Mega-Tech’s First Quarter Reporting Season Takeaways

Daniel Morgan, Senior Portfolio Manager

The top-tech players (Amazon, Google, Microsoft and Meta) are projected to spend collectively up to $180 billion in artificial intelligence (AI) CAPEX in 2025. Most will fail, but a few will also succeed. As we enter into this upcoming 1Q24 reporting season, investors will be able to peep through the window for a brief moment to ascertain how the top technology stocks are progressing with their Gen-AI efforts. Away from these big expectations surrounding the impact of AI, most of the large mega-tech stocks have, or are, expected to report strong growth in their core businesses.

Netflix

Netflix (NFLX) kicked off the season with a blowout 1Q24 print. NFLX reported 1Q24 revenue and an earnings per share (EPS) of $9.37 billion, $5.28 vs. consensus of $9.27 billion, $4.52, with EPS upside driven by better-than-expected margins. Total revenue grew 15% Year over Year (YoY) versus 14% estimates and compared to 13% growth last quarter, and 8% a year ago. Total memberships grew to 269.6 million versus 264.2 million expected. New subscribers (9.3 million) in the first quarter was a 16% increase YoY, and represented a huge beat with consensus calling for 4.84 million, driven by increasing penetration of paid account sharing across regions. This was a monster new subscriber member figure as many NFLX analysts had bumped up new subscriber estimates to 6-7 million right before print, making the hurdle much higher!

NFLX stock is up 25% year-to-date (YTD), surpassing the S&P 500 by 5%. The stock has traded up in anticipation of strong 1Q24 results. This may be a reason why the stock was selling off at the print. “Buy on the rumor and sell the stock on the news.”

Other reasons for the recent selloff in NFLX shares could be related to the guidance for the 2Q24 revenue of $9.49 billion versus an estimate of $9.51 billion. Further, NFLX announced that upcoming 2Q24 new subscribers (estimated at 4.3 million) would be less than the first quarter’s 9.33 million.

All in all, the biggest contributing factor to weakness in the share price was NFLX’s announcement that stated that the company will no longer report subscriber numbers — which has been a key metric for streaming services for years — beginning with 2025’s first quarter.  This lowers the visibility on the company’s financial metrics in a time when the model is pivoting to harvesting its estimated 100 million nonpaying users with paid sharing and ad tier pricing programs.  The company said it will continue to report new subscriber milestones.

Meta

Meta shares plunged in extended trading after the company reported 1Q24 results that beat estimates, but revenue guidance for the upcoming 2Q24 was light. 1Q24 revenue increased 27% from $28.65 billion in the same period a year earlier, the fastest rate of expansion for any quarter since 2021. Net income more than doubled to $12.37 billion, or $4.71 per share, from $5.71 billion, or $2.20 per share, a year ago. Revenue growth accelerated, but key reasons for the pop in net income was because sales and marketing costs dropped 16% from the year earlier period. Meta issued a 2Q24 forecast that was below estimates, stating that the company expects sales of $36.5 billion to $39 billion. The midpoint of the range, $37.75 billion, would represent 18% YoY growth and is below analysts’ average 38.3 billion estimate. Coming into the report, Meta shares have been on rampage, up 40% YTD, so there was little room for error.

Despite the lower-than-expected guidance, there is a belief the 1Q24 print was constructive with multiple catalysts ahead, such as:

1. Gen-AI products — META's recent announcements of host AI initiatives should start to add to the top and bottom-line growth, which includes: AI-powered video recommendations, AI-based assistants and AI messaging tools for business;

2. MTIA - META has dived headfirst into the AI silicon race with the introduction of MTIA v1 (Meta Training and Inference Accelerator);

3. Healthy ad market — Based on recent comments from ad platforms, the digital ad market is healthy. Data from Madison & Wall forecasting media, search, social, broader digital advertising growing 19%, 7%, 10% and 11%, respectively, YoY in 1Q24;

4. Expect OPEX guidance to step down throughout FY2024, consistent with historical trends, with leverage on headcount the primary driver; and

5. Reels remains in a $3 billion run-rate that could serve as a substantial monetization catalyst and become at least neutral to revenue in 2Q24.

Microsoft

Microsoft reported strong 3Q24 results that surpassed estimates on while exhibiting solid contributions from the company’s AI initiatives. Microsoft reported earnings per share (EPS) of $2.94 on revenue of $61.9 billion. Wall Street was anticipating a $2.83 EPS on revenue of $60.88 billion, according to analysts’ estimates. Microsoft's overall commercial cloud revenue came in at $35.1 billion, ahead of Wall Street estimates of $33.93 billion.

“On the AI front, Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry," Microsoft CEO Satya Nadella said in a statement. Microsoft added that its AI services contributed 7 percentage points of growth to its Azure and other cloud services revenue. That's up from 6 percentage points in 2Q24, and 3 percentage points in 1Q24. Going into the 4Q24 print, revenue is expected between $63.5 billion and $64.5 billion, just ahead of analysts' expectations of $64.7 billion.

For Microsoft, GenAI-specific revenue has already become a key stock driver, given the company's practice over the last three quarters of releasing GenAI's contribution to Azure's growth. For Fiscal Year (FY) 23, Microsoft generated about $250 million of GenAI revenue (0.1% of total), which is expected to grow to  $5.5 billion in FY24 (2.2% of total), and $19.2 billion in FY25 (6.7% of total), settling at 50% compound annual growth (CAGR). We can broadly divide the GenAI industry into four buckets:

1. Developer tools (e.g., coding assistants);

2. ChatGPT/Co-Pilots;

3. Media generation (image, audio and video de-noising models); and

4. Platforms (tooling, models, data, studios and marketplaces).

Microsoft will be a particularly strong participant in ChatGPT/Co-Pilots and Platforms, with the distinction of having the most mature GenAI app in GitHub Co-Pilot, which pre-dated ChatGPT paid plans by seven months. Microsoft is projected to invest approximately $57.5 billion in CAPEX in FY2025 to develop new GenAI products. 

Alphabet

Alphabet reported 1Q24 earnings and revenue that handily beat consensus estimates while the internet giant announced its first-ever dividend and a new $70 billion stock buyback. Google’s highly followed key metrics — ad revenues at $61.66 billion (up 13% YoY), YouTube revenues at $8.08 billion (up 21% YoY) and Google Cloud Platform at $9.57 billion (up 27% YoY) — all beat estimates. Google reported revenue of $80.54 billion, a 15% YoY increase and the fastest growth rate since early 2022, surpassing the $78.59 billion in sales expected by analysts. Earnings of $1.89 per share eclipsed the $1.51 in earnings per share expected by Wall Street. The company said the board also approved the repurchase of an additional $70 billion in stock.

In February, Alphabet rolled out Gemini 1.5 Pro, which shows dramatic performance enhancements across a number of dimensions. It includes a breakthrough in long-context understanding, achieving the longest context window of any large-scale foundation model yet. Combining this with Gemini’s native multimodal understanding across audio, video, text, code and more — it’s highly capable. Google and Apple are in talks to incorporate Google’s Gemini engine into the iPhone, which is important for three reasons:

1. The extent to which Gemini powers a next-Generation Siri (AI Assistant) would help Google maintain its position at the top of the internet funnel for this critical high net-worth iPhone user base. This matters for data and monetization;

2. Apple’s adoption of Gemini is an important endorsement of Google’s leading GenAI technologies. Further, this speaks to the importance of Google’s key applications with iOS (namely Gmail, YouTube and logged-in browser history data), which are likely going to be important to creating a high-utility, next-generation consumer GenAI search assistant; and

3. While the terms of the contract have not been fully disclosed, expect the net impact of this agreement to likely be net accretive to Google. Estimate Google currently pays Apple $20 billion in search distribution TAC, but now expect Apple to pay Google some license fee to use Gemini through GCP and possibly additional fees.