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Key Questions About Alphabet (GOOGL) Earnings in October 2023

By: Melissa Otto, CFA

Alphabet Inc. (NASDAQ: GOOGL) reported earnings for Q3 2023 after the market close on Tuesday, October 24, 2023. What happened during the release and earnings call, and what’s next?

What happened in Q3?

Alphabet Inc. (NASDAQ: GOOGL) reported earnings a bit below expectations for Q3 2023 after the market close on Tuesday, October 24, 2023, driving the stock down after the release. Alphabet’s core business of Search and YouTube delivered revenues 1.5% ahead of expectations. However, the Cloud and Network search businesses together were -3% below expectations. In particular, the Cloud business appeared to lose share in the quarter and AI efforts seem to be behind competitors, which likely contributed to higher-than-expected costs.

More concerning, the operating profit margin of 27.8% for Alphabet overall came in 70 basis points below expectations, driven by a combination of higher-than-expected losses in other businesses and a cloud margin nearly 200 basis points below estimates. Coming into the quarter, analysts were expecting Alphabet to maintain the same 5% margin it achieved in Q2 for the cloud business, and the level of losses for the other bets and unallocated segments to remain around $2 billion. In Q3, however, the cloud margin dipped to 3% and the other bets and unallocated losses jumped 42% quarter-over-quarter to $2.9 billion.

Question: Will Google Cloud margin improve in Q4 or stay around 3%?

Q4 and Beyond

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. While Cloud revenues are expected to hit $40 billion in FY 2024 and almost $50 billion by FY 2025, profitability remains a looming concern.

Analysts were initially projecting the Cloud business to generate a 5% margin in Q4, but this estimate has ticked down to 4.4% since the release. For FY 2024, analysts are expecting Cloud revenues to grow to $40 billion, up 23% year-over-year, and operating income to more than double from an expected $1.3 billion in FY 2023 to $2.7 billion. Analysts project a strong 6.6% operating profit margin in the Cloud business in FY 2024 and for this margin to jump to 13% by the end of FY 2026, which may be aggressive given the Cloud margin performance in Q3 and lower expectations into Q4 2023.

Question: Will Vertex AI help to drive share gains and margin expansion going forward?

In addition, the other bets revenues are expected to remain just over $1 billion, but losses are expected to decrease around $2.5 billion year-over-year in FY 2024. Losses for these line items are projected to be over $11.5 billion in FY 2023 and to decline to $9 billion in FY 2024 and $8 billion in FY 2025. Given the performance this quarter, questions remain about how Alphabet may reduce these losses.

While the company has a strong cash position of $120 billion, CapEx is projected to increase $12 billion from an expected $31 billion in FY 2023 to $43 billion in FY 2026. In order to catch up to competitors in the AI space, further investments and CapEx may be required.

Question: Will Alphabet be able to rein in these losses, while still innovating and maintaining its strong cash position in 2024?

Figure 1: Alphabet’s Key Financial Items

AlphabetSource: Visible Alpha consensus (October 27, 2023)

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Three Key Questions About Microsoft (MSFT) Earnings in October 2023

By: Melissa Otto, CFA

Microsoft (NASDAQ: MSFT) reported earnings for fiscal Q1 2024 after the market close on Tuesday, October 24, 2023. 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 Q1 2024?

Both Productivity & Business Processes and Intelligent Cloud (including Azure) came in slightly ahead of Visible Alpha consensus estimates for sales and operating profit.

Productivity & Business Processes: In Q1, the Productivity & Business Processes segment delivered $18.6 billion in revenue and $10 billion in operating profit, resulting in a 54% operating profit margin driven by strength in Office Commercial, ahead of the 51% margin that was expected based on Visible Alpha consensus.

Microsoft guided to $18.8-19.1 billion in Productivity & Business Processes revenue for Q2, in line with analysts’ estimates of $19.0 billion. In FY 2024, the segment is expected by analysts to grow to $77.1 billion in revenue, which would be up 11% year over year.

Intelligent Cloud: Prior to the Q1 earnings release, analysts expected the Intelligent Cloud business (including Azure) to generate $23.5 billion in revenue for Q1 and $102 billion for FY 2024, and for operating margins to remain around 43% for FY 2024. In Q1, Intelligent Cloud delivered revenue of $24.3 billion and operating profit of $11.8 billion, ahead of the $10.3 billion expected, resulting in a 48% operating profit margin, well ahead of the consensus estimate of 43%.

According to management, Azure took share and got a boost from AI. Intelligent Cloud Q2 guidance of $25.1-25.4 billion with Azure up 26-27% (in constant currency) is in line with current expectations. However, it is worth noting that Microsoft was more conservative in its cloud outlook than Amazon by noting that H2 will be stable for Azure.

In FY 2024, Intelligent Cloud is expected to deliver $103.5 billion, up 18% year over year, and to grow to $122.3 billion by the end of FY 2025, 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 2024 and $130 billion in 2025.

New Question: Will Office’s and Azure’s growth and margins continue in FY 2024?

2. CapEx continues to grow: Where is Microsoft investing?

Microsoft’s CapEx levels by FY 2025 are expected to be 10X from FY 2013, 5X from FY 2017, and 3X from FY 2019. CapEx for Q1 came in ahead of expectations and was up $1 billion quarter over quarter to $9.9 billion, and 58% year over year. CapEx as a percentage of revenue has ticked up to 18% from 16% in Q4 2023 and from 13% in FY 2023.

The company guided to further increased sequential CapEx spending for cloud infrastructure in FY 2024. Analysts expect total CapEx of $42.3 billion for FY 2024, up 50% year-over-year. This level of CapEx spend is likely to help drive cloud revenue and Microsoft’s position in AI.

According to CEO Satya 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. 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.

New Question: What will be the catalyst to drive revenue and profit from Microsoft’s CapEx investments?

3. What’s the expected impact of the Activision Blizzard deal?

Microsoft completed the acquisition of Activision Blizzard on October 13, 2023. Going forward, results will be in the Gaming segment under More Personal Computing. According to Microsoft, the company expects “revenue growth in the mid to high 40s. This includes roughly 35 points of net impact from the Activision acquisition.” Analysts are expecting a $1.8 billion revenue impact from Activision in Q2 2024 and $5 billion for FY 2024 from the deal. In addition, the company will move from third-party to first-party accounting.

New Question: How long will it take the Activision Blizzard acquisition to add $10 billion to Gaming revenues?

Figure 1: Microsoft’s key financial items

MicrosoftSource: Visible Alpha consensus (October 27, 2023)

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Meta Platforms (META) Q3 2023 Earnings Preview

By: Melissa Otto, CFA

Meta Platforms, Inc. (NASDAQ: META) will report Q3 2023 results on Wednesday, October 25, 2023. Here are the key numbers that we’re watching.

Figure 1: Meta Platforms – consensus expectations for Q3, past earnings surprises, revisions, and CAGR

Meta Earnings PreviewSource: Visible Alpha consensus (October 23, 2023). “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 Q3 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 have come up from the beginning of the year, from $29.7 billion to $33.5 billion, driven by an increase in expectations for Meta’s Family of Apps.

In addition, Q3 expectations for operating income have increased significantly from $5.8 billion at the beginning of the year to $11.6 billion ahead of Q3 earnings, driven by both better profitability in the Family of Apps and smaller losses for Reality Labs. Expectations increased by 50% for the Family of Apps’ income from operations, taking the consensus number from $10.1 billion to $15.5 billion into Q3. However, there is a significant range of analyst estimates into Q3 for this business, from $11.8 billion to $17.4 billion.

The stock has been a big outperformer this year, up more than 150% year to date. Coming out of the META Connect 2023 event, the company’s new products and features have increased focus around the potential to increase the revenue generated per DAU (daily active user), especially outside the U.S. What new information will come out of the Q3 release that could potentially maintain the positive momentum?

Figure 2: Meta consensus estimates

Meta Consensus EstimatesSource: Visible Alpha consensus (October 23, 2023). Stock price data courtesy of FactSet. Meta stock price is as of the market close on October 20, 2023.

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Alphabet (GOOGL) Q3 2023 Earnings Preview

By: Melissa Otto, CFA

Alphabet Inc. (NASDAQ: GOOGL) will report Q3 2023 results on Tuesday, October 24, 2023, after the market close. Here are the key numbers that we’re watching.

Figure 1: Alphabet – consensus expectations for Q3, past earnings surprises, consensus revisions, and CAGR

Alphabet Earnings Preview

Source: Visible Alpha consensus (October 19, 2023). “Previous Surprises” indicate the direction that specific line items beat or missed. “Consensus Revisions” show the trajectory of line items from a given date.

Alphabet Q3 2023 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q3 have come up slightly from July, from $75.7 billion to $76.0 billion, driven by resilience in its ad business. In addition, the Q3 consensus expectations for operating income and EPS have increased from the beginning of the year, but show a slight dip to the projections from the end of Q2 to current levels.

We are closely monitoring the trend of the Cloud business, given its new AI products and improved profitability. The operating profit margin, which turned positive in Q1 and showed further improvement in Q2, is projected to remain at 5% in Q3, but increase to 6% in Q4.

Alphabet stock has traded up 12.9% since last quarter’s July release and up 56.4% since the beginning of the year, outperforming the S&P 500. The stock has remained resilient, driven by expected ad growth and the projected outlook for profitability in the Cloud business. Could the Q3 release provide a new catalyst for the stock?

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

Alphabet Consensus Estimates

Source: Visible Alpha consensus (October 19, 2023). Stock price data courtesy of FactSet. Alphabet stock price is as of the market close on October 18, 2023.

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Microsoft (MSFT) Q1 2024 Earnings Preview

By: Melissa Otto, CFA

Microsoft Corporation (NASDAQ: MSFT) will report Q1 2024 results on Tuesday, October 24, 2023, after the market close. Here are the key numbers that we’re watching.

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

Microsoft Earnings Preview

Source: Visible Alpha consensus (October 19, 2023). “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 Q1 2024 Earnings Preview

According to Visible Alpha consensus, total revenues expected for Q1 have remained around $54.5 billion since April, driven by resilience in its core business segments. 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 January. According to consensus projections, CapEx estimates have climbed over $10 billion from $29.3 billion to $39.5 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.

In particular, the Intelligent Cloud segment, which makes up over 40% of total revenues, is projected to remain solid, with consensus estimates around $102 billion for FY2024, driven by Azure. The profitability of this segment is a source of debate among analysts and may explain some of the stock’s recent sluggish performance. Currently, the FYQ1 consensus of 12 analysts for the Intelligent Cloud business’s operating profit margin is 44%, but ranges from 40% to 46%, suggesting this segment may deliver a surprise in the Q1 release.

Microsoft stock has traded down -5.9% since the July earnings release, but is up 37.6% from January 1, 2023. Could the Q3 release provide a positive catalyst to get the stock back on an outperformance path?

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

Microsoft Consensus Estimates

Source: Visible Alpha consensus (October 19, 2023). Stock price data courtesy of FactSet. Microsoft stock price is as of the market close on October 18, 2023.

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Nvidia’s Data Center Dominance; RTX’s Jet Grounding Impact on Earnings; Lundin’s Copper Mine Acquisition

By: Visible Alpha Research & Innovation Lab

In our weekly round-up of the top charts and market-moving analyst insights: the move to accelerated computing is driving Nvidia’s (NASDAQ: NVDA) data center segment growth; analysts lower earnings and FCF projections for RTX (NYSE: RTX) after Airbus jet grounding announcement; Lundin Mining’s (TSE: LUN) copper mine acquisition is poised to boost production and cut costs.

Nvidia’s Data Center Segment Driven by Move to Accelerated Computing

Generative AI’s (GAI) continuing move toward accelerated computing has created a sharply increased demand for Nvidia’s (NASDAQ: NVDA) data center platform, especially its data center GPUs (graphics processing units).

According to Visible Alpha’s consensus, analysts expect the data center segment to account for 76.1% of Nvidia’s total revenue in fiscal 2024, a substantial increase from 55.6% in 2023. Nvidia’s total revenue is estimated to rise by 103% year over year in fiscal 2024, primarily driven by an estimated 178% year-over-year increase in data center revenue. Revenue generated from the data center segment in 2024 is projected to reach $41.7 billion in FY 2024 from $15 billion in FY 2023. Analysts also expect the company overall to generate $26.9 billion in operating income in 2024, up from $4.2 billion in 2023.

To learn more about Nvidia’s latest developments and insights following the company’s Q2 FY2024 earnings report, explore our Post-Q2 FY2024 Earnings Update on Nvidia.

Nvidia

Analysts Lower Earnings and FCF Projections for RTX After Airbus Jet Grounding Announcement

RTX Corporation (formerly Raytheon Technologies) (NYSE: RTX), the U.S. aerospace and defense company, announced on September 11, 2023, the grounding of an estimated 600-700 of its Pratt & Whitney Geared Turbofan (GTF) engines from Airbus A320neo jets. The reason for the grounding is to conduct quality inspections between 2023-2026 due to a manufacturing flaw. RTX operates through four segments: Collins Aerospace, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense, and this issue primarily impacts the Pratt & Whitney segment of the company.

As a result, analysts have adjusted their EPS and free cash flow expectations downward, with a projected decrease in diluted EPS (GAAP) of -44% year over year and free cash flow of nearly -14% year over year in 2023, according to Visible Alpha consensus estimates. Analysts expect an operating loss of -$1.25 billion in 2023 for the company’s Pratt & Whitney segment, but recovery is expected to commence starting in 2024. (Note: These data points are from Visible Alpha’s custom consensus, focusing only on brokers who have factored RTX’s announcement into their models.)

RTX

Mine Acquisition to Boost Lundin’s Copper Production, Cut Costs

Toronto-based mining company Lundin Mining (TSE: LUN) made a significant move in July 2023 by acquiring a 51% ownership stake in SCM Minera Lumina Copper Chile, which operates the Caserones copper-molybdenum mine in Chile. This mine is strategically located just around 100 kilometers away from Lundin’s Candelaria operation in Chile and only 20 km from its Josemaria project, located across the border in Argentina.

Based on Visible Alpha consensus estimates, following the acquisition, Lundin’s cash cost per unit net of by-products – copper (per Kton) is projected to trend downwards starting in 2024, while copper production volume is expected to pick up. The geographic proximity among the three mines is expected to create opportunities for synergies in terms of supply, logistics, and management. Analysts anticipate that these synergies will result in cost reductions for the company as shared resources and infrastructure are efficiently optimized. In 2024, copper production is projected to ramp up to 370 Ktons from an expected 292 Ktons in 2023 (+26.5% expected year-over-year). Meanwhile, cash cost per unit, net of by-products, is estimated to be $3.98 per Kton of copper in 2024, down from a projected $4.82 per Kton in 2023 (-17.5% expected year-over-year).

Lundin

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Questions Coming Out of Meta Connect 2023

By: Melissa Otto, CFA

Key Takeaways

  • According to Visible Alpha consensus, Reality Labs’ sales are projected to hit $1.7 billion by the end of FY 2023, but losses are expected to continue. Priced at $499.99, will Quest 3 start to move the needle?
  • Ad revenue per DAU (Daily Average User) in Europe and Asia trails the U.S. Could the new Meta AIs drive higher Ad revenue per DAU in overseas markets and ARPU (Average Revenue per User) overall?
  • Meta and Microsoft are partnering on games, search and enterprise applications. How might this partnership impact numbers going forward?

Meta Platforms (NASDAQ: META) hosted its Meta Connect 2023 conference on September 27-28, 2023. In the opening keynote speech, CEO Mark Zuckerberg highlighted three new product innovations all geared toward making people feel closer and strengthening relationships. On the hardware side, the company showcased a faster, smoother Quest 3 VR headset and an upgraded pair of Ray-Ban Meta smart glasses. In addition, Zuckerberg discussed the new Meta AI innovations.

Quest 3 mixed reality headset

Meta’s Quest 3 mixed reality headset will go on sale on October 10 for $499.99, a fraction of Apple’s $3,499. The headset will also include the game Asgard’s Wrath to appeal to gamers. Looking ahead to the holiday season, Microsoft’s Xbox cloud gaming is coming to Quest in December.

Quest 3’s resolution will be an upgrade from Quest 2, but will still trail Apple’s Vision Pro by a significant margin. The 10x increase in pixels in Passthrough will give users improved accuracy within their play space. Given the big price differential, however, will these improvements help to stimulate sales with core gamers this holiday season?

In addition to the consumer market, Meta is also going after the enterprise market with Meta Quest for Business. Due out next month, it will be compatible with Microsoft and other business applications and take mixed reality to the workplace at scale. How big could this opportunity be for Meta?

Smart glasses

The next-gen smart glasses will feature a better camera/audio, a livestream capability, and Meta AI. The glasses will be available October 17 and retail for $299. A free software update next year will make the smart glasses multi-modal. According to the company, this multi-modality will be a natural way to put holograms into the world and the ideal way to let an AI assistant see what a user is doing. Could these smart glasses be a hot item this holiday season?

Implications for Reality Labs

With these new product releases, how they will help to drive revenues in this segment will be key. Reality Labs has been a meaningful drag on the company’s total operating profit margin with little visibility into when this drag will improve. According to Visible Alpha consensus, Reality Labs sales expectations have been trending down since Q2. Analyst estimates for Reality Labs revenues have come down from $1.9 billion to $1.7 billion for FY 2023 and from $2.2 billion to $2.1 billion for FY 2024. Analysts’ forecasts of operating losses at Reality Labs have increased from -$15.9 billion to -$17.4 billion in FY 2024.

Figure 1: Meta Platforms’ CEO Mark Zuckerberg’s keynote address

Mark Zuckerberg

Source: Meta Connect 2023 on September 27, 2023

Meta AI

Meta’s new AI capabilities were in focus at the conference. Meta AI is a basic assistant to help answer questions and requests based on Llama 2 with Microsoft’s Bing search. Emu, Meta’s image-generation model, will enable users to create and send AI-generated stickers in chat. Emu is built directly into Meta AI to generate images in chat. Next year, AI Studio, Meta’s platform for building AIs, will roll out a sandbox for people that do not code.

The company partnered with celebrities on a number of Meta AI chat categories. For example, the company featured Snoop Dogg as the Dungeon Master for its Dungeons and Dragons AI chatbot. Will these enhancements help to drive engagement in Meta’s family of apps, leading to higher metrics and sales in Q4 and FY 2024?

Figure 2: CEO Mark Zuckerberg’s demo of Snoop Dogg as AI Dungeon Master

Snoop Dogg

Source: Meta Connect 2023 on September 27, 2023

AI and the numbers

Could the new AI chatbots and stickers help to drive higher ARPU (Average Revenue per User) and ad revenue per DAU (Daily Average User) overseas? Increasing the monetization of Meta (Instagram, Facebook, WhatsApp) users overseas may be a positive going forward, especially in Asia. ARPU for the U.S. and Canada was up quarter over quarter and year over year to $53.53 in Q2, while international markets remained well below that level, diluting the worldwide ARPU to $10.63. In particular, Asia ad revenue per DAU (Daily Average User) was a fraction of U.S. and Europe levels in the first half.

Going forward, Asia ad revenue per DAU is expected to be a mere $30 in FY 2023, compared to significantly higher U.S. ad revenue per DAU projected to be $298, and EMEA ad revenue per DAU at $96. Could these enhancements make Meta’s WhatsApp more competitive against Tencent’s WeChat?

Figure 3: Facebook’s Average Revenue per User (ARPU)

Facebook ARPU

Source: Meta Q2 2023 slide deck
https://s21.q4cdn.com/399680738/files/doc_financials/2023/q2/Earnings-Presentation-Q2-2023.pdf

Figure 4: META segment revenue and income consensus

 

Meta Revenue

Source: Visible Alpha consensus (October 3, 2023)

 

References:

  • Meta Connect: https://www.facebook.com/Meta/videos/1038522214125952
  • Meta Q2 2023 slide deck: https://s21.q4cdn.com/399680738/files/doc_financials/2023/q2/Earnings-Presentation-Q2-2023.pdf

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Palantir Profitability; Generics Threaten Pfizer/BMS Drug; DoorDash to Deliver International Growth

By: Visible Alpha Research & Innovation Lab

In our weekly round-up of the top charts and market-moving analyst insights: Palantir Technologies (NYSE: PLTR) is on track to achieve full-year profitability in 2023; generics pose revenue threat to Eliquis drug from Pfizer (NYSE: PFE) and Bristol-Myers Squibb (NYSE: BMY); analysts expect DoorDash (NYSE: DASH) to see robust growth in international revenue.

Palantir Projected to Achieve Full-Year Profitability in 2023

Palantir Technologies (NYSE: PLTR) is on track to achieve full-year profitability in 2023. The application software company marked its first profitable quarter in the fourth quarter of 2022, recording net income (GAAP) of $33.5 million. According to Visible Alpha consensus estimates, the company is projected to generate net income (GAAP) of $133.7 million in 2023, up from a net loss of -$371.1 million last year.

Palantir’s total revenue is projected to grow by 16.2% year-over-year to $2.2 billion in 2023. Revenue growth for the company has been moderating over the last few years, following a revenue growth peak of 47% in 2020. Total government revenue, which accounts for around 56% of the company’s total revenue, is expected to see 17.4% growth in 2023 (down from 77% growth in 2020), while commercial revenue is projected to grow by 14.6% year-over-year in 2023.

Palantir Projected to Achieve Full-Year Profitability in 2023

Generics Pose Greater Threat to Eliquis (Pfizer & Bristol-Myers Squibb) Than Medicare Price Cuts

Pfizer (NYSE: PFE) and Bristol-Myers Squibb (NYSE: BMY) are partnered worldwide to commercialize the oral anticoagulant, Eliquis, which is approved to prevent blood clots and strokes in patients with atrial fibrillation. Eliquis is one of 10 prescription drugs that initially fall under the Inflation Reduction Act (IRA) of 2022, which allows Medicare to negotiate lower prices directly with drug companies. The reduction in U.S. prices is expected to take effect beginning in 2026. Of all drugs on the list, Eliquis accounted for Medicare’s highest gross expenditure of approximately $1.6 billion for the period between June 2022 and May 2023.

Despite these price cuts, the significant reduction in revenue projections for Eliquis is driven largely by U.S. and international generic competition expected to begin in 2028. According to Visible Alpha consensus, U.S. and international revenues for Eliquis decline in tandem as generics are expected to make it to market starting in 2028. Note that generic versions of Eliquis have been available in the relatively smaller markets of the UK and Canada since mid-2022.

Apixaban, the generic version of Eliquis, was approved by the FDA in January 2020, but Pfizer and Bristol-Myers Squibb filed lawsuits charging patent infringement against the generic manufacturers. In August 2020, a U.S. district court upheld two relevant Eliquis patents covering composition of matter and formulation that favored Pfizer’s and Bristol-Myers Squibb’s stance. Based on agreements reached among the two companies and generic manufacturers, generic versions of Eliquis are expected to launch after 2027.

Generics Pose Greater Threat to Eliquis (Pfizer & Bristol-Myers Squibb) Than Medicare Price Cuts

Analysts Expect Robust International Growth for DoorDash

Analysts expect DoorDash (NYSE: DASH) to see strong growth in international revenue in 2023, based on Visible Alpha consensus estimates. U.S. revenue is projected to continue to see steady growth, reaching $7.8 billion (+24% year over year) in 2023. While the U.S. remains the primary market for the company, revenue from the food delivery app’s international operations is estimated to surge to $724 million in 2023, or +118% year over year from $332 million in 2022. According to consensus, the international segment is projected to reach over $1 billion in revenue by the end of 2024.

Outside the U.S., DoorDash has operated in Canada and Australia since 2015 and 2019, respectively. In 2021, DoorDash expanded its footprint into Germany and Japan. In 2022, the company acquired Finland-based online delivery platform Wolt. With this acquisition, DoorDash expanded into 21 major markets throughout Europe. Also in 2022, DoorDash launched operations in New Zealand, further diversifying its international reach.

The company recently announced that it will transfer its stock exchange listing to the Nasdaq Stock Market (NASDAQ) from the New York Stock Exchange. It expects to begin trading as a Nasdaq-listed company on September 27, 2023.

Analysts Expect Robust International Growth for DoorDash

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Novartis Drug to Face Generics and Price Cuts; Salesforce Expands Margins; Sleep Country Wakes Up With Acquisitions

By: Visible Alpha Research & Innovation Lab

In our weekly round-up of the top charts and market-moving analyst insights: Novartis’ Entresto (NYSE: NVS) faces generic competition & Medicare price cuts in the U.S.; Salesforce (NYSE: CRM) mitigates its revenue slowdown with margin expansion; and Sleep Country Canada (TSX: ZZZ) expands its portfolio amid a growth slowdown.

Novartis’ Entresto Facing Generic Competition & Medicare Price Cuts in the U.S.

Novartis’ (NYSE: NVS) Entresto is one of 10 prescription drugs that initially fall under the Inflation Reduction Act (IRA) of 2022, which allows Medicare to negotiate lower prices directly with drug companies. Entresto is prescribed for patients with heart failure to help reduce the risk of death and hospitalization. The expected reduction in U.S. prices will take effect from 2026.

In the case of Entresto, however, generic competition is expected to be a greater threat than lowered pricing for U.S. revenue from 2025 onward. Analysts expect generic competition to begin taking effect between 2025 and 2027.

Novartis has thwarted attempts by generic makers of Entresto since 2019, utilizing patent infringement lawsuits. Notably, the company has settled with several generic companies regarding a U.S. launch date for Entresto generics. Novartis has guided investors to model 2025 as a reasonable timeline to assume generic competition. Even though one Entresto patent will expire in 2025 based on a recent court decision, other key Entresto patents could survive through 2027.

Novartis' Entresto Facing Generic Competition & Medicare Price Cuts in the U.S.

Salesforce to Mitigate Revenue Slowdown with Margin Expansion

Salesforce (NYSE: CRM) has seen its revenue growth slow down significantly over the last year as economic challenges prompted many companies to tighten their spending. Analysts expect the company’s total revenue to increase by 11% in 2024, a notable slowdown from its 18.3% growth in fiscal 2023 and the 24.7% surge in fiscal 2022.

According to Visible Alpha consensus, however, Salesforce’s margins are expected to continue to expand. Analysts expect the company to generate an operating margin (GAAP) of 13.5% in 2024, up from 3.3% in fiscal 2023, and 2.1% in fiscal 2022.

The growth in profitability is on the back of several measures the company has implemented over the past year. Salesforce laid off about 10% of its workforce in early 2023, halted all major acquisitions, and has also reined in its operating expenses. The company’s selling and marketing expenses, a major expense line for the company, are projected to decline by -5.2% in 2024, while total operating expenses are projected to fall by -2.8%.

Salesforce to Mitigate Revenue Slowdown with Margin Expansion

Sleep Country Canada Expands Portfolio Amid Growth Slowdown

Analysts expect Canadian specialty sleep retailer Sleep Country Canada (TSX: ZZZ) to see total growth improve starting in 2023, following a sharp decline in 2022, according to Visible Alpha consensus. The company has seen total growth slow down since last year due to reduced consumer spending on big-ticket discretionary items. Total growth combines the percentage increases in same-store sales and sales from new stores.

In an effort to enhance its portfolio, the omnichannel specialty sleep retailer has been on an acquisition spree since 2021. Earlier this year, the company acquired the Canadian operations of mattress retailer Casper Sleep, and late last year, it acquired the direct-to-consumer sleep brand Silk & Snow. Additionally, in 2021, Sleep Country Canada made investments in Hush Blankets and Sleepout, a start-up curtain company.

Novartis Drug to Face Generics and Price Cuts; Salesforce Expands Margins; Sleep Country Wakes Up With Acquisitions

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Bringing AI to Heavy Industry

By: Melissa Otto, CFA

Key Takeaways

  • The move to accelerated computing could have the potential to enable deeper integration of AI into heavy industry.
  • Could Nvidia’s recent upward revisions suggest upside for robotics and automation firms?
  • According to Visible Alpha consensus, analysts project single-digit sales growth for Fanuc, Yaskawa, ABB, and Midea/Kuka. Could the current expectations for these companies be considered conservative?

The move to accelerated computing could have the potential to enable deeper integration of AI into heavy industry. How could this impact companies that adopt and scale innovative solutions to their manufacturing processes?

As we’ve seen already, this move to accelerated computing in data centers has been underpinning the investment story for Nvidia. As Cloud Service Providers (CSP) and consumer internet companies have raced to transform their data centers from general purpose computing to accelerated computing, the platform shift has opened questions about the broader, longer-term implications of moving from the CPU (central processing unit) to the GPU (graphics processing unit).

Figure 1: Upward revenue revisions (%) for Nvidia (NASDAQ: NVDA) segments

Figure 1: Upward revenue revisions (%) for Nvidia (NASDAQ: NVDA) segments

Source: Visible Alpha Insights (September 14, 2023)

Accelerated computing enables faster data processing with lower power consumption. In addition to speed and energy efficiency, accelerated computing is highly optimized for specific tasks, making it easier to scale tasks that can be parallelized (i.e., big data applications), making it ideal for AI/ML, modeling, and graphics. Generative AI (GAI) is currently used mainly by light industry (information, words, images, and music), but not broadly by heavy industry as of yet.

This platform move has the potential to enable deeper integration of AI/ML to heavy industry and to provide a foundation for the broader use and application of robotics. At Computex 2023, Nvidia CEO Jensen Huang highlighted the Omniverse and how the Digital Twin will provide a virtual environment for replicating environments and situations ideal for testing automation.

The Digital Twin can be applied to many industrial scenarios and help manufacturers manage risks and deliver more precise results and, ultimately, more impactful solutions. For example, a factory may wish to personalize parts of its assembly and want to test this in a virtual factory or want to have greater visibility into the timing of its supply chain.

Figure 2: The Digital Twin

Bringing AI to Heavy Industry

Source: Nvidia Keynote at Computex 2023

Virtual factory: Digitalizing heavy industry

Back in October 2016, Nvidia (NASDAQ: NVDA) and Fanuc (TSE: 6954) teamed up to build AI-powered factory robots with GPU-accelerated deep learning in the cloud. Given the innovations with the Omniverse, manufacturing, factory automation and industrial robotics may begin to show new capabilities.

According to Huang, the $45 trillion global manufacturing industry is racing to have its factories become software defined to ensure they can produce products with quality and speed, and as cost efficiently as possible. The application of AI via software to manufacturing can support these objectives.

Figure 3: GAI use cases for manufacturing

GAI use cases for manufacturing

Source: Google Cloud GAI Use Cases for Manufacturing

By leveraging one unified source of data across the company, teams can virtually design, build, and operate a factory before actually breaking ground. In the Omniverse, teams can start by building a Digital Twin of their factory, unifying siloed datasets to provide a real-time view of their factory data to their planning teams, stakeholders, and suppliers. In the cloud, native Digital Twin planners can then optimize the factory virtually before deploying changes to the real factory.

Figure 4: Factory simulation in a Digital Twin

Figure 4: Factory simulation in a Digital Twin

Source: Nvidia Keynote at Computex 2023

Fully autonomous robots can be trained on complex tasks entirely in simulation and operations can be validated before deployment to the real world. This process has the potential to significantly help manufacturers reduce risks, improve efficiency, and reduce cost in heavy industries like automotive and electronics manufacturing.

Companies and expectations

There are several players in the factory automation and industrial robotics space. Based on Visible Alpha data, growth and profitability vary among the players. Additionally, China’s slowing, foreign exchange impacts, and product cyclicality have created some volatility in the pace and outlook for growth. However, with the consensus outlook looking cautious, could this be an interesting time to revisit these names, given the broader industry trends?

Figure 5: Peer analysis of robotics revenue in U.S. dollars

Figure 5: Peer analysis of robotics revenue in U.S. dollars

Source: Visible Alpha Insights (September 14, 2023)

How these firms integrate some of the new AI capabilities to the brain of the robot and to aspects of automation will be critical to the investment story and outlook. The potential growth could be significant for companies that adopt and scale innovative solutions to their manufacturing processes. Additionally, based on the platform shift to accelerated computing, Nvidia seems well-positioned to support the tech stack and data unification that needs to happen to embed AI more holistically into the manufacturing process and to the supply chain.

  • Will these innovations drive a scalable new product cycle?
  • Will these manufacturing enhancements have higher price points and margins?
  • Which companies are positioned to benefit longer term?

ABB: Sweden/Switzerland-based ABB (SIX: ABBN) has a leading electrification, robot, automation, and motion portfolio that it connects to software to drive better performance.

ABB is projected to generate a 16% margin, driven by its higher margin Electrification and Motion segments, but revenue growth is only projected to be 4% for FY 2024 and FY 2025. Could longer-term innovations in factories drive an uptick to numbers?

Figure 6: ABB segment revenue and income consensus

Figure 6: ABB segment revenue and income consensus

Yaskawa: Japan-based Yaskawa (TSE: 6506) is a leading manufacturer of motion controls and robotics for the automobile, semiconductor, food and biotech industries.

Similar to ABB, Yaskawa is projected to generate a 12% margin, driven by its higher margin Robotics and Motion segments. While the revenue and profitability growth of its robotics segment is expected to outperform other segments, the company overall is expected to see mild growth till FY 2026. Could longer-term expectations be overly cautious given the shift toward AI?

Figure 7: Yaskawa segment revenue and income consensus

Figure 7: Yaskawa segment revenue and income consensus

Fanuc: Japan-based Fanuc (TSE: 6954) is a global leader in factory automation and robotics. Fanuc is the clear leader for profitability in automation and robotics with over 20% operating profit margins expected. With enhancements to robotics and factory automation, could Yaskawa, ABB and Kuka (Midea) catch up to Fanuc? Could Fanuc’s projected margins return to their FY 2022 level of 25%?

Figure 8: Fanuc segment revenue and income consensus

Bringing AI to Heavy Industry

Midea (Kuka): Midea (SZSE: 000333) is an electrical appliance manufacturer based in China. Leading German-based robotics firm, Kuka, was acquired by Midea in 2016.

Figure 9: BMW factory simulation using Kuka robots

Figure 9: BMW factory simulation using Kuka robots

Source: Nvidia Keynote at Computex 2023

Kuka’s margins remain well-below both Midea’s 10% margin and the 15-20% ranges of competitors. Will parent company Midea be able to drive margin expansion at Kuka?

Figure 10: Midea (and Kuka) segment revenue and income consensus

Figure 10: Midea (and Kuka) segment revenue and income consensus

 

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