY2023. The company guided to further increased sequential CapEx spending for cloud infrastructure in FY2024. Analysts are expecting CapEx to jump to $40 billion, up $12 billion and an expected increase of 45% year over year.
According to CEO Satya Nadella, the easiest path for companies to adopt generative AI is via Copilot and the Cloud. Microsoft wants to help customers build generative AI capabilities and expects this benefit to be weighted toward H2 2024. According to CFO Amy Hood, AI-related gross margins should scale faster and the pace of adoption should be quicker than in previous cycles.
According to Nadella, Microsoft is reshaping search with multi-modal capabilities and Bing is continuing to take share. According to analysts, MSFT’s Bing / display advertising business generated $3.1 billion in Q4 and $12.3 billion for FY2023, in line with expectations. For FY2024, analysts expect Bing to grow revenues to $13.2 billion.
New Questions: How quickly will CapEx investments to support AI start to add to growth at MSFT, and will these investments help drive more substantial ad revenue growth at Bing?
3. What’s happening with the Activision Blizzard Deal?
According to CEO Satya Nadella, the company is committed to getting the deal done. Analysts expected MSFT’s Gaming business to generate $16 billion in revenues for FY2024. According to Visible Alpha consensus, Activision Blizzard (NASDAQ: ATVI) is expected to generate $9.4 billion in revenues in 2023 and $3 billion in operating income. Microsoft did not provide guidance or additional details around this pending deal.
New Question: Will the deal pass regulators and get done?
ChatGPT-4 Plugins: Gateway to Increased Sales at Amazon and Expedia?
By: Melissa Otto, CFA
Generative AI chatbots have taken the world by storm, but who will benefit from their usage? The market is full of debate about how these chatbots may disrupt search, user behavior, payments, and productivity. On top of this, the FTC has begun an investigation into how ChatGPT and OpenAI may threaten the privacy and data of consumers. Given the surge of interest and investment in generative AI, we focus here on a few examples of how AI chatbots may start to impact company fundamentals.
In this report, we show Expedia (NASDAQ: EXPE) and Amazon.com (NASDAQ: AMZN) revenues that may begin to benefit from generative AI chatbots. Visible Alpha has identified some of the critical line items in a company’s financial model to monitor, which may provide an early read into the trends. The dispersion of estimates and number of sources can reveal debates and changing trends in a company’s fundamentals, which can help to uncover potential new alpha not yet fully captured in the stock price.
What are plugins?
According to OpenAI, plugins connect ChatGPT to third-party applications. These plugins enable ChatGPT to interact with APIs defined by developers, enhancing ChatGPT’s capabilities and allowing it to perform a wide range of actions. Plugins enable ChatGPT to do things like:
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- Assist users with actions; e.g., booking a hotel, shop for food, buy clothing
- Retrieve real-time information; e.g., sports scores, stock prices, the latest news
- Retrieve knowledge-base information; e.g., company docs, personal notes
Source: https://platform.openai.com/docs/plugins/introduction (July 6, 2023)
Companies in the consumer space may benefit from the capabilities of generative AI to assist users with actions by reducing noise and presenting users with specific goods and services they want to buy. Public and private companies, like Instacart, Shop.com, Shop, Amazon.com, Expedia, Kakaku.com, DoorDash and Kayak all currently have plugins on ChatGPT-4.
Background of capabilities
Users can access ChatGPT-3.5/4 and Google Bard generative AI tools by PC or mobile. The user’s experience is different depending on where and how the prompt is made. On a PC, ChatGPT-4’s beta version offers more capabilities than on mobile and seems to offer more capabilities than Google Bard, due to the many beta plugins available in ChatGPT-4 on a PC. Currently, ChatGPT-4 subscribers can access all of the plugins, but there is a waitlist for developers. According to OpenAI, “if you are a developer who has ChatGPT Plus and you are interested in making a plugin, you will need to fill out a form and join a waitlist.”
Through its beta features, ChatGPT-4 allows users to enable up to three plugins at a time on a PC. There are currently hundreds of plugins in ChatGPT-4 available for users to save and then enable as part of the three that can be run in their chats. Through ChatGPT-4, users can align their plugins to the type of prompt they are making. For example, if a user wants to book a hotel, they can start a new chat, then directly enable the Expedia plugin. In the chat, the user then adds a prompt, “hotel and flight Maui”, for example. ChatGPT-4 will automatically pick up the Expedia plugin and sync with ChatGPT-4 on PC, but not on mobile like Bard can with Google Search.
Figure 1: ChatGPT-4 Expedia plugin prompt and results
Source: ChatGPT-4 with Expedia plugin (July 11, 2023)
The user can then simply link directly and make a purchase. The Expedia plugin also surfaces prices, reviews, duration and details, which help keep the user in the specific plugin/application. How will this plugin impact revenues and operating profit at Expedia?
Figure 2: Expedia’s revenue breakdown
Source: Visible Alpha consensus (July 12, 2023)
Bard seems to have better basic functionality on mobile, given its sync to Google Search and also more timely data, since ChatGPT results do not automatically incorporate information beyond September 2021 (enabling a specific plugin is required). For example, an iPhone user can ask Bard for hotel recommendations and then directly access a link to booking.com to make the reservation in a mobile environment. In ChatGPT on mobile, this connection between the prompt results and a transaction can not currently be done. ChatGPT-4 users currently can not access the plugins on mobile.
If the user is looking to host a party or make a specific recipe, the Instacart plugin will automatically upload a shopping list to a cart to be purchased and delivered or picked up, in one seamless interaction. However, these actions still cannot be done on ChatGPT or Bard for mobile. Plugins are currently not available in Google’s Bard, but Bard does link to Google. At the Google I/O conference in May, the company announced that they will integrate Google applications/services and be adding “tools,” similar to plugins. It’s not clear yet exactly what the tools will do.
Amazon
With Amazon’s Prime Day occurring this past week, we wanted to think about the potential impact to Amazon’s numbers as the generative AI chatbots potentially take hold in the future. How may these impact consumer behavior and drive not only more spending, but also more efficient, faster spending?
Figure 3: ChatGPT-4 Amazon Gift Chooser plugin prompt and results
Source: ChatGPT-4 with Amazon Gift Chooser plugin (July 7, 2023)
Figure 4: Amazon revenue breakdown
Source: Visible Alpha consensus (July 11, 2023)
Currently, the retail third-party seller services segment is expected to expand by almost $100 billion from $118 billion at the end of 2022 to $216 billion by the end of 2027. This business is expected to make up 25% of Amazon’s total revenues by the end of 2027.
Impact to third-party seller services revenue: With greater curation, Amazon can align consumers more quickly to items they want or need to buy. Amazon’s plugin focuses on gift giving and may help drive third-party seller services revenues, including shipping, FBA, and commissions. Visible Alpha has a few sources modeling the third-party line items, including a break out of commission and FBA/shipping revenues. These estimates seem to be worth watching and may serve as a way to capture and gauge how generative AI may be influencing and growing their third-party segment.
Figure 5: Amazon third-party seller services revenue breakdown
Source: Visible Alpha consensus (July 11, 2023)
The profitability of this segment could expand as services revenues scale further, particularly in the North America market. North America operating profit margin is expected to expand 680 basis points and go from an operating loss at the end of 2022 to 6% at the end of 2027, surpassing historic highs of 5%, but still substantially below AWS’s operating profit margin of 28.5% at the end of 2022. Internationally, Amazon generated a -7% operating loss margin at the end of 2022 and is projected to improve it to 2% by the end of 2027. Can applications of generative AI help drive Amazon’s retail business in the U.S. and abroad to higher margins?
Figure 6: Amazon operating profit breakdown
Source: Visible Alpha consensus (July 11, 2023)
There is significant debate about the trajectory and size of these margin improvements in Amazon’s North America business. It will be interesting to see how chatbots may help to drive revenues from third party sellers. The most optimistic analyst is expecting the North America business to generate an ambitious 8% operating profit margin, over 200 basis points above consensus of 6% and $20 billion ahead of the $30 billion of operating profit expected by analysts by the end of 2027. The most conservative analyst is baking in a lower 4% operating profit margin and is expecting revenues to be $10 billion below consensus estimates of $30 billion.
Figure 7: Amazon operating profit margin dispersion
Source: Visible Alpha consensus (July 12, 2023)
The bottom line
ChatGPT-4’s plugins provide a sneak peek into the next generation of innovation to come. While it is early days, generative AI has the potential to make consumers and businesses more productive and effective with more comprehensive, curated responses. By syncing the results to actual products and services, ChatGPT-4 plugins may start to change consumer behavior, leading to potential changes in the digital advertising space, and how and where revenues are generated.
Coming into this earnings season, we are looking forward to hearing updates from companies about their generative AI strategies, chatbot impact, and where we may see AI start to impact the fundamentals of their business models. Will AI drive higher revenues, increase margins, and help companies overall become more profitable and productive?
Netflix Ads; Alibaba’s Global Expansion; AMD’s Data Center; BYD’s EV Growth
By: Visible Alpha Research & Innovation Lab
In our weekly round-up of the top charts and market-moving analyst insights: Netflix’s (NYSE: NFLX) ad-supported tier expected to see rise in revenue and subscribers; Alibaba (NYSE: BABA) expands internationally; AMD’s (NASDAQ: AMD) data center segment projected to see significant rise in revenue and profitability; BYD’s (SZSE: 002594) EV focus expected to drive growth.
Netflix’s Ad-Supported Tier Expected to Support Revenue & Subscriber Growth
Netflix (NASDAQ: NFLX) is expected to experience a steady rise in both revenue and subscribers for its new ad-supported tier, according to analysts. The company launched this ad-supported plan late last year to help address password-sharing concerns.
According to Visible Alpha consensus, Netflix’s ad-supported tier for the U.S. & Canada (UCAN) is projected to generate $396 million in advertising revenue and $284 million in subscription revenue in 2023, along with an expected 6.2 million subscribers. Analysts expect UCAN ad-supported revenue from both advertising and subscriptions to exceed $5 billion by 2027.
Alibaba’s International Expansion Expected to Accelerate Growth
Analysts expect a robust 19% CAGR from 2023 to 2027 for Alibaba’s (NYSE: BABA) International Commerce revenue as the company forges ahead with its global expansion strategy, highlighted by the introduction of Tmall in Europe. Unlike AliExpress in Europe, Tmall will prioritize the sale of local brands to local customers.
Alibaba’s logistics subsidiary, Cainiao Logistics, also aims to expand internationally and has been constructing its own warehouses and recruiting delivery personnel across Europe and Southeast Asia.
In 2027, analysts project CNY 140 billion in International Commerce revenue, and CNY 103 billion in Cainiao Logistics services revenue, a 17% CAGR from 2023 to 2027. These emerging businesses are expected to grow at a faster pace than the core China Commerce segment that made up ~80% of revenue in 2022, but is expected to generate a lower 7% CAGR from 2023 to 2027, and to decline to 69% of revenue by 2027.
Analysts Expect AMD’s Data Center to Drive Revenue Growth
AMD’s (NASDAQ: AMD) data center segment is expected to see its revenue grow from $6.7 billion in 2023 to $12.2 billion in 2025. In addition, the profitability of the data center segment is projected to expand significantly from $1.6 billion in 2023 to $4.6 billion in 2025, taking the operating profit margin from ~24% to ~38%.
AMD recently announced the launch of its new high-performance MI300X chip, which the company describes as “the most advanced accelerator for generative AI.” This may help drive further growth in 2024 and beyond.
BYD’s NEV Focus to Drive Rising Revenue Expectations, Say Analysts
Chinese automaker and EV-specialist BYD (SZSE: 002594) is expected to increase its vehicle sales to 4.4 million units by 2025. This is a significant jump from the 1.8 million units sold in 2022 and projected 2.9 million units for 2023.
In 2022, the automaker made the strategic decision to discontinue the production of internal combustion engine (ICE) vehicles and instead focus exclusively on manufacturing hybrid and electric vehicles, also known as new energy vehicles (NEVs).
Analysts project BYD’s NEV segment revenue to grow 62% year-over-year in 2023, reaching a total of CNY 471 billion ($66 billion), up from CNY 290 billion ($41 billion) in 2022.
AI, Search, Ads and Images: Google and Bing
By: Melissa Otto, CFA
AI is changing the presentation of search results for both users and advertisers by creating a more curated experience with images and AI-generated stories. Here is a look at the key AI enhancements to search from Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOGL).
Is the growth in Alphabet’s Google Search sustainable?
Alphabet has dominated the digital advertising revenue space through the strength of its Google Search. Alphabet generated $224 billion in ad revenues in FY 2022 with $162 billion coming from search. Looking ahead, analysts expect Alphabet’s ad revenues to grow more than $30 billion to reach $255 billion by end of FY 2024, a projected increase of over $120 billion since FY 2019.
Figure 1: Search revenue expectations for Bing and Google
The importance of images: Google and Microsoft’s Bing generate advertising revenue via search through user impressions and clicks. Speaking at the Google Marketing Live conference on May 23, 2023, Brandye Sweetnam, Director of Product Management, Merchant Content & Discovery at Google, highlighted that images help drive an increase in impressions and clicks. Sweetnam stated that offers with more than one image see a 76% increase in impressions and a 32% increase in traffic, making it a very valuable feature.
Bing’s new search capabilities: When compared to Google’s $187 billion in advertising revenues from search expected by the end of FY 2024, Bing is projected to generate a mere $13 billion in advertising revenue by end of FY 2024. However, Microsoft appears to be leading the integration of AI-generated results into its search. Bing users are currently presented with more images, categories, and AI-generated stories, when compared to Google. With Bing’s new AI-enhanced search, could Microsoft start to take some revenue share away from Google and see stronger-than-expected growth over the next two years?
Figures 2 & 3: Based on searching for “Hawaii vacation” Bing surfaces a full palette of images compared to Google
Sources: Bing.com (June 8, 2023) and Google.com (June 8, 2023)
Figure 4: Bing’s AI-generated story for the “Hawaii Vacation” search query
Source: Bing.com (June 8, 2023)
AI “coming soon” at Google: It is also worth noting that Bing’s AI lead in its search experience for users may be a threat to the advertising revenues Google generates. Google’s focus on adding images and AI-generated stories to its current search results represents a critical area going forward to both maintain its stronghold in the space and continue to grow its advertising revenues. Increasing the number of images in Google’s search results, according to Sweetnam, will be a key driver in increasing user impressions and clicks, which are key to securing advertiser dollars. Images will likely play a critical role for Google both to remain competitive in search over the long term and to generate the advertising revenues that analysts are expecting. While Bing’s AI-enhancements are live now, these new capabilities at Google are “coming soon” and not yet in production for Alphabet’s end users.
According to Vidhya Srinivasan, VP of Search Ads and Ads on Google Experiences, at the Google I/O conference in May 2023, new enhancements in generative AI will make search smarter and a lot simpler to navigate. Based on the experiences the user searches for, ads will be placed within the list of products. Google’s new generative AI capabilities in search will create more opportunities to show the user content that is highly relevant, according to what they search for.
Figure 5: Google’s AI-generated story capability is “coming soon”
Source: Google Marketing Live (May 23, 2023)
In addition, the context is carried over from question to question, so both organic results and ads understand the current query, but also remember the previous set of contextual questions. In this case, the user is going on vacation in Maui, but then subsequently started looking for outdoor activities for her kids. Leveraging generative AI, search now understands the multiple levels of context and will customize and surface ads around the user’s queries. The ads are then matched to the search journey.
Also, in Google’s pipeline of generative-AI enhancements will be an ability to leverage text-to-image creation capabilities. The ability to automatically generate background scenery and images for search ads is likely to drive more impressions and clicks, which will be key to revenues. However, Google only highlighted at Google Marketing Live that these innovations are “coming soon” and did not give clear timelines. Microsoft has already integrated this text-to-image capability in Bing with its DALL-E partnership.
Figure 6: Bing’s Text-To-Image AI image creator is already in production
Source: Bing.com (June 13, 2023)
From now until these enhancements move to production at Google, does Bing have an opportunity to grab more consumers? Given the changes happening to a user’s search experience, could we start to see users switch to Microsoft’s Bing? Could Microsoft begin to take some of Google’s large share of advertising revenues?
All Eyes on Apple’s (AAPL) Vision Pro Release
By: Melissa Otto, CFA
Apple (NASDAQ: AAPL) showcased a number of new products during its Worldwide Developers Conference (WWDC) on June 5, 2023, most notably its new virtual reality headset, Vision Pro. The new headset will retail for $3,499 and be available from early next year. What happened during the conference and what are analysts focusing on, specifically surrounding the new Vision Pro headset?
Figure 1: First impressions of the Vision Pro
Source: Apple WWDC (June 5, 2023)
How does Apple’s new Vision Pro work?
The lines of work and play are continuing to blur further with the introduction of Apple’s virtual reality headset, Vision Pro. The headset is controlled with a combination of voice, eye, and finger movement. Users can enjoy immersive, interactive professional and personal experiences that leverage a comprehensive array of applications and functions. And it’ll all be available in 3-D.
Users can use the Vision Pro for bringing apps and experiences into their preferred space, like watching movies, playing games, and chatting over FaceTime with friends and family. CEO of Disney, Bob Iger, made a guest appearance and mentioned that Disney+ will be available for Vision Pro on day one.
Virtual reality in the workplace?
In addition, users can access an enterprise workspace for collaboration that allows use of work applications like Microsoft Office, and other collaboration tools. According to Susan Prescott, Apple’s VP of Worldwide Developer Relations, Microsoft Excel, Word, and Teams make full use of the expansive canvas and full-text rendering. There seems to be a significant opportunity to expand usage for enterprises, as work spaces try to find ways to engage, inspire, and build trust, loyalty, and creativity in a virtual world that offers employees more flexibility.
As work culture currently stands, it has been challenging to build and sustain culture over 2-D virtual environments. In fact, burn-out and cultural erosion have been noted during the “great resignation” that prevailed post-pandemic. With broad adoption of virtual reality environments, will users ever need to go to an office again?
What are analysts expecting for Apple Accessories revenue?
Currently, Apple Watch and Accessories are each expected by analysts to make up around 5-6% of total revenue in FY 2024, with each expected to generate $20+ billion in revenue by the end of FY 2024, according to Visible Alpha consensus estimates. How long will it take the Vision Pro itself to account for $20 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.
Here are the current analyst estimates for the key line items, Accessories and Apple Watch:
Figure 2: Analyst estimates for Apple Accessories and Apple Watch
Source: Visible Alpha (June 6, 2023). All dollar figures are in millions, with the exception of EPS.
What jumps out about the Vision Pro experience
Mike Rockwell, VP of the Technology Development Group, highlighted the Apple silicon dual-chip design, M2 and R1. M2 allows the device to remain quiet and cool, while R1 reduces latency.
Given the high levels of sophisticated compute this device is processing, heat and noise can impede the experience for the user. M2 is designed to address these issues.
Latency has long been a problem with virtual reality and 3-D experiences, because it tends to cause motion discomfort. I, personally, have become uncomfortable while trying out numerous products in the past, and am keen to see how the new R1 ensures experiences do not have latency and create motion discomfort for users.
Figure 3: Apple’s dual-chip design (M2 and R1)
Source: Apple WWDC (June 5, 2023)
Microsoft (MSFT) and Nvidia (NVDA) Drive the Next Technology Shift to AI
By: Melissa Otto, CFA
The big tech companies have offered up an array of AI initiatives to drive their future growth and the value they add to their marketplaces. Here is a look at the key highlights from Microsoft’s (NASDAQ: MSFT) recent conference (Microsoft Build) and from Nvidia’s (NASDAQ: NVDA) strong outlook from their latest earnings release.
These events have underscored how these two companies are thinking about the future direction of AI for their businesses and the potential opportunities that lie ahead.
Microsoft’s Five Big Changes
At the Microsoft Build conference last week, CEO Satya Nadella said that every aspect of the tech stack is changing. Then, he noted that there are close to 50 changes happening at Microsoft, but highlighted the following five big ones:
- Bing to ChatGPT: The company plans to leverage AI to create better search results. Bing ad revenues are projected by analysts to hit $13 billion by the end of FY 2024. However, the size of the global digital advertising revenues market is enormous. While Microsoft remains behind Alphabet (GOOGL) in search, could their superior AI give them the edge to take a greater share of the digital advertising market?
- CoPilot to Windows: In his presentation, Panos Panay explained that it is a great time to be a developer on Windows and he believes that Windows is the best endpoint for AI. With 1.4 billion monthly active devices running on Windows, CoPilot will enable developers to build applications for new ways to work within Windows. Total Office revenues are estimated by analysts to be $53 billion by the end of FY 2024, which may be a conservative projection given the amount of innovation happening in this area. Is Microsoft aiming to be the workplace productivity platform by bringing innovations to the PC?
- CoPilot Stack: Microsoft AI CTO Kevin Scott highlighted the end-to-end platform that will start with Azure and be the cloud for AI. The platform will enable developers to run powerful AI models on a Windows PC and to create true AI hybrid applications that span from Edge to the cloud. Given the enhancements to the tech stack, how can more automation and efficiency in their tech stack support higher margins?
Figure 1: Microsoft CoPilot Stack
Source: Microsoft Build (May 24, 2023)
- Azure AI Studio: This is the toolkit to build an intelligent AI app and deploy it safely. This will enable developers to build and train models and to ultimately make them safe and compliant by embedding these checks within the development lifecycle. There is healthy skepticism about the safety of AI and Microsoft’s role in driving that, but by building safety into the toolchain Microsoft aims to reduce deployment risk. The Intelligent Cloud business at Microsoft is expected by analysts to generate $100+ billion by the end of FY 2024 with a 42% operating profit margin. Will Azure AI Studio’s ability to enable high levels of data safety drive revenues?
- Microsoft Fabric: Since all AI applications will start with data, Fabric will be the data analytics stack for AI. It will unify storage, compute, experience, governance and the business model. Developers can use the same compute infrastructure for SQL or Machine Learning. According to Nadella, this will drive the data layer for the next generation of AI applications. What role will Microsoft Fabric play in driving Microsoft’s next leg of growth?
Figure 2: Analysts’ expectations for Microsoft
Source: Visible Alpha (May 30, 2023). All dollar figures are in millions.
Nvidia’s Big AI Moment
Nvidia announced a strong beat in Q1 and guided revenues to $11 billion, $4 billion ahead of consensus for Q2, with gross margins expected to expand from 57% in FY 2023 to 68% in FY 2024. The company highlighted strong demand for their products in data centers, driven by their customers racing to integrate AI. In response to the Data Center demand visibility into H2, the company has procured supply that is substantially larger. In response to this news, the stock was up as much as 26% on the day after the earnings release.
Figure 3: Analysts’ expectations for NVIDIA
Source: Visible Alpha (May 30, 2023). All dollar figures with the exception of EPS are in millions
Accelerated computing is a full stack problem: According to Nvidia CEO Jensen Huang, $1 trillion of data centers are populated by CPUs, not accelerated computing. He believes CapEx dollars will lean into generative AI infrastructure (Training and Inference) over the next 4-5 years. With generative AI moving toward accelerated computing, this shift is driving significant order flows to build out the accelerated computing in data centers. Prior to the earnings release, revenue from data centers was expected to generate $23 billion by the end of FY 2025, but is now expected to reach nearly $40 billion.
Figure 4: From data to results: How Microsoft and Nvidia will work together
Source: Microsoft Build (May 24, 2023)
As the gold standard in AI infrastructure, Nvidia together with Microsoft will enable Machine Learning Training and Inference. In addition, this partnership will enable an Omniverse cloud to live within the Microsoft Azure cloud which will allow new applications to be built and serviced together. Also, Nvidia’s CUDA applications can operate with Windows and allow for integration of existing software. It is worth noting that Amazon AWS is investing in their own customized Machine Learning chips for Training and Inference.
The pace of potential growth in computing and networking is driving lofty analyst expectations for Nvidia. Prior to the earnings release, consensus revenue estimates for 2025 were $37 billion with EPS at $4.87/share, but have since jumped up to nearly $55 billion in revenue and $8.64/share. Given the demand for the company’s products and the potentially large size of the market, how fast will it take Nvidia to hit $100 billion in revenues?
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 better-curated information. Like it or not, AI is here to stay.
The top three companies that dominate the global digital advertising space are Alphabet (NASDAQ: GOOGL), Meta Platforms (NASDAQ: META), and Amazon.com (NASDAQ: AMZN), in that order. Together, they account for over 70% of global public companies’ digital ad revenues, with Chinese companies coming in second. Here, we discuss the debates among analysts about future prospects for the big three.
Total digital advertising revenue growth
Based on the 64 public companies aggregated by Visible Alpha that comprise the global digital advertising universe, analysts now expect global ad revenue to grow nearly 8% in 2023 from $505B in 2022 and to deliver a two-year CAGR of 10%. These estimates have been revised up from March 30, 2023 levels to $545B (previously $537B) in 2023, and a further 11% in 2024 to $604B (previously $598B), adding an additional $99B (previously $93B) over the two-year period with 72% of that new growth, or $71B (previously $63B), coming from the top three: Alphabet, Meta Platforms, and Amazon.com.
Advertising revenue and growth in the space are overwhelmingly dominated by a handful of large U.S. and Chinese players, with the remaining 54 companies each generating less than 1% of total ad revenues.
Much of the overall new growth estimated by analysts for the digital advertising space has been driven by upward revisions for META after its recent Q1 2023 earnings release.
Figure 1: Top 10 Players – Total Ad Revenue and CAGR
Source: Visible Alpha (May 10, 2023)
Key Takeaways:
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Expected growth drivers in digital advertising revenues at GOOGL, META, and AMZN in 2023 and 2024
The combined digital advertising revenue of the Big 3 from 2022 to 2023 is expected to increase 7% (adding $28B) and a further 11% from 2023 to 2024 (adding another $43B), with growth driven largely by Facebook/Instagram, Google Search, and Amazon Advertising. In particular, Facebook core revenues have been revised up since March 30, 2023.
Figure 2: Big 3 Ad Revenue
Source: Visible Alpha (May 10, 2023)
The debates in these growth drivers
1. META: What is driving the upside in Facebook’s revenues?
On the earnings call, CEO Mark Zuckerberg noted that AI recommended ~20% of the content in the Facebook/Instagram feeds and has supported Reels monetization. Analysts have started to revise up revenue estimates to reflect ad revenue increases driven by AI-supported enhancements to content, messaging, and Reels.
Facebook core ad revenues: Of the 4 analysts providing data on META’s ad revenue for Facebook, the consensus estimates have been revised upward. In particular, the most conservative estimates have come up post-Q1, increasing $9B and narrowing the range. For 2023, the low-end estimate is now $76B (previously $67B), which is -12% (previously -17%) below consensus of $86B (previously $81B). The high-end estimate is now $100B (previously $95B), which is 14% (previously 17%) ahead of consensus.
In 2024, there is still debate about the expected performance of Facebook. The range widens further to 18% above and -15% below consensus of $95B, a spread of $31B.
Instagram ad revenues: Of the 7 analysts forecasting Instagram ad revenue for META, there is significant debate about the performance of Instagram over the next two years. Analysts vary substantially on their views and calculations of the Instagram business and its projected growth.
For 2023, analysts are expecting $37B in ad revenues for Instagram. However, the high end of $51B is 38% above consensus and the low of $16B is -56% below, a range of almost $35B.
In 2024, the range is further increased, with the high of $61B contributing a whopping 45% to total revenues and coming in 43% above consensus of $42.4B, and the low -57% below.
Figure 3: META Ad Revenue
Source: Visible Alpha (May 10, 2023)
2. GOOGL: How are ad revenues from Search shifting?
At the Google I/O conference on May 10, 2023, AI was a central theme and CEO Sundar Pichai highlighted that Search, Cloud, and Maps will be increasingly incorporating AI enhancements.
Estimates are tracking in a tighter range with more debate in 2024 around Search and YouTube. The range of estimates narrowed for Search post-Q1 with low-end estimates coming up.
Search: Of the 22 analysts estimating GOOGL’s Search ad revenue in 2023, the top estimate of $176B is 3% above consensus of $171B and the low end is $166B, which is -3% below consensus, an improvement from earlier, more bearish estimates of $153B prior to Q1 earnings.
In 2024, analysts’ estimates have been diverging on Search with the high estimate of $197B, 5% above consensus of $187B, but $179B at the low end, which is -4% below consensus, an improvement from $160B prior to Q1 earnings.
YouTube: Of the 22 analysts estimating GOOGL’s YouTube ad revenue in 2023, the top estimate of $32B is 5% above consensus of $30B, and the low end of $29B is -5% below.
In 2024, analysts have greater variance in their views on YouTube, with the high estimate of $38B, or 10% above consensus of $34B, but $31B at the low end, which is -9% below.
Figure 4: GOOGL Ad Revenue
Source: Visible Alpha (May 10, 2023)
3. AMZN: When will they hit $50B in ad revenue?
Analysts expect AMZN’s year-over-year ad revenue growth of 19% in 2023 to generate $45B, and a further 18% increase in 2024 to deliver $53B, outpacing META, GOOGL and MSFT, and highlighting AMZN’s emerging position in the space. The ad business is also expected to drive better profitability.
There is, however, debate about the trajectory of AMZN’s ad revenue growth. In 2023, the high estimate of $49B is 9% ahead of consensus, and the low estimate of $42B is -5.5% below consensus of $45B.
In 2024, the most bullish forecast is now expecting $59B from ad revenue, down from $70B, but still 12% ahead of the $53B consensus estimate, while the low end of $48.5B is -8% below consensus.
Figure 5: AMZN Ad Revenue
Source: Visible Alpha (May 10, 2023)
