Last week marked the begining of the long-awaited earnings reports from the American tech giants. Amidst the conflicting economic indicators and the lingering questions about artificial intelligence, these earnings reports serve as a cruicial milestone in determining whether the numbers are aligning with the narrative. It is imperative that I review these reports to gain insights into the current state of affairs.
In this post, I will delve into the earnings reports of Tesla, Meta, Alphabet, and Microsoft, and assess whether they are progressing as I had anticipated. Additionally, I will update my investment opinions based on these findings. It is worth noting that Tesla, Meta, and Alphabet are part of my personal investment portfolio, which adds an extra layer of interest to this analysis.
Tesla: More than just electric vehicles
Let's start with Tesla, the company that has been the subject of much discussion and controversy recently. As many had anticipated based on the previously announced delivery numbers, Tesla's Q1 2024 earnings were the worst yet.
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Source: Tesla IR
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Tesla's total revenue for Q1 2024 was $21.3 billion, a 9% decrease compared to the same quarter last year. With Tesla's revenue declining, many market participants are already expressing significant concerns. The main factor contributing to the decline in revenue is the sales of electric vehicles, which is Tesla's core business model. Electric vehicle revenue decreased by 13% year-over-year, dragging down total revenue.
The reasons for the decline in electric vehicle revenue are the decrease in demand for electric vehicles due to high-interest rates and an unstable macro economy, as well as the intensifying competition from Chinese electric vehicle manufacturers.
On a positive note, we can see that the energy and service businesses continue to grow. Energy business revenue is $1.6 billion, which is less than 10% of total revenue, but Elon Musk expects the energy business to grow faster than the automotive nusiness in the future.
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Source: Tesla IR
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In this earnings announcement, Tesla seemed to emphasize that it is not just a car manufacturing company. Showcasing Tesla's ecosystem, they highlighted additional business in the energy sector, including solar power, ESS, VPP (Autobidder), and electric vehicle charging. Beyond simply selling vehicles, Tesla emphasized services, insurance, and AI computing as part of their automotive business. In particular, they talked about their tremendous investment in AI learning and inference, and previously mentioned that they would unveil the robotaxi on August 8th. FSD is rapidly improving in performance as it completely erases human coding and engages in end-to-end learning, which can already be seen through Youtube and many other media outlets. Tesla's robot, Optimus, which utilizes the same AI computing, is also expected to be directly integrated into the production prosess starting later this year, performing simple tasks.
To properly value Tesla, it is necessary to accurately understand Tesla's business model. If viewed simply as an electric vehicle manufacturer, even the current valuation may be expensive. However, as Elon has stated, I have been consistently arguing that Tesla should be viewed as an AI, robotics, and energy company. All three business areas have bright future prospects. Of course, electric vehicle sales also need to increase, and for that to happen, a low-cost model needs to be introduced. Fortunately, during this earnings call, Elon announced that production of the low-cost version, known as Model 2, will begin in the first half of next year. However, since they have decided not to adopt the unboxing method to innovatively reduce production costs and release it at around $25,000, deeming it not yet feasible, the launch price is expected to be slightly higher as they will use the existing production line. Nonetheless, it is positive news.
I will conduct a more in-depth company analysis individually later, but for now, I have updated the numbers from the previous valuation based on this earnings report. My subjective calculation of Tesla's fair value is approximately $180. The investment opinion remains a buy, but I believe Tesla is a stock that requires a longer-term investment approach, as the momentum is not yet alive.
(While writing this article, Tesla's stock price has surged and is now trading near the fair value I suggested, Currently, I hold a neutral view on the stock.)
Meta: Priortizing Monetization Through AI
While Tesla manged to achieve a sharp rebound in its stock price despite posting the worst earnings, Meta experienced a steep decline in its stock price despite delivering the best earnings. In the previous earnings report, I updated Meta's investment opinion to split selling, which, in hindsight, appears to have been a good strategy.
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Source: Meta IR
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Meta's Q1 revenue was $36.5 billion, a remarkable 27% increase compared to the same quarter last year. User growth continued to increase, with the daily active users(DAU) of Meta's applications surpassing 3.2 billion. Thanks to the restructuring efforts made last year, which Meta described as the "year of efficiency," the company showed a strong operating profit margin of 38%.
Meta is focusing its efforts on investing and expanding its open-source-based artificial intelligence. This is a different approach compared to Google and OpenAI. The advancement of AI-based content recommendations has led to increased user activity, which is driving the growth of advertising revenue. Notably, with the announcement of LLaMA 3, Meta introduced an AI model that is lightweight but delivers performance comparable to OpenAI's GPT-4, which was trained with a large number of parameters. In the future, such lightweight AI will be integrated into on-device applications, particularly in synergy with Meta's Reality Labs business, in which the company is investing heavily. The Meta AI Assistant is expected to be an example of this.
Meta is seeking long-term innovation by combining AI and the metaverse while maintaining competitiveness in its advertising business. However, during this earnings call, Zuckerberg stated that large-scale investments are inevitable due to the advancement of AI models and service development. He mentioned that this could lead to a deterioration in short-term profitability. This reminds investors of painful memories, such as when the company changed its name to Meta and announced that it would continue making substantial investments in the metaverse, leading to a persistently poor stock performance. There are concerns that if Meta fails to monetize AI quickly, significant cash will continue to flow out for AI investments. However, for Meta, AI technology is indispensable. Meta needs to demonstrate rapid monetization through AI to have a positive impact on its stock price.
Meta also discusses how the introduction of AI technology improves user experience and how AI-based automation solutions enhance advertising performance, suggesting that profitability will further improve soon. They also mentioned that open-sourcing will streamline costs, and the development of their own AI chips will reduce infrastructure expenses. The problem is time.
Again, I have simply updated the numbers and personally calculated Meta's fair value to be $435.49 I am updating the investment opinion from split selling to neutral.
Google: The protagonist of Last Week
Among the companies that reported earnings last week, the protagonist was Alphabet. With strong earnings and a compelling story, Alphabet excited investors, and its stock price surged by 10% after the earnings announcement, pushing its market capitalization to $2 trillion.
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| Source: Alphabet IR |
Alphabet' Q1 revenue was $80.5 billion, a remarkable 15% increase compared to the same quarter last year. It is simply astonishing that a company of this scale still shows 15% revenue growth.
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| Source: Alphabet IR |
The key factor driving Google's strong earnings was undoubtedly AI. Google Search and YouTube enhanced user experience through AI-based search improvements, significantly increasing advertising revenue. This story is similar to Meta's growth. The difference was in the cloud segment. As the contribution of AI solutions expanded, the growth rate of the cloud business increased again. Google Cloud emphasized that it offers not only NVIDIA's latest solution, Blackwell, but also its own AI-specialized chip, the TPU v5p.
Moreover, Google excited investors with its expanded shareholder return policy. Alphabet announced the introduction of a dividend. They decided to introduce a quarterly divident of $0.20 per share and approved an additional $70 billion share repurchase program on top of the existing share buyback program.
It seems inevitable that Alphabet's stock price would rise, given the improved revenue growth driven by AI and the strong commitment to shareholder returns. Based on the content of this earnings report, the fair value of Alphabet Class A(GOOGL) is updated to around $168.6. The investment opinion remains neutral.
Microsoft: The Perfect Portfolio and Perfect Earnings
Unlike Meta and Google, which are too focused on digital advertising, Microsoft's revenue diversification appears to be a perfectly structured portfolio. The company's recent earnings were excellent, and Microsoft seems to have no weakness.
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| Source: Microsoft IR |
Microsoft's revenue was $61.9 billion, a 17% increase compared to the same quarter last year, and its operating income was $27.6 billion, a remarkable 23% increase compared to the same quarter last year. Microsoft's growth in AI and cloud revenue stands out. Azure revenue increased by 31% year-over-year, with AI services specifically contributing 7 percentage points to the growth. The mention of a clear increase in large, long-term contracts for the cloud indicates strong demand for AI services.
The introduction of Microsoft's own AI solution, Copilot, is also expected to create synergy with Microsoft's existing software. Revenue from Office 365 and Dynamics 365 also continues to grow steadily, showing robust growth.
Personally, I have updated Microsoft's fair value to approximately $380 per share. The investment opinion remains neutral.
With that, I have briefly reviewed the earnings of the big tech companies that reported last week and updated my investment opinions. As I believe these companies will continue to lead the market for the next few years, I think all investors should keep a close eye on them and pay attention. I will update in-depth analyses of each company individually and provide more detailed fair value analyses.
All investment responsibilities lie with the individual.
Thank you.
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