Netflix Q1: Large Paid Net Adds Beat, Yet Important Key Metrics Dropped Starting in 2025

Posted on April 19, 2024June 30, 2026 by io-fund

Netflix logged its largest EPS beat since Q3 2022 with phenomenal 83% YoY EPS growth, as it reported an acceleration in both revenue and global membership growth in Q1. This was driven by strong paid net adds of 9.33 million in the quarter, far above consensus estimates for 4.11 million net adds.

However, Netflix guided Q2 revenue slightly below consensus, though it still points to revenue acceleration continuing for at least one more quarter. In addition, the fiscal year revenue growth guide was a bit soft and hinted at a back half deceleration.

Netflix also announced a change in its reporting metrics. Starting next year in Q1 2025, Netflix will no longer report quarterly membership numbers and ARM, though it will continue to report revenue by region. In addition, Netflix will begin guiding full-year revenue numbers and provide updates on “major subscriber milestones” as they occur. The markets do not like changes like this, and it likely contributed to the weak price action. We detail what we think is the motivation behind these key metrics being dropped below in the Q&A section.

Revenue and EPS:

Revenue of $9.37 billion beat estimates by less than 1%, representing YoY growth of 14.8%. This was Netflix’s highest revenue growth since Q4 2021.
EPS increased more than 83% YoY to $5.28 versus consensus of $4.54, beating estimates by 16.8%. Netflix reported $2.332 billion in net income, more than 18% higher than mgmt’s guide for $1.976 billion.
For Q2, Netflix guided revenue of $9.49 billion, representing YoY growth of 15.9%. This was slightly below consensus of $9.53 billion for 16.3% YoY growth.
Netflix guided EPS of $4.68 in Q2, representing YoY growth of more than 42%.
For the full year, Netflix called for “healthy” revenue growth between 13% to 15%, versus analyst estimates for nearly 14.4% growth. This is construed as a miss at the midpoint. It also indicates a lower rate in H2 since Q1 and Q2 were growth rates of 15% to 16% growth.

Margins:

Netflix reported an operating margin of 28.1% in Q1, its highest ever as margins continue to expand across the board. Netflix boosted its full year operating margin guide by 100 bp to 25%, which would represent a solid 440 bp improvement from 20.6% in 2023.

Gross margin was 46.9%, a 580 bp YoY expansion as gross profit rose nearly 31% YoY.
Operating margin was 28.1%, a 710 bp YoY improvement as Netflix reported 54% growth in operating income. Timing of content spend and the higher-than-anticipated revenue also aided this operating margin expansion.
Net margin was 24.9%, a 900 bp YoY expansion due to the strong 79% YoY increase in net income.
Operating margin for Q2 was guided at 26.6%, a 410 bp YoY expansion though slightly 150 bp lower sequentially. For the full year, Netflix boosted its operating margin guide to 25% from a prior view for 24%, suggesting that while margins are strong in 1H, a deceleration in 2H to the low-20% range is likely.
Net margin for Q2 was 21.7%, a 610 bp YoY improvement, but again a 320 bp sequential decline.

Cash and Debt:

Operating cash flow in Q1 was $2.21 billion for a margin of 23.6%. This is Netflix’s second-highest quarterly OCF margin and only its third OCF margin to be above 20%.
Free cash flow was $2.14 billion for a margin of 22.8%. Similar to OCF, this was the second-highest quarterly FCF margin and the third above 20%. Despite the strong FCF number, Netflix maintained its $6 billion guide for the full year.
Cash and short-term investments totaled $7.04 billion, while gross debt totaled $14.0 billion, as Netflix paid down $0.4 billion in senior notes in the quarter.

Netflix reported a cash spend of $17 billion. Content spend is often asked about given the budget can be quite large for Netflix. Management stated: “So we believe we can manage to that roughly 1 to 1 of cash content spend relative to expense on the P&L.”

The company repurchased $2 billion shares this quarter.

Key Metrics:

Paid Net Adds Blow Past Consensus

Though we had noted in our pre-earnings report that management’s commentary pointed to a wide possible range for net adds (between 2M and 13M), Netflix reported paid net adds at the high end of that range at 9.33 million. This compared to just 4.11 million expected by some analysts, and some as high as 5.11 million from TD Cowen’s bullish view – essentially, Netflix blew it out of the water with paid net adds in the quarter.

This pushed global paid memberships up to nearly 270 million, or a YoY increase of 16%. This is the fastest growth in global paid memberships since Q4 2020 – Netflix is one of the few, if only, pandemic beneficiaries to return to pandemic growth rates. This also marks a sharp acceleration from less than 5% growth in Q1 last year.

Breaking down paid net adds geographically shows that the growth was well rounded. EMEA saw paid net adds of over 2.91 million, while UCAN added 2.53 million and APAC nearly 2.16 million. Here’s a snapshot of the regional highlights:

EMEA has reported >2 million paid net adds for four consecutive quarters. Paid net adds in the region totaled nearly 8 million in the past two quarters.
APAC has reported >2 million paid net adds for two consecutive quarters, and more than 5 million paid net adds in the past two quarters combined, for total membership growth of nearly 12% since Q3 2023.
UCAN’s 2.53 million paid net adds were more than 40% of 2023’s paid net adds for the entire year.

For Q2, Netflix guided paid net adds to be down sequentially, following seasonal trends. Given the wide range of possible outcomes again, this will be an important metric to track next quarter.

ARM: 1% YoY Increase

We had noted that ARM would be one of the more important metrics coming out of this report, on expectations for an inflection back to growth in 2024.

ARM increased 1% YoY in Q1, and 4% on an FX neutral basis, compared to 1% on a reported and FX neutral basis in Q4. Management expects ARM to increase YoY in Q2.

This growth in ARM was driven primarily by UCAN, which saw ARM increase 7% YoY to $17.30.
EMEA’s ARM was flat YoY, breaking four quarters of declines on an FX neutral basis.
LATAM continued to face headwinds from the major devaluation of the Argentine peso, reporting a (4%) YoY decline in Arm but a 16% increase on an FX neutral basis.
APAC provided the largest headwind to ARM, with a (8%) YoY decline or (4%) on an FX neutral basis.

Earnings Call

Cutting Off Password Sharing Will (at some point) Reach Saturation

One analyst is probed into how far along Netflix is into cutting password sharing off. Management did not give a straight forward answer but this is important to consider if management is wanting to phase-out key metrics that may have been bolstered by this. Typically dropping key metrics is a flag, so analysts were trying to figure out indirectly what the cause could be.

Our next question comes from Alan Gould of Loop Capital. Which inning are we in with respect to enforcing paid sharing? Two years ago, you said 100 million subscribers were sharing passwords with 30 million in UCAN. How many do you estimate still borrow passwords? And I'll turn the floor over to Greg to answer that question.

The answer was long but vague, and offered no transparency into the potential saturation of cutting-off PW sharing: “I think worth noting that while we're fully anticipating continuing to grow subs, the overall business growth now has extra levers and extra drivers like plan optimization, including things like extra members, ads revenue, pricing into more value, which is important. So those levers are also an increasingly important part of our growth model as well.”

Another analyst snuck this in and it was not refuted. It’s subtle that management didn’t state otherwise but important to note. “Could you please provide an update on engagement trends now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on.”now that paid sharing is mostly behind you? So I'll kick it over to Ted first, and Greg, you can feel free to add on.”

On that last question, management did mention that cutting off password sharing will weigh on viewing metrics:

“As we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that.”“As we have said, due to the work that we've been doing on password sharing, we're essentially cutting off some viewers who are not payers, and therefore, we're going to lose some viewing associated with that. So when you see our next engagement report, you are going to see some impact to our overall absolute view hours as a result of that.”

Therefore, if password sharing becomes saturated, this could lead to paid net adds potentially flatlining as its been the primary growth lever for some of these knockout reports on paid net adds.

Demand Problem on Ad Tier

In the call, management pointed to there not being enough demand for the ad tier, which means not enough advertisers. This may change next month in the upfront season where top tier content providers court advertisers for upfront commitments in a highly publicized event, but for now, it’s creating a drag on ARM.

“In terms of how we're doing now relative to what we discussed when we first launched business, as Greg said, we've been growing our inventory at quite a fast clip. And so monetization hasn't fully kept up with that growth in scale and inventory as we're still early in building out our sales capabilities and our ad products. But that is an opportunity for us because this — we're still a very premium content environment, very highly engaged audience that's at an increasing scale. So our CPMs remain strong.

And we're building out our capabilities, as Greg talked about. So the revenue is going to follow engagement over time, and it's already kind of growing nicely, which is great just off a small base. So then really, as Greg said, what that means for ARM is right now, it is a bit of a drag on our ARM because of we're kind of under-monetizing relative to supply.”what that means for ARM is right now, it is a bit of a drag on our ARM because of we're kind of under-monetizing relative to supply.”

Therefore, the ad tier seeing a lag on demand could be the motivation for dropping ARM as a key metric come Q1 2025.

Lower Revenue Guide

The revenue guide being slightly lower at the midpoint was addressed on the call in terms of why there may be a slowdown by one or two points. Here is what management stated: “So our growth in the back half of '24 is really kind of comping off of those hard comps. And at the high end of our revenue forecast, our growth in the second half is consistent with our growth in the first half even with those tougher comps.”

The ARM in the UCAN region is a strong start as Netflix has recently raised prices in this region. EMEA may have broken it’s string of four quarters of decline due to increased prices in France and the UK being the remaining markets that saw price increases. However, it’s not going to be straight-forward ARM growth due to cutting-off password sharing leading to some lower priced tiers.

Per the call: “So mostly what you're seeing in our growth profile this year is the fact that we haven't taken pricing in most countries for the past 2 years really. And we also have some ARM kind of headwinds in the near term that you see in Q1. You'll probably see throughout most of this year, which is that, one, we have some — this plan mix shift as we roll out paid sharing. So it's — while it's highly revenue accretive, as you can see in our numbers, in our reported growth — strong reported growth in Q1 and outlook for the year, that – – as we spin off into new paid memberships, they tend to spin off into a mix of plan tiers that's a little bit of a lower price SKU than what we see in our tenured members […] And we're also growing our ads tier at a nice clip as you've seen and I'm sure we'll talk about. And monetization is lagging growth there.”

Conclusion:

This is a tough one because it’s a strong report at face value. This quarter was very impressive, and the nominally weaker full year guide feels a bit nit-picky to focus on. Overall, Netflix’s free cash flow guide of $6 billion and earnings growth over the next few quarters could sustain the stock, if needed. The company was wise to move toward efficiency and we have held the stock primarily for this reason as the foundation to our thesis while we participated in the speculative pivots of cutting off passwords and the ad tier. So far, one of those pivots has performed as planned (cutting of PWs) while the other pivot has been slow to monetize (the ad tier).

We are seeing important key metrics get dropped next year, which almost-always indicates an issue that management wants to get in front of. It’s interesting that Netflix rode out some tough quarters post-Covid with the pull-forward that occurred, yet kept these key metrics. In this case, it’s only natural to wonder if what’s ahead will be bumpier than the Covid pull-forward.

When you combine the fact that the key metrics could point toward the eventual saturation in cutting off password sharing coupled with a lag in demand on the ad tier, the next few quarters feel a bit like Russian roulette on when these two issues will intersect. It could be all blanks, and the juggernaut could march along and be rewarded especially for the bottom line, or these two could intersect and create a drag on both paid net adds and ARM at the same time. We are weighing these scenarios and our decision will ultimately be communicated in how the I/O Fund manages the position.

Damien Robbins, Equity Analyst for the I/O Fund, contributed to this analysis.

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Positions Report – April 2024

Posted on April 19, 2024June 30, 2026 by io-fund

For reference to terminology used, please look at technical analysis under our resources section here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.here. Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Elliott Wave counts are meant to provide context. Each colored count represents the most probable paths given the current price data. There is a pattern unfolding in real-time, one of which will play out. By monitoring price levels that are held/broken, it will help us figure out which one is in play, so that we can better manage risk.

I/O Fund Positioning

We continue to hold a sizable cash position; however, not as large as last month. We have been taking gains in various positions as they hit our technical and valuation targets, while not liking many great companies based on current technicals and fundamentals, at this moment. This tactic has naturally put us into cash close to tops.

The one exception we have found continues to be in the AI, specifically the AI memory space. Micron’s (MU) recent report was stellar, and it is showing up in the charts and fundamentals. We made a large move into MU and decided to begin layering into Lam Research and Broadcom, as well.

We always prefer to layer into names that we want to own based on several scenarios playing out. Though we only added 2% in Broadcom, we could easily see this moving into a 10% position. If something changes and we break critical supports across the board, we may stop out of both Broadcom and Lam Research, reduce our risk, and target lower levels. We plan to hedge Micron if this happens.

We also continue to accumulate crypto based on technical levels getting hit. Until critical support levels break, or we start seeing overheating with on-chain metrics, we will continue to follow our game plan and buy the dips.

The below pie chart represents our invested assets, not including cash or hedges. As of now, we are ~35% hedged, and may stop out of this hedge if the green path outlined above starts to build in probabilities.

Nvidia (NVDA)

Nvidia appears to be setting up for one more high into the $1050 – $1200 range. Note the pattern from the high is a clear 3 wave move. This looks corrective, which suggests the larger uptrend isn’t over. This is accompanied with the composite index making a lower low, while price is making a higher low. This tends to happen in on-going uptrends.

Below $880 will be the first warning to the bullish case, but this drop can really go as low as $785 and still hold the pattern that would take us higher. As long as any further weakness holds above $785, I still expect to see another high. Below $785 and the top is in, which would have us shift toward setting up buy targets.

Micron (MU)

MU is still in the middle of an incomplete uptrend pattern. Note how we have gone vertical, which tends to be around the halfway point of a 5 wave pattern. At some point, maybe a little higher from where we are, we will see a 4th wave correction take hold. This pullback needs to hold above $100 to keep the pattern valid. If this happens, we will look to add on the 4th wave pullback, and targeting around $150 – $160 for the 5th wave, as of now.

Bitcoin (BTCUSD)

While many alt-coins saw a big sell-off over the weekend, which altered their counts, Bitcoin has yet to test even the upper support for this minor 4th wave pullback. So far, it appears that we are in a bull flag, which still needs to chop around above $57,000 before completing. A break below $57,000 will be the first warning that something else might be playing out. However, as long as any additional weakness holds above $48,000, we are treating this as a buying opportunity. Below $48,000 and the larger uptrend pattern is at risk of invalidating.

Advanced Micro Devices (AMD)

So far, this pullback appears to be corrective within a larger uptrend. Note how the pattern is a 3 wave drop on decelerating selling volume. Also, the downside is losing momentum, as noted by the divergence in the composite index. At minimum, it appears that we are setting up for a bounce.

What concerns me is that we are below important price supports at $191 and again at $173. If the next bounce is a 3 wave move higher that fails at one of these price levels, it will be a warning sign that we may not get another high. If we can reclaim these levels in a more direct/5 wave move higher, then we can certainly see the uptrend continue.

In order for any of these moves higher to manifest, we need to find support above $158. Any decisive close below this level, would put this count in jeopardy of not playing out.

Netflix (NFLX)

NFLX has been tracing the leading diagonal pattern for 2 years. We are in the final 5th wave of this larger 5 wave pattern, and as long as any additional weakness holds $605, I expect to see one more swing higher before completing. Below $605 is a warning that this may not happen. Below $544 and the top is in for NFLX.

Ethereum (ETHUSD)

The breakdown below $3000 was significant for Ethereum’s structure. This invalidated the classic 5 wave pattern we have been tracing, which was pointing toward $10,000. At best, I see a diagonal pattern playing out, which should see one more high to complete the large 3rd wave.

This is a risky count, and the only bullish interpretation I can find. The reason is because it has the C wave of 3 as a diagonal, and the larger structure is a diagonal. So, this specifies uncertainty within the markets. The current minor 4th wave can drop as low as 2450 and still be valid. Below this level will be concerning.

Regarding the red count, it is very much alive in Ethereum and not in Bitcoin. But, we would need to see a large 5 wave pattern drop below 2015 to make this more likely. As of now, we only have 3 waves down from the high.

Supermicro (SMCI)

So far, we are only seeing 3 waves down from the high. As long as we stay above $775, we can push higher in a final 5th wave push. We need to see a vertical bounce above $775 to give me confidence this might happen. If we break below $775, then the top is in.

Chainlink (LINKUSD)

We only have a 3 wave drop from the high, so far. This is what we wanted, as this correction is following a clean 5 wave move off the 2023 low. We hit our target box, and began buying again. There is a chance that we are only at the bottom of the A wave in this correction. If that is the case, the next larger bounce will be a 3 wave move that fails below $19.80. If we go above $19.80, the odds will start favoring a low. If we go below $8.75, then the larger bullish count we have been tracking could be in trouble.

Broadcom (AVGO)

AVGO is in a rising wedge. It either topped in a 3rd wave or has one more small swing to $1527 before topping. When wedges break, it's usually a sharp drop back to the start of the wedge, which takes us into our buy zone at $1015 – $900. Below $1275 is the first warning and below $1200 will put the top in.

Lam Research (LRCX)

The green count below has LRCX still in the larger 3rd wave. Above $1007 and this is what I believe is playing out. The blue count has LRCX topping in the larger 3rd wave. A break below $900 will confirm this. Either way, I believe LRCX has more room to run, which lines up with the fundamental outlook. So, we will continue to look for places where we can add.

Solana (SOLUSD)

This drop in Solana actually explains the messy structure in the most recent swing higher. It, now, best fits as an ending diagonal, which means that we should see fresh highs. This means that we are in the final push of a 5th wave. The real question will be – what wave is this 5th wave ending? If it is the end of a larger 3rd wave, then the following 4th wave correction will be another great buying opportunity. However, if this is ending the 5th wave, then that will be the top in Solana. Regardless, both counts suggest volatility after we get a fresh high, so we will likely take significant gains if this happens. For this to play out, we must hold last weekend’s low at $119.

If we break $119, then that leads us to the other interpretation, which states that we have topped in the larger 3rd wave and still working through the 4th wave. This would mean that the next several weeks – months will be a range followed by another low below $100. In this scenario, we must hold $77 – $70 or a bigger top will likely be in.

Crowdstrike (CRWD)

CRWD appears to be in a 4th wave. It should find support around $270 if this is a shallow 4th wave, exhibited by the blue count below. However, if we break below $270, we should see a more conventional 4th wave, which should take us the $238 region. This 4th wave can go as low as $218 and still be valid. Below $218 and a bigger top is likely in.

Microsoft (MSFT)

MSFT is tracing a wedge pattern for the final 5th wave push. I keep going back and forth between the larger 5th wave being a standard 5 wave pattern or a large degree ending diagonal. Based on recent price action, I tend to favor the later. Regardless, both counts have MSFT potentially pushing higher for a final 5th wave swing. Below $397 and the odds favor a top being in. Below $365 and the top is in.

Cloudflare (NET)

NET just broke the critical support level at $90. Below here and the odds favor a top being in. I’d prefer to see a more direct drop for confirmation, which we are not getting. Instead, the price action is quite messy, which has me open to another high in a final swing. This is outlined by the green count below. If the next bounce is a 5 wave move, it will become my primary.

Broad Market Technical Analysis

Price Analysis

Last month, we took a deep dive into the long-term trends that appear to be approaching an inflection point. This analysis positioned the bull market that started in 2023 as part of a much greater bull market that started in 1933. For those that would like this context, please read the opening section in last month’s report here.

We are in a secular bull market, and when this bull run will end is an important question. There are 3 interpretations of the secular bull market that started in 2009.

If we zoom in on the 2022 top through today, we can get a better context on where the market is. These three scenarios are outlined below.

Red Count – This count suggests that the secular bull market that started in 2009 ended in early 2022 for the S&P 500. This would make 2022 the (A) wave in the first corrective move down in a new secular bear market. This would then make 2023-2024 the (B) wave bounce, or a cyclical bull market within a larger secular bear market. How we will know this count is playing out is that the next larger drop will be a more direct, 5 wave pattern. This would mean that 2025 will be a sharp, and devastating drop for those not prepared, as we retrace all of the 2023 cyclical bull market and likely go beyond.
Blue Count – This count has us in the final moves of a blow off top. This blow off top is the 5th wave of an ending diagonal pattern. Within a larger context, this ending diagonal pattern is the 5th wave of the bull market that started off the COVID low. How we will know this count is playing out instead of the red count is that the next larger drop should be a 3 wave pattern, followed by a final push for the bulls that will retrace most of the drop. This count will give us a ~10% trading range into 2025, before seeing the bigger drop.
Green Count – This count has us halfway through with the final 5th wave in the secular bull market. If this is playing out, we will need to hold 4960 and then turn back higher in a direct move that is 5 waves. If this happens, and we break out to new highs, it will make this count a higher probability.

The major support regions 5080, 5055 and 4960. So far, we have taken out 2/3 of these supports, which builds the case for a top being in. We should see a bounce soon, the structure of which will be very important for what follows.

Supporting Markets and the Alternative Bullish Count

The majority of price and time information suggest that we are approaching a top, of sorts. However, some charts can be worked into a larger uptrend that can take us into 2025 before topping. This month, we will discuss what I want to see in order for us to pivot our positioning, as well as some problematic markets for the green count.

Small Caps (IWM)

Small caps are the biggest concern that I have regarding the green count. If we are about to embark on the 5th wave of a large degree 3rd wave, typically, we’d be able to see this type of move, to some degree, in all major charts. This is simply not the case in small caps.

IWM is seeing an important confluence of time, price and pattern with IWM. The below Gann chart shows price struggling underneath a confluence of major angles and a cluster of important cycles. Note how the trend was moving into this region, which suggests a reversal is most likely.

If we analyze the pattern going into this important region, it appears that we have already put in a top. I have been discussing for many months how IWM, since bottoming in 2022, has been tracing what appears to be a large degree (B) wave in a much larger correction. The final move of this (B) wave is a 5 wave move higher. This has taken place, and is now breaking the support region that should have held if we are going to push higher.

In the chart below, you can see that we have gaped below the lower trend channel in what appears to be an ending diagonal pattern for the final 5th wave. Since then we are tracing what looks like a 5 wave pattern lower. If we get a small bounce for 4 that holds $200, followed by a 5th wave lower, then we will have strong evidence that our thesis is playing out. This is one of the key charts to watch.

The alternative count is that we have a leading diagonal pattern that just completed. This would also be a 5 wave pattern, and should be followed by a 3 wave bounce that can go above $200, but should hold below $205.

So, the next bounce will be very telling for IWM. If we get a corrective/3 wave move, it will increase the odds of a top being in place.

Semiconductors (SMH)

One of the most important markets, right now, is semiconductors. The reason for this is because this segment of the market has been largely compensating for the weakening Mag 7 from 2023. As long as the AI push holds, and semis lead, we can keep this bull market going.

What’s interesting is that on March 8th, Semiconductors topped while the broad market pushed higher. It’s always concerning when the market leaders do not confirm a new high, which is why we are cautious now. More times than not, the cycle leaders will lead on the way down, when the market reverses.

If SMH decisively breaks below $218, then it is a strong warning that this sector has topped. This will be a warning to broad market, which will likely follow. On the other hand, if SMH can break above $241, then it will support this bull market pushing higher, at least into late April/early May.

NASDAQ-100 (NDX)

Regarding NDX, this chart best shows how the alternative green count will likely play out. In order for this to manifest, we need to not only see SMH break above $241, but I’d also like to see NDX break above 18,606.

If we instead, break down below 17,810 – 17,265 then the odds will start building that a top is building in NDX.

As you can see, we are just above the final support for the green. So, we will need to see a reversal soon, and it needs to be in the shape of a direct/5 wave pattern. If it is instead a 3 wave pattern, it will build the odds that a top is in place.

I’m not sure if you want me to talk about Inflation or Rates. If so, I can coble together those sections from the original report here.

Recommended Reading:

Positions Report – April 2024

Posted on April 19, 2024June 30, 2026 by io-fund

Regarding the horizontal lines, black lines represent strong support/resistance, while dark red lines mark very strong support/resistance.

Nvidia (NVDA)

Bitcoin (BTCUSD)

Microsoft (MSFT)

Broad Market Technical Analysis

Price Analysis

We are in a secular bull market, and when this bull run will end is an important question. There are 3 interpretations of the secular bull market that started in 2009.

If we zoom in on the 2022 top through today, we can get a better context on where the market is. These three scenarios are outlined below.

Red Count – This count suggests that the secular bull market that started in 2009 ended in early 2022 for the S&P 500. This would make 2022 the (A) wave in the first corrective move down in a new secular bear market. This would then make 2023-2024 the (B) wave bounce, or a cyclical bull market within a larger secular bear market. How we will know this count is playing out is that the next larger drop will be a more direct, 5 wave pattern. This would mean that 2025 will be a sharp, and devastating drop for those not prepared, as we retrace all of the 2023 cyclical bull market and likely go beyond.
Blue Count – This count has us in the final moves of a blow off top. This blow off top is the 5th wave of an ending diagonal pattern. Within a larger context, this ending diagonal pattern is the 5th wave of the bull market that started off the COVID low. How we will know this count is playing out instead of the red count is that the next larger drop should be a 3 wave pattern, followed by a final push for the bulls that will retrace most of the drop. This count will give us a ~10% trading range into 2025, before seeing the bigger drop.
Green Count – This count has us halfway through with the final 5th wave in the secular bull market. If this is playing out, we will need to hold 4960 and then turn back higher in a direct move that is 5 waves. If this happens, and we break out to new highs, it will make this count a higher probability.

Advanced Market Signals Members receive in-depth technical analysis from our Portfolio Manager, Knox Ridley. Learn more here.here.

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Netflix Q1 Pre-Earnings: Looking to ARM and Net Additions

Posted on April 18, 2024June 30, 2026 by io-fund

Netflix kicks off tech’s Q1 earnings season on Thursday, and is setting a high bar after guiding for a first quarter revenue acceleration and nearly double-digit margin expansion. Netflix returned to double-digit growth in Q4, and guided to 13.2% YoY revenue growth, the fastest growth rate since Q4 2021.

We noted in Q4’s post-earnings report that average revenue per member (ARM) would be one of the more important metrics to watch this quarter, after Netflix raised prices for the first time in 18 months last October. Commentary from management implied we would see ARM return to growth in 2024 after being flat to negative throughout 2023.

Despite not yet being a substantial driver of growth, management was optimistic about the ad tier, saying they expect strong growth off a small base this year to transition ads into a “substantial revenue stream” in 2025 and beyond. Netflix has not updated its ad tier subscribers since January, so an update may be in store.

Notably, Netflix has gone through a phenomenal turnaround on the bottom line and this was the primary reason we added the stock to our portfolio about 18 months ago. Earnings continues to grow while cash flow is pausing on growth, per current estimates and commentary. We detail this and more below.

Revenue and EPS:

Netflix guided for $9.24 billion in revenue in Q1, representing YoY growth of 13.2%, with a three percentage point headwind from the devaluation of the Argentine peso relative to the US dollar. On a constant currency basis, this represents approximately 16% YoY growth.

Revenue growth is poised to continue accelerating through Q2, with estimates pointing to 16.3% growth in the June quarter before softening to the 14% range for the back half of the year. Q2 is still expected to mark ‘peak’ growth as was noted in January; however, revenue growth forecasts for 2025 have inched higher. Prior to Q4, revenue growth was projected to moderate to the 10% range, but now it is expected to hover in the 12% range.

Q1’s EPS guide called for more than 112% QoQ growth and 56% YoY growth to $4.49, which would be Netflix’s highest ever quarterly EPS print. Much of this EPS growth stems from margin expansion driving increased operating leverage – Netflix guided for operating income to increase nearly $1 billion sequentially to $2.42 billion, and that is flowing straight through to the bottom line with net income guided to rise by more than $1 billion sequentially to $1.98 billion.

This sets the stage for strong EPS growth for fiscal 2024 and into 2025. Current estimates call for EPS growth of 43.1% YoY to $17.22 in 2024, a strong double-digit acceleration from 20.9% growth in 2023. EPS growth in 2025 is projected to moderate to 23.2% YoY to $21.21.

Margins:

Operating margin expansion is one of the primary highlights for Q1’s upcoming report, with Netflix guiding for a 26.2% operating margin in the quarter, a ~930 bp expansion to the highest level in three years.

An operating margin in the mid to high-20% range is not out of the ordinary for Netflix in the first quarter, with margins in this ballpark in 2021 and 2022. However, Netflix increased its full year operating margin guide from 22.5% at midpoint to 24%, implying that margins through the remainder of the year will remain strong, and not as prone to sequential weakness as we had seen in 2021 and 2022.

Q2’s operating margin guide will provide clues as to how this will unfold – a guide for sequential growth would imply a weaker Q4 in line with historical trends, while a guide in the low 20% range points to steady margins and likely strong YoY expansion in Q4.

With this operating margin strength, net margin in Q1 is also expected to be very strong at 21.4%. This compares to 10.6% in Q4, and 15.9% in the year ago quarter.

Cash Flows and Balance Sheet

Cash flows have been a strong point throughout 2023, with Netflix more than tripling operating and free cash flows and driving more than 1500 bp expansion in operating and free cash flow margins for the full year.

Operating cash flow was $1.66 billion in Q4 and $7.27 billion in 2023, for a margin of 18.8% and 21.6% respectively. The 21.6% margin in 2023 marked a substantial 1520 bp expansion from 6.4% in 2022, as operating cash flow increased 259% YoY. For Q1, operating cash flow is expected to be just north of $2 billion, for a margin of ~22.0%.

Free cash flow was $1.58 billion in Q4 and $6.93 billion in 2023, for a margin of 17.9% and 20.5% respectively. Free cash flow increased 328% YoY last year, though growth is pausing – management guided for ~$6 billion in FCF this year, or a (13.4%) YoY decline with this lumpiness caused by the WGA and SAG-AFTRA strikes.

Netflix has more than $7.1 billion in cash and short term investments on the balance sheet, while debt totaled $14.5 billion.

Key Metrics: ARM, Paid Net Adds In Focus

Paid Adds:

Paid net additions were probably the strongest key metric in Q4’s report. Netflix reported 13.12 million paid net adds globally, driving global paid memberships up 12.8% to more than 260 million. This marked the fourth quarter of accelerating growth and the highest growth rate in eleven quarters for global paid memberships.

Management hinted that we would see strong paid net additions in Q1, saying that “similar to prior years, we expect paid net additions to be down sequentially (reflecting typical seasonality as well as some likely pull forward from our strong Q4’23 performance) but to be up versus Q1’23 paid net adds of 1.8M.” However, this leaves quite a wide range for where paid net adds could fall – Q4’s total paid net adds surpassed 13.1M, so technically, anything between 2M and 13M is fair game and would align with management’s commentary.

Consensus for paid net adds sits on the lower end of the range, at 4.11 million. Analysts from TD Cowen are expecting paid net adds of 5.11 million, noting the firm is “benefiting from a dual tailwind of paid sharing initiatives as well as strong underlying business demand from a robust, increasingly global content slate.” This 5.11 million expectation would correlate to global paid membership growth of almost 14.2%, suggesting analysts are looking for another quarter of acceleration in Q1.

ARM:

ARM also will be watched closely, given that it is expected to inflect back to growth and contribute to revenue growth instead of providing a headwind as it had in 2023. Netflix said for 2024, it expects “healthy double digit revenue growth…on a F/X neutral basis driven by continued membership growth as well as improvement in F/X neutral ARM as we adjust prices.”

As Netflix’s largest region by paid memberships, EMEA’s return to growth in ARM will be critical, given that it declined (1%) YoY to $10.84 in Q4 on an F/X neutral basis. Return to growth in APAC may take an extra quarter of two, given that Netflix has been struggling to improve monetization with ARM declining for seven straight quarters. UCAN ARM accelerated to 3% growth in Q4 from 0% in Q3, and further acceleration will help offset residual weakness in APAC in Q1 and potentially lighter growth in EMEA.

Ads:

With management aiming to make ads a more substantial revenue driver in 2025, updates on ad-tier subscriber count could be in store, following strong growth over the past three quarters and potential for partner deals like that with T-Mobile further boosting growth.

We have seen strong adoption of Netflix’s ad-tiers so far: subscribers tripled from 5 million in May 2023 to 15 million in November, before rising another 53% to 23 million in early January. Ad-tier subscribers now account for nearly 10% of Netflix’s total paid memberships.

In late January, all of T-Mobile's subscribers to its Netflix on Us deal, which previously offered a free Netflix Basic subscription, will convert to Netflix's Standard with Ads tier unless subscribers pay the difference for a plan without ads. Management explained that these kinds of partner deals are “very effective, very useful for us because that lower consumer-facing price means that we got room now to bundle the ads plan into a set of lower-priced partner offerings where it was hard to make the economics work for everyone previously.” This provides two outlets for growth –a surge in ad-tier users from those who do not wish to upgrade, and extra revenue dollars from those that pay the difference to upgrade.

Conclusion

Netflix has been delivering on its promise to shareholders with accelerating revenue and subscriber growth, greatly improved margins and cashflows, and strong EPS growth. A few metrics we are watching closely include ARM and paid net additions growth, given the strong numbers Netflix has reported recently.

We are also on the lookout for whether the ad tier’s strong initial adoption will begin to slow and/or if Netflix will run out of growth levers, though this may become more of a concern for 2025. With that said, an ad tier should greatly improve margins as we go along and that’s also central to the story beyond paid net additions. We will keep you in the loop on how we view Netflix’s peak growth in Q2 and the inevitable slowing growth come 2025 (or perhaps 2026) in the face of its impressive and expanding margins and cash flows.

Damien Robbins, Equity Analyst at the I/O Fund, contributed to this analysis

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Semiconductor Stocks Q4 Overview: AI Gains Heat Up

Posted on April 15, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Apr 11, 2024,03:58 pm EDTForbes on Apr 11, 2024,03:58 pm EDT

Semiconductor stocks are standout performers so far in 2024, with investor appetite for AI stocks remaining elevated as AI chip leader Nvidia continues its streak of high growth. Numerous chipmaking equipment and chip stocks outperform the broader indices on a YTD basis – sixteen have YTD gains above 20%.

For years, the I/O Fund has published on semiconductors being the leaders in tech as the building blocks and common denominators for the decade’s largest tech trends, most notably AI and high-performance computing, but also EVs, robotics, 5G, and IoT. Our premium research urged our members to look closely at semiconductors across these trends dating back to 2019.

These emerging trends, coupled with strong demand for AI and HPC applications at the moment, set semiconductors up as an ideal investment, supported by strong free cash flow generation. Below, we update our semiconductor sector analysis to look at which companies have performed well in the most recent quarter, and also which companies stand out on a forward-basis with revenue growth estimates, profits, cash flows and earnings surprises. We also look into key management insights.

Top Semiconductor Companies with the Highest Quarterly Revenue Growth Rates

Nvidia led the semiconductor sector with 265.3% YoY revenue growth in Q4.

Source: YCharts

It should’ve been an easy guess that AI’s de facto leader Nvidia would sit atop the list here, as it reported more than 265% YoY revenue growth to $22.1 billion in its fourth quarter. Nvidia CFO Colette Kress said that Q4’s “data center revenue of $18.4 billion was a record, up 27% sequentially and up 409% year-over-year, driven by the NVIDIA Hopper GPU computing platform along with InfiniBand end-to-end networking. Compute revenue grew more than 5x and networking revenue tripled from last year.”

AI fueled gains outside of Nvidia as well – Micron is emerging as a big winner from surging AI demand. Micron’s recovery looks to be in full force as it reported nearly 58% revenue growth, driven by strong AI demand and increased pricing power stemming from a tighter supply environment.

However, we saw pockets of strength outside of AI – indie Semiconductor and Navitas Semiconductor both reported over 110% revenue growth, with primarily automotive and industrial end markets. ACM Research reported 57% revenue growth, and Qorvo followed with 45% revenue growth due to content gains at its single largest customer.

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Q4 Revenue Surprise

Cirrus Logic and ACM Research both beat quarterly revenue estimates by more than 14% in Q4, while AI favorites Micron, Arm, and Nvidia each beat by more than 7.5%.

Source: YCharts

Cirrus Logic reported a significant 14.6%, or $79 million, revenue beat in the December quarter (its fiscal third quarter) as it posted a record $619 million in revenue on strong smartphone shipments. This represented 29% QoQ and 5% YoY growth. Management said the $619 million was “significantly above our guidance range, as sales of components shipping and smartphones exceeded our expectations, driven by strength in orders from our largest customer. Shipments stayed strong throughout the quarter, including the first holiday week, and we also benefited from an additional week of revenue in the quarter.” This uptick in smartphone shipments also aided Qorvo, who beat estimates by 7.1%.

Three of the Street’s AI favorites — Micron, Arm, and Nvidia — all beat revenue estimates by 7.6% to 8.8%. Strong AI-fueled memory chip demand aided Micron’s growth in the quarter, while strong GPU shipments and still-dazzling data center revenue growth served as a major contributor to Nvidia’s $1.6 billion revenue beat. Arm’s $61 million revenue beat was driven by record royalty revenue, with royalties for the newest v9 design underpinning the latest AI chips and other advanced smartphone chips, double that of the v8.

Revenue Growth Estimates for Current Quarter

Source: YCharts

If it’s not obvious which chip stock would hold the crown for the highest estimated revenue growth for Q1, then you’ve been living in a cave.

Nvidia leads the sector with a blazing 237% estimated revenue growth rate for Q1, to an estimated $24.2 billion. Growth in Q1 is expected to be driven by sequential growth in data center revenues, as Big Tech companies continue to quickly snap up GPUs. Nvidia has been on a streak of beating-and-raising by approximately $2 billion over the past couple quarters, and it will be looking to keep this streak alive in the first quarter. Analysts have had an extremely difficult time pinpointing just how rapidly Nvidia’s GPU sales and revenue growth will be – six months ago, in October 2023, analysts’ Q1 revenue estimate was pegged at $18.4 billion, and now, it’s nearly 32% higher. This is reflective of the unprecedented growth materializing for Nvidia over the past year.

ACM Research is expected to see over 105% YoY growth in Q1, with management expecting a strong 2024 on mature node investment in China and product development progress at multiple customers. However, despite the triple-digit headline growth rate, the $152 million revenue estimate would represent an ~(11%) sequential decline.

Micron’s growth is poised to accelerate from 58% YoY to nearly 77% YoY, as it continues to reap the benefits of this unfolding recovery in the memory market with strong pricing tailwinds. Management said that “AI server demand is driving rapid growth in HBM, DDR5 and data center SSDs, which is tightening leading-edge supply availability for DRAM and NAND. This is resulting in a positive ripple effect on pricing across all memory and storage end markets. We expect DRAM and NAND pricing levels to increase further throughout calendar year 2024 and expect record revenue and much improved profitability now in fiscal year 2025.”

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Revenue Growth Estimates for Current Year

Nvidia and Micron lead the sector with estimated revenue growth rates of 82.7% and 58.1% for the current fiscal year.

Source: YCharts

There should be no surprises here, with Nvidia and Micron leading the way with 82.7% and 58.1% estimated revenue growth for the current fiscal year. Navitas’ strong growth in Q4 and expected growth in Q1 are projected to translate to a solid year with nearly 43% growth, while Rambus is expected to record more than 32% growth.

Data center will be the main driver of Nvidia’s growth this fiscal year, with the H200 shipping at the end of the second quarter and the new B200 Blackwell GPUs commencing late in the year. Put in dollar terms, Nvidia is estimated to generate $50 billion in revenue growth this year – assuming data center drives ~90% of that growth, that could represent more than 1 million additional GPUs shipped this year.

What you may have noticed is that the estimated 83% growth for Nvidia is a far cry from the 237% estimated growth for Q1. It’s not that revenue growth will slow on a dollar basis – Nvidia is estimated to see ~$2 billion in sequential growth each quarter this year, but rather it will start to face tough comps in the back half of the fiscal year, when it comes head-to-head with $14.5 billion and $18.4 billion data center revenue prints. This is what will drag on YoY revenue growth rates, from the 237% to an estimated 40% by fiscal Q4.

We’re seeing thematic similarities in the chip companies making the list of fastest revenue growth expectations for the current fiscal year. Nvidia is capitalizing on data center AI demand and TSMC and Arm are seeing tailwinds from this growth. Micron is seeing rising DRAM and NAND prices aid AI strength, while Rambus and Camtek are both poised to capture growth on this memory upswing. Rambus is seeing the data center drive more than 75% of its chip and silicon IP revenue with outlets in DDR5 and HBM, and Camtek is benefiting from increased metrology equipment demand from HBM and AI chiplet customers.

Top-Line Valuation

Source: YCharts

Despite popular belief, Nvidia is not the most expensive semiconductor stock on a top-line (and even bottom-line) valuation. On a top-line, forward PS valuation, Arm is the most expensive semiconductor stock by a wide margin, trading at 32.4x forward sales despite having a forward revenue growth rate of just 18.7%. We discussed Arm’s extreme valuation and how it poses risks to investors to our free newsletter readers last month in the analysis “Arm Stock: AI Chip Favorite is Overpriced.”

Nvidia trades at 19.8x forward sales and arguably deserves this premium valuation due to its unrivaled position on GPUs and the raw earnings power this is driving; in addition, this 19.8x multiple surprisingly is a slight discount to the 21.7x average PS multiple Nvidia has traded at over the past 5 years.

Semiconductors with the highest exposure levels to the unfolding AI megatrends are predominantly among the sector’s most expensive stocks. For example, Monolithic Power is the fourth most expensive at 15.6x forward sales, while ASML and Marvell also feature on the list. Monolithic has seen strong growth in its Enterprise Data segment as a primary power management supplier for Nvidia’s H100 GPU, though it is also recording >20% growth in automotive and ADAS markets.

Operating Margin

Source: YCharts

Despite some of the blazing growth rates we are seeing emerge across the sector, only a handful of companies with the highest operating margins are seeing growth translate into increased operating leverage.

Due to the sheer pricing power of its H100 GPUs, Nvidia has seen its operating margin rise to nearly 62% in the most recent quarter, compared to a TTM operating margin of under 52%. This suggests that Nvidia will still feel these positive margin tailwinds over the next few quarters, assuming it can maintain a 60%+ quarterly operating margin as it scales its next-generation GPUs.

Smartphone strengths drove improvements in margins for Qualcomm and Cirrus Logic, while strong royalty revenue growth aided in Rambus’ margin improvement. TSMC is facing some margin headwinds, primarily due to its positioning in the ramp cycle of its 3nm node, which is still in the early stages.

Free Cash Flow Margin

Source: YCharts

Strong free cash flow generation and high FCF margins are a core factor in the chip sector’s attractiveness to investors – not only does strong FCF generation allow companies to reinvest rather heavily in R&D and remain on the leading edge of innovation, but it provides an extra safety net when the macroenvironment sours.

Skyworks led the sector with a 62% free cash flow margin as the company reported record quarterly cash flow metrics. CEO Liam Griffin said the company “continues to execute well and generate robust profitability in light of ongoing macroeconomic volatility” and “delivered record quarterly free cash flow of $753 million, which reflects strong working capital management and moderating capex intensity.”

Taking a broader view of the entire sector, 18 semiconductor stocks reported quarterly FCF margins above 30%, with 9 having a 30% or higher free cash flow margin on a TTM basis. Skyworks reported a 62% FCF margin in Q4, followed by Nvidia at 51% and Cirrus Logic at 49%.

Conclusion

Nvidia has quickly become the market’s most-followed AI stock due to its ‘hockey stick’ data center revenue growth, and it also became the first semiconductor stock to break both $1 trillion and $2 trillion in market cap. However, it’s not the only one putting up strong growth numbers, with Micron expected to see 58% revenue growth this year, and Navitas projected to record over 40% growth.

Strong free cash flow generation has been a hallmark of some of the sector’s top performers. As building blocks for AI and other developing megatrends, semiconductors remain a vital sector to track for tech investors, due to their position at the forefront of AI, strong margins, and strong free cash flow generation.

Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.

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Broad Market and Positions Update

Posted on April 12, 2024June 30, 2026 by io-fund

Watch Portfolio Manager Knox Ridley as he covers the Broad Market, Microsoft, Nvidia, and Bitcoin.

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Dell Fiscal Q4: Early Shoots from AI Servers

Posted on April 5, 2024June 30, 2026 by io-fund

Dell stock shot up 31% following its fiscal Q4 results. The market was excited to see orders for AI-optimized surge 40% QoQ despite only contributing 5% of overall revenue. There is certainly room in Dell’s valuation when management convinces the market it’s a serious AI player with each subsequent earnings report. Compared to other AI stocks, Dell is a slow-growth company, per analyst estimates. As a percentage of revenue, SMCI has 50% AI revenue versus Dell’s 5% AI revenue.

There is also a concern among analysts due to dilutive margins from the company’s AI server portfolio, mixed with additional pricing pressures on traditional servers due to inflationary pressures and an intensely competitive market.

Ultimately, there are a few key things we’d like to see from Dell as we consider a position. We detail this and more below.

Revenue and Earnings:

Dell reported fiscal Q4 revenue of $22.3 billion for revenue decline of (-10.9%). This was flat QoQ but an improvement from the April quarter at (-19.9%). Dell is expected to return to positive growth next quarter at 3.3% for revenue of $21.6 billion.

For the full year, analysts are expecting growth of 5.8% for revenue of $93.5 billion.

Revenue Segments:

The lower total revenue was driven by a (-6%) decrease in Infrastructure Solutions Group (ISG) and a (-12%) decrease in the Client Solutions Group (CSG) YoY.

Client Solutions Group (CSG) delivered fourth quarter revenue of $11.7 billion, down (-5%) sequentially and (-12%) year over year. Commercial client revenue was $9.6 billion, and Consumer revenue was $2.2 billion. Operating income from the segment was $726 million. Full-year CSG revenue was $48.9 billion, down (-16%) year over year, and full-year operating income was $3.5 billion, down (-8%) year over year.

Moving forward, CSG is expected “to be down in the low single digits, so minus three about year-over-year.” Management has indicated a recovery in PCs is likely in the second half of the year.

Infrastructure Solutions Group (ISG) incl AI revenue:

ISG revenue was $9.3 billion, down (-6%) and up 10% sequentially. Servers and networking revenue was $4.9 billion, down (-2%) year-over-year and up 4% sequentially. ISG operating income was 15.3% of revenue and $1.4 billion was down (-7%), driven by a decline in revenue and a lower gross margin rate given the higher AI-optimized server mix, partially offset by lower operating expense.

Moving forward, ISG is expected “to grow in the teens driven by traditional and AI services.” Per the CFO: “[…] from a traditional server standpoint, we're expecting modest growth, so growth in the upcoming year. AI servers, certainly a very strong growth, especially from a year-over-year standpoint. And then storage, will lag a bit, but we expect tailwinds as the year progresses in the storage portfolio.”

Per management: “Our AI mix of server demand increased again sequentially given strong customer interest in GenAI.” The company shipped $800 million of AI-optimized servers with a backlog that “nearly doubled sequentially, exiting the fiscal year at $2.9 billion.” The press release stated orders increased nearly 40% sequentially and backlog nearly doubled to reach the $2.9 billion. Regarding how the backlog digests, it was later stated: “We believe we will ship more in Q1 than we shipped in Q4. As we look forward in our annual guidance, Yvonne has our best estimate of our demand and fulfillment of that demand that we've put into the annual guidance.”

Additional commentary was offered on the earnings call: “Demand continues to outpace GPU supply, though we are seeing H100 lead times improving. We are also seeing strong interest in orders for AI-optimized servers equipped with the next generation of AI GPUs, including the H200 and the MI300X. Most customers are still in the early stages of their AI journey, and they are very interested in what we are doing at Dell.”

Storage revenue of $4.5 billion was down (-10%) year-over-year and up 16% sequentially. Per management: “demand improved sequentially across the storage portfolio, above our normal seasonality.” Storage reported improved profitability due to a mix of proprietary storage software.

Margins:

Margins have improved YoY as the company juggles margin contraction and margin expansion in varied segments. The company is not expected to continue this trend of improving profit margins for a few reasons. First, the high-growth AI market is generating lower margins than the company’s other leading products. In addition, the company expects input costs to increase further in FY25, driven by anticipated inflation for component costs as the year progresses. Management also anticipates the pricing environment to be more competitive in FY25.

Gross margin has been steady at 23% to 24% although this may change with higher AI product mix and also inflationary input costs. Gross profits were $5.32 billion last quarter. The CFO guided a 100-basis points moderation in the adjusted gross margin for FY2025 and to be 200 bps lower next quarter. For reference, FY2024 adjusted GM was 24.3%.

Operating margin of 6.7% is up 190 bps from the year ago quarter as operating expenses as a percentage of revenue was reduced to 17.1% compared to 18.3% in the same quarter last year. This is also higher than FY2024 at 5.9% operating margin. Adjusted operating margin was 9.6%.

Net margin of 5.2% was up 270 bps from the year ago quarter. This is higher than FY2024 net margin of 3.6%. The adjusted net margin was 7.2%.

Margins were a focus in the Q&A with the CFO expanding on what will drive lower margins next quarter:

“And then we get to gross margin rate, which I think is the key to your question. So we expect that to be down quarter-on-quarter, about 200 basis points. Now, what is supporting that expectation? We are seasonally lower in storage mix. We see that every Q4 to Q1, so that's one of the drivers. We will have higher AI optimized server mix in Q1. Jeff already talked about that in question.

And then holistically, we have another few influences on the margin. We've got an inflationary component cost environment. We're moving from deflationary last year to inflationary in the year that we are in right now. And then I'd say there's more competitive pressure. We're seeing more and more of that. And so that's what we expect to be impacting the gross margin. And I'd say operating margin rates will be down quarter-over-quarter due to all the items I just mentioned. But for the year, we're expecting improved performance as the quarters progress.”

Regarding competitive pressure, this is coming from traditional servers. Per the CEO: “we did see in traditional servers that in large bids, the competitiveness did increase quarter-over-quarter in Q4. We expect that to continue.”

Dell had a large beat on adjusted EPS reporting $2.20 compared to $1.72 expected for a beat of 27.9%. Next quarter, the company is expected to report $1.22 for a decline of (-7.1%). We discussed above some of the factors like inflationary cost pressure, seasonality lower storage revenue mix, and higher proportion of AI product mix for lower margins in the next quarter.

Cash Flow:

Operating cash flow of $1.53 billion in fiscal Q4 represented a margin of 6.9%. Free cash flow of $806 million represented a FCF margin of 3.6%.

There is $8.7 billion in cash and investments on the balance sheet and $26 billion in debt. Debt has decreased since Q4 2023 from $29.59B to $25.99B for Q4 2024 as the company focused on deleveraging.

Dell announced a 20% hike in the annual dividend to $1.78 per share and substantial share buyback program reflects Dell's confidence in sustained cash flow generation and long-term value creation. Per the earnings call: “we repurchased 11.2 million shares of stock at an average price of $74.67 and paid a $0.37 per share quarterly dividend. And earlier today, we announced a 20% increase in our annual dividend to $1.78 per share, well above our long-term financial framework and a testament to our confidence in the business and our ability to generate strong cash flow.”

Earnings Call:

Dell’s management team is expecting a return to growth with a focus on AI and a bullish view on the PC refresh cycle by the exit of FY2025.

AI-Related Revenue

The 40% QoQ growth in AI servers is clearly the driver for the 30%+ after hours pop the day the company reported. Here are some of the more pertinent points discussed on the call regarding AI revenue:

From the CEO, regarding where the demand is coming from – notably, Dell’s management was quite clear their AI opportunity is more with enterprises and on-premise servers as opposed to purely hyperscalers. This helps explain why Dell’s AI revenue is ramping more slowly as it’s more of a phase two server company (phase 2 being enterprise-driven, client-driven, and especially characterized by edge AI).

“Let me start with maybe the demand. And you heard us talk about the demand up sequentially 40%. And that demand was across a rich customer set. The number of CSPs grew, the number of enterprise buyers grew. So for us, two important indicators is less concentrated this quarter than the previous quarter with more customers in both the CSP category and the enterprise category buying from us.And you heard us talk about the demand up sequentially 40%. And that demand was across a rich customer set. The number of CSPs grew, the number of enterprise buyers grew. So for us, two important indicators is less concentrated this quarter than the previous quarter with more customers in both the CSP category and the enterprise category buying from us.

That demand was spread across the H100, H800, the H200 and the MI300X. So we sold a broad portfolio or a broad portfolio of silicon diversity into the marketplace for our customers […] Probably another important characterization about the demand and how the backlog looks is the pipeline grew. We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we're going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4. I hope that was the color that you're looking forbably another important characterization about the demand and how the backlog looks is the pipeline grew. We talked about our five-quarter pipeline at the last call. The five-quarter pipeline grew this quarter as well. So who we sold to grew. The potential of who we're going to sell to grew. The number of shipments that we had during the quarter grew and the backlog grew. And we expect to ship more in Q1 than we shipped in Q4. I hope that was the color that you're looking for.”

In Jeff Clark’s, CEO, opening remarks, “We saw strong demand continue for our AI-optimized server portfolio, including our flagship PowerEdge XE9680, which remains the fastest-ramping solution in company history. We have just started to touch the AI opportunities ahead of us, including broader adoption of AI by enterprise customers and the projected growth in unstructured data where we are well-positioned with industry-leading storage solutions.”

Margins, and the fact Dell’s AI servers have dilutive margins, was a common focus for analysts on the call. AI server sales were less than 5% of overall revenues, however it’s expected AI will have a negative impact on profit margins for the company as it grows. As of now, margins have expanded YoY and QoQ.

Enterprise is an AI Opportunity for Dell:

I want to drill down on the comment I made above that enterprise is where Dell anticipates they will see a larger AI product mix as they will then be able to cross-sell. On the call, Dell’s CFO pointed toward enterprise being a larger opportunity than hyperscalers for their servers. The CFO stated: “What I'm really excited about is the other thing that Jeff talked about on really getting more and more value out of our GPU servers, really with, as we move more and more into the enterprise and get more richly configured, more services, etcetera, attached to that.”really getting more and more value out of our GPU servers, really with, as we move more and more into the enterprise and get more richly configured, more services, etcetera, attached to that.”

The CEO backed this up by saying: “That's the path. There's storage, deployment services, pro support, our consulting services, networking, so in the entire basket of the solution.”

Later, the CEO stated again: “I need to mention we got a storage opportunity in there, that we have a networking opportunity in there, and we have a services opportunity in there and to go for the last of the bunch of financing opportunities. So those — how could you not be excited about that given the demand environment?”

Sizing the AI-Related Opportunity

There were also questions about how big the opportunity is and how Dell will participate as TAM rapidly grows at 20% CAGR over the next few years. The CEO answered with the following:

“The first thing you probably noticed in our web deck is we increased our view of the opportunity in the marketplace to $152 billion, 20% CAGR going forward to 2027. And quite frankly, that's probably a lagging indicator. It's still catching up. We think demand continues to be ahead of that. Primarily driven is the overall desire, demand for the computational components to do AI exceeds the supply picture. And quite frankly, it's refreshing to see. We have a high growth category here.”

This was one of the more important comments on the call:

“And then if I think long-term going forward, as we look at the opportunity, and again, we referenced the $152 billion in our web deck, but we've done some analysis that's available out in the public domain, but we're looking at an opportunity where every dollar that is for a AI server, GPU server, there's $2 to a growing $3 of professional services around that, networking around that, storage around that.”but we've done some analysis that's available out in the public domain, but we're looking at an opportunity where every dollar that is for a AI server, GPU server, there's $2 to a growing $3 of professional services around that, networking around that, storage around that.”

In October, Dell published an Investor’s Presentation that showed the AI hardware and services opportunity (ISG segment) growing at 18% CAGR for $124 billion by 2027. In the quarterly presentation, the company updated this to a 20% CAGR reaching $152 billion by 2027.

An analyst from Citi asked about the change in total addressable market (TAM) on the call:

Asiya Merchant

Hey, thank you for very much for taking my question. Great results by the way. Just a quick question. I know you guys refreshed sort of your AI TAM as part of this presentation. Just the questions that I get from investors, as you think about the 150 billion TAM that you guys are highlighting now in 27, given Dell's share in storage, obviously your server, mainstream server share and overall share tam in servers. How do you guys think about your share in this 152 billion market by 27? Should we assume the share that you guys have now for servers and storage translates itself into the 150 billion share TAM equivalent? Thank you.

Jeff Clarke:

[…] quite frankly, that's probably a lagging indicator. It's still catching up. We think demand continues to be ahead of that. Primarily driven is the overall desire, demand for the computational components to do AI exceeds the supply picture. And quite frankly, it's refreshing to see. We have a high growth category here […] So this notion of enterprise, our enterprise customer base growing, we've sold to education customers, manufacturing customers, governments. We've sold to financial services, business, engineering and consumer services companies. They're seeing vast deployments, proving out the technology. And some cases are using the tooling of the public cloud. And then they quickly find that they want to run AI on-prem because they want to control their data. They want to secure their data. It's their IP and they want to run domain specific and process specific models to get the outcomes they're looking for.”

Foxconn also stated the AI server market will reach $150 billion by 2027, yet stated it would be due to cloud service providers (CSPs) whereas what Dell is describing is a bit different, as their view is that it will be driven by enterprises.

Following the Q&A, the Citi analyst updated to the following: “Our estimates move higher on higher revenues with slightly lower gross margins offset by tighter operational expenditures. Our estimates assume AI revenues of around $10B by FY26/CY25, and we see upside to $12-15B."

However, this seems low if Dell has a server market share of 21% according to Statista. Dell’s recent investor’s presentation shows a server market share of 31% and “accounts for 43% of new industry revenue over the past 10 years.” Dell also has a 30% market share in storage and “accounts for 38% of new industry revenue over the past five years.” Due to AI revenue being quite speculative at this point (although off to a great start on the sequential growth), it’s likely these estimates are conservative.

Source: Dell’s Investor Presentation

Traditional Server Market & PCs Rebounding (Per Dell):

What is key to our Micron, Broadcom positions and even AMD is the PC rebound as this is when the combination of AI revenue merging with other leading segments will be most evident. The same is true for Dell, and even more so.

According to management, traditional servers will no longer weigh on the company’s revenue in the near-term: “We talked about traditional servers. There's momentum there. Three consecutive quarters of sequential growth and demand. First quarter in a long time of year-over-year demand growth. We exit with good momentum. We tried to reflect that in our guidance. That is in all geographies.”

Since Dell is a major player in PCs, are also noting here comments on when PCs will see a recovery:

“Do I expect the PC market to be bigger in calendar 2024 than 2023? Yes. Do I think the PC market is likely bigger in the second half of 2024 than it is in the first half? Absolutely so. Hence our remarks that we believe the opportunity in PCs is second half driven.”

Dell is a Valuation Story, Like SuperMicro:

Last summer, I made the argument on Fox Business News that integral to our position in SMCI was its valuation, as moving from a commoditized hardware stock to an AI stock would surely boost the valuation from roughly a 1 Fwd PS to something more reflective of an AI stock. About six months later, in January of 2024, SMCI shot up in valuation to 3 Fwd PS.

Therefore, if Dell continues to report more AI revenue, then the company will be on the precipice of challenging its valuation as a commoditized hardware company. To be clear, Dell is not on par with Super Micro in terms of its AI revenue. Dell has 5% AI revenue and SMCI has a whopping 50%, which we called out as a top company in terms of AI revenue in August.

By 2027, if the Citi estimate is correct, Dell would have about 15% of its revenue from AI if we use the $15 billion. If the $30 billion is what materializes (based on Dell’s current server market share of 21% based on a market size of $152B) then there’s potential to reach 31% of revenue from AI by 2027. Both are speculative but also reasonable given Dell’s dominance in servers.

Truly, Dell is a different profile than Super Micro as Dell is a more conservative, blue chip stock and Super Micro is a high-flier that was a small cap less than a year ago. Super Micro has also announced its intent to raise $2 billion from an equity sale compared to Dell’s $836M buyback program this year alone while also offering a rare dividend among tech stocks.

Dell has a net margin of 5.2% and adjusted net margin of 7.2% which is lower than Super Micro’s at 8.1% and 9%, respectively. However, Dell has scale to help offset a lower margin.

On the bottom line, Dell is trading well at a forward PE ratio of 16.7 above its 3-year median at 11.3. However, if/when Dell is re-rated as an AI stock, there is plenty of room as most AI peers are trading at a 40-50 forward PE ratio.

Technical Analysis

By Knox Ridley

There are two scenarios that best fit the price action of Dell. The direction that we break out of the range between $107 and $137 will determine what path we game plan for.

Green – This scenario would have Dell decisively breakout above $137 on expanding volume and in a straight line. This would signal that we are around the halfway mark of a large degree 5 wave pattern. This would be targeting $275 – $395 before the next notable pullback.

Red – This scenario fits well, especially considering the move off the 2022 low is a clean 5 wave pattern. Note that momentum is fading as price is pushing higher. This fits with a coming pullback, which would start a 4th wave toward the $70 region. A decisive move below $107 would likely put a notable top in for Dell, and favor the red scenario.

There has been considerable institution activity above the $107 region. Either this is accumulation for the next leg higher, or it is distribution for the red scenario. This increases the importance of this region.

Conclusion:

The last earnings report showed signs of early shoots for Dell’s AI potential. If enterprise servers are going to see an AI overhaul, then it makes sense that Dell will participate. What we like about Dell is its conservative blue-chip profile, characterized by a company that operates at scale, offers a buyback program and a dividend. This offers some diversification compared to Super Micro’s risk-on profile.

Even though Dell is optimistic about FY25 growth, in large part thanks to AI server growth and an expected uptick in storage, the company expects input costs to increase further in FY25. This is going to weigh on margins, driven by anticipated inflation for component costs as the year progresses. They also anticipate the pricing environment to be more competitive in FY25, further putting pressure on margins to shrink. This will be a strong focus for calls, as it is for Super Micro, as well.

We would love to participate in Dell if the re-rating on valuation comes sooner rather than later. However, we also want to be cautious as the 5% AI revenue is quite low. We are likely to wait for the breakout detailed above instead of front-running this stock as any breakout will still provide plenty of time to capture Dell if it does get a new valuation.

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Baidu: An Emerging China-AI Momentum Play

Posted on April 5, 2024June 30, 2026 by io-fund

The I/O Fund team believes that Baidu could make for an interesting momentum play. We define a momentum position as one where technicals lead, where we respect the stops, and where the fundamentals may not be perfect for one reason or another. For Baidu, risk from China is too high for the stock to be considered for anything more than momentum. Due to the emphasis on technicals, we only release momentum plays to Advanced Members.

Liquidity and Valuations

By Knox Ridley

China’s property sector accounts for nearly 30% of their GDP. This is far greater than any other developed nation, and exposes them to broad based deflation as their real estate market continues to unwind.

The Chinese property downturn is in its 3rd year, as new housing starts are down 60% compared to pre-COVID levels. This is a shocking slowdown in a short amount of time, yet, due to centralized control of the economy, we have yet to see housing prices fall in accordance with demand. While we have seen eight straight months of house prices decline in China, with recent data showing a 1.4% YoY drop, which is an acceleration to the downside from last month’s 0.7% YoY drop, the Chinese government is providing a wide range of defensive measures to prevent a full scale crash in the housing market.

For example, developers and lenders are allowed to delay recognizing bad loans in an effort to avoid bankruptcies, which is helping overextended banks stay solvent. We are also seeing rules on how listings must be priced in an attempt to prevent price discovery based on an oversupply in the face of decreasing demand.

How these measures will play out is yet to be seen. However, the one measure that is of interest to Chinese risk assets is how the People’s Bank of China (PBOC) has reacted. We have seen a large expansion of their balance sheet, which increases liquidity in the Chinese economy. This matters, as Chinese equities have a high correlation to liquidity expansions and contractions.

This correlation to expanding liquidity in China is one reason why we are interested in a small momentum allocation to Chinese equities. It is apparent that the CCP is adamant about preventing contagion from their struggling real estate markets. Furthermore, they have announced their inflation, growth and employment targets for 2024, which is highly supportive of a continuation of easing liquidity.

The other reason can be seen in the fundamentals. Since topping in February of 2021, the popular Chinese ETF, FXI, is currently down 52%, while the tech focused Chinese ETF, CQQQ, is down nearly 70% from its 2021 highs.

This has created some appealing valuations within Chinese tech. Baidu is trading at a 13.2x trailing PE ratio and a 8.9x forward PE ratio, as well as a 2x PS ratio and a 7.4x price to free cash flow ratio. Compare this to American search and generative AI rival Alphabet, which is trading at a 26.2x trailing PE, a 19.3x forward PE, and a 6.6x PS and 28.2x P/FCF ratio.

Baidu is trading at a significant discount relative to its three-year medians for these valuation metrics, though revenue growth next quarter risks declining and EPS growth is expected to be negative in two quarters this year.

However, as a whole, Chinese stocks have been deeply discounted, and the variegated risks from the economic risks discussed here, along with mounting geopolitical risks, has investors looking elsewhere for gains. This has created some attractive valuations within a market that is not correlated to the US markets.

Technical Outlook

How these risks and reactions from the Chinese government are getting baked into the price is interesting. For one, the Shanghai Composite Index (SSE) has broken a trendline that has been in place since 2006. Price has reclaimed this trendline, which is another reason why we are interested in this sector. When this trendline breaks, and if a retest had failed, then it would be a rather large problem for Chinese equities.

As of now, if SSE can break above the 3315 resistance, then we could see a nice swing higher into 2024/2025. How this pattern can be counted is in two general ways. The most bearish one would have us in a large degree 2nd wave. This count would have us, likely, test the 3315 region before rolling over. The other count I’m tracking would have us in a large degree B wave. This count would have us breaking above 3315, at minimum. Both counts do not look favorable for the Chinese markets on a long-term basis, which is why any plays we initiate will come with stops and targets.

My interpretation of the price action can be best counted in 2 general ways. The red count is the most bearish. It has us completing the A wave of a larger 2nd wave. The green count has us in the start of a new cyclical bull market within a larger secular bear market. Both scenarios can account for the setups we are seeing within the Chinese stock market.

Baidu’s Chart:

There are two counts that I am tracking in BIDU:

Green – we are about to start the C wave of a Zig-Zag correction. Long-term, this would be a bear market rally; however, the C wave is targeting ~100% gains, from current levels.
Blue – We have a first and now second wave in place in a large degree 5 wave move higher. This would be wave 5 of a very large 5 wave pattern.

The bounce off of the October 2022 low appears to be a 5 wave move. This has been followed by and overlapping, messy correction that is making a higher low, so far. This favors the two bullish counts listed. If we do see a breakdown below $73.50, it will invalidate these two bullish outcomes. Furthermore, the next breakout bounce must be a 5 wave move higher, and it needs to break over $114. This would likely be our signal to buy, with a stop to sell our position if we then move under $93.

ERNIE Versus ChatGPT: Baidu Quickly Catching Up

By Damien Robbins

Baidu is making strides in generative AI, evidenced via rapid growth in its generative AI offering ERNIE Bot. This rapid growth in consumer adoption of its ERNIE chatbot and strong initial adoption of its enterprise APIs are a positive sign for AI cloud helping drive a revenue acceleration for Baidu. We’re already seeing strong interest from leading consumer firms to integrate ERNIE – Samsung will integrate ERNIE in its S24 smartphones, Apple is in discussions to use ERNIE in devices in China, while Great Wall Motors will use ERNIE for an in-vehicle assistant.

Daily queries on ERNIE rose 190% QoQ to more than 50 million. Baidu noted that queries in the first half of November were 50% higher month-over-month relative to October, while daily queries had reached tens of millions. For context, ChatGPT had 60 million daily queries in August last year with over 1.4 billion monthly visits.

For Baidu, what’s important to watch is the growth trajectory of ERNIE, and if it can continue to show strong growth trends in both enterprises adopting APIs as well as within daily queries, as that suggests usage remains high. Baidu is expecting to see more enterprises build LLMs using ERNIE’s APIs, which will serve as a growth driver for AI cloud revenue as model deployment and usage increases.

OpenAI has shown signs of successfully monetizing ChatGPT via both APIs and a consumer-facing subscription to unlock more advanced features. OpenAI reached $1.3 billion in ARR in October, which then rose to $2.0 billion in December. Baidu’s generative AI and foundation model revenue was just $90 million (RMB656 million) in Q4, so there’s still a lot of catching up needed with OpenAI in terms of revenue.

Apollo Go: Moonshot Project Making Steady Progress

Baidu is quickly establishing itself as one of China’s outright leaders in autonomous driving via Apollo Go, and while the robotaxi services continue to expand, it remains at a small scale.

Apollo Go announced two significant milestones in 2024 alongside the 5 million cumulative rides: it launched a 24/7 driverless service in Wuhan and launched a highway pilot in Beijing to Beijing Daixin Airport, the world’s first robotaxi airport service in a capital city. Expanding service hours, fleet size, testing in new cities and expanding testing zones within cities are all necessary steps for Apollo Go’s expansion; however, fleet sizes do still remain small, and its geographic presence has not yet proliferated rapidly.

Management has signalled a willingness to push forward with a more rapid expansion path once it reaches UE (unit equivalent) breakeven in Wuhan. Robotaxis are operating in only 10 cities at the moment, and Wuhan’s fleet size reached just 300 vehicles in September, so a swift expansion to more cities with larger fleets opens the door for substantial revenue generation; however, given the small current scale, this is more of a moonshoot bet for 2024 (much in the sense that Tesla’s FSD is a moonshoot) rather than a contributor to the near-term thesis.

Baidu’s Revenue

By Royston Roche

Baidu’s Q4 revenue grew by 2.6% YoY to $4.92 billion. Revenue in local currency grew by 6% YoY to RMB 35 billion. Analysts expect revenue to be flat next quarter and is expected to accelerate to 7.3% YoY growth in Q2 and 7.6% in Q3. It’s clear with the chart below that Baidu’s revenue growth will bottom in Q1, barring any unforeseen issues.

Revenue from Baidu Core grew by 7% YoY to RMB 27.5 billion or $3.87 billion. Baidu Core includes online marketing that grew 6% YoY to RMB 19.2 billion or $2.7 billion and non-online marketing revenue that grew by 9% YoY to RMB 8.3 billion or $1.17 billion, primarily helped by the growth in AI cloud revenue.
Revenue from streaming service iQIYI, popularly known as ‘Netflix of China’ grew by 2% YoY to RMB 7.7 billion or $1.09 billion.

The company’s investment in AI has started yielding results and is expected to contribute more meaningful to revenue in 2024.

AI cloud revenue grew by 11% YoY to RMB 5.7 billion or $802.8 million, accelerating from a (2%) decline in Q3, helped by the strong demand for large language models.

Robin Li, co-founder and CEO said in the earnings call, “AI Cloud revenue grew by 11% year-over-year to RMB5.7 billion and continue to improve profitability in the fourth quarter. Revenue from Gen AI and foundation model represents 4.8% of our AI Cloud revenue in Q4. The increasing demand for model building played a significant role in this accelerated revenue growth, along with increasing distributions from inference.AI Cloud revenue grew by 11% year-over-year to RMB5.7 billion and continue to improve profitability in the fourth quarter. Revenue from Gen AI and foundation model represents 4.8% of our AI Cloud revenue in Q4. The increasing demand for model building played a significant role in this accelerated revenue growth, along with increasing distributions from inference.

We have seen a growing number of enterprises, in particular, tech companies turning to our public cloud to build their models. Additionally, the AI cloud revenue generated by Baidu Core, other business groups, such as the Mobile Ecosystem Group and the Intelligent Driving Group was about RMB2.7 billion in Q4. Within the Q4 internal cloud revenue, Gen AI and foundation model accounted for about 14%. On a combined basis, the total internal and external AI Cloud revenue was RMB8.4 billion in Q4, with Gen AI and foundation model contributing around RMB656 million.” On a combined basis, the total internal and external AI Cloud revenue was RMB8.4 billion in Q4, with Gen AI and foundation model contributing around RMB656 million.” The total from both internal and external AI cloud revenue was $1.18 billion in USD and Gen AI and foundation model contributed around $92.4 million.

Margins

The gross margin and the operating margin have improved on a YoY basis, but sequentially, there is a dip due to the higher costs in the AI cloud business. Management believes that the margins will improve in the long-term in the AI cloud business as revenue increases. The net margin was down mainly due to the equity method investment adjustments, which vary each quarter and there was one-time adjustment related to preference shares. However, we saw an uptick in the adjusted net margin sequentially and on a YoY basis.

The gross margin was 50.2% compared to 48.8% in the same period last year and 52.7% in the September quarter. The gross margin partially benefitted from lower content costs, but the higher costs in the AI cloud business were a drag. Management believes that the AI cloud margins will improve in the long term and replied to an analyst question on the margin trend for 2024.

“We are pretty confident in maintaining profitability for our AI Cloud. For Enterprise Cloud, we should be able to consistently improve gross margins for the legacy cloud businesses. As for Gen AI and LLM businesses, the market is still at a very early stage of development. So we should hold a pretty dynamic pricing strategy to quickly educate the market and expand our penetration into more enterprise customers. So we believe over the long term, the new business should have higher normalized margins than the traditional cloud businesses.”As for Gen AI and LLM businesses, the market is still at a very early stage of development. So we should hold a pretty dynamic pricing strategy to quickly educate the market and expand our penetration into more enterprise customers. So we believe over the long term, the new business should have higher normalized margins than the traditional cloud businesses.”

The operating margin was 15.4% compared to 13.9% in the same period last year and 18.2% in the September quarter. The SG&A expenses remained flat YoY, but R&D expenses increased 11% YoY due to the higher server depreciation expenses and server custody fees related to Gen AI R&D.

The net margin was 7.4% compared to 15% in the same period last year. The net margin was down primarily “due to a pickup of losses from an equity method investment as a result of a modification of certain terms of the underlying preferred shares.” The adjusted net margin was 22.2% compared to 16.2% in the same period last year and 21.1% in the September quarter. GAAP EPS was $0.95 compared to $1.97 in the same period last year. Adjusted EPS was $3.08 compared to $2.21 in the same period last year. The analysts expect adjusted EPS to grow 2.3% YoY in Q1 and decline (6.3%) in Q2.

On an annual basis, Baidu is expected to grow fiscal year EPS (-2%) in FY2024 and then 10% over the next two years before EPS is expected to rapidly accelerate in growth in fiscal year 2027 to +33%. Overall, analysts are not expecting any further negative growth beyond FY2024.

Cash Flow and Balance Sheet

The operating cash flow was $1.5 billion or 30.4% of revenue compared to $1.14 billion or 23.8% of revenue in the same quarter last year. The free cash flow was $980 million or 19.9% of revenue compared to $859 million or 17.9% of revenue in the same quarter last year. Management attributed to “Mobile ecosystem exhibited solid performance across revenue margin and cash flow.” They expect mobile ecosystem (includes Baidu App, Ernie bot, Haokan, and Baidu Post, among others) to continue to generate steady profits and cash flows in 2024.

Cash, restricted cash, and short-term investments were $28.93 billion, and debt was $10.77 billion, compared to $27.78 billion and $10.93 billion at the end of the September quarter. The company repurchased $318 million worth of shares in Q4 and totaled $669 million under the 2023 share repurchase plan.

Earnings Call

The company’s investments in AI are expected to yield several billion RMB revenue in 2024. Robin Li said in the earnings call:

“Since Q2 2023, we have actively utilized ERNIE to revolutionize our products and services, creating AI native experiences. We believe real applications are essential to unleashing the full business potential of ERNIE and ERNIE Bot. Recently, we began to generate incremental revenues from ERNIE and ERNIE Bot. In the fourth quarter, we earned several hundred million RMB primarily from ad technology improvement, and helping enterprises build their own models. I'll provide a more detailed explanation in the business review section.Recently, we began to generate incremental revenues from ERNIE and ERNIE Bot. In the fourth quarter, we earned several hundred million RMB primarily from ad technology improvement, and helping enterprises build their own models. I'll provide a more detailed explanation in the business review section.

Looking into 2024, we believe this incremental revenue will multiply to several billion RMB primarily from advertising and AI cloud building.”Looking into 2024, we believe this incremental revenue will multiply to several billion RMB primarily from advertising and AI cloud building.”

The company launched a new version of AI model Ernie 4.0 in Q4 2023, which it claims will rival Chat GPT-4. Management mentioned in the earnings call that the Ernie API is used in Samsung S24 and Honor Magic 8.0 (Honor was spun off from Huawei in November 2020).

“As the front runner in AI, Baidu probably became the first public company globally to launch a GPT model with our EP 4.0 standing high as the most powerful foundation model in China. ERNIE continues to gain market recognition, as evidenced by ERNIE API calls from multiple well known companies.

Notably, Samsung uses ERNIE API on its Galaxy S24 5G sales. Honor uses ERNIE API in its Magic 8.0 and Autohome using ERNIE API to power multiple AITC apps.”

The management also highlighted the increasing use of Ernie by enterprises as the CEO stated, “In December about 26,000 enterprises are actively using ERNIE through API on a monthly basis, increasing 150% quarter-over-quarter. And ERNIE is now handling more than 50 million queries every day. That's up 190% quarter-over-quarter is a significant rise in third party quality.”

The company is using AI to increase revenues in advertising.

“In the fourth quarter Baidu’s core online marketing revenue increased by 6% year-over-year, driven by verticals in travel, healthcare, business services, and others.

In Q4, we generated several hundred million RMB incremental ad revenue due to improvements in ad tech.”

The company expects to achieve operational break-even in 2024 for Apollo Go.

“Our intelligent driving business continued to focus on achieving new breakeven for Apollo Go. In Wuhan, Apollo Go's largest operation, about 45% of our orders were provided by fully driverless vehicles in Q4. This metric surpassed 50% in January. The increase is because we intensified operations during peak hours in areas with complex traffic conditions and further expanding our operating area in the past few months. This development resulted from our ongoing efforts to improve technology through safety — through safely operating Apollo Go on public doles.

In China, Apollo Go provided about 839,000 ride in the public in Q4, marking up 49% year-over-year increase. In early January, the cumulative rides offered by Apollo Go exceeded 5 million. The substantial data collected from operations will further help us enhance the efficiency of safe operations.

Looking into 2024, we will remain focused on getting closer to Apollo Go's UE breakeven target and managing our costs and expenses to reduce losses in intelligent driving. Upon reaching UE breakeven, we plan to swiftly replicate our successful operations in Wuhan to other regions.”

Other Key Metrics

Baidu’s PaddlePaddle AI developer community has reached 10.7 million developers by the end of 2023. Developers created 860,000 models on PaddlePaddle by the end of last year.

Enterprises actively using ERNIE’s APIs on a monthly basis increased 150% QoQ to 26,000 in Q4. Baidu opened ERNIE APIs to enterprise customers at the end of August after receiving approval to deploy ERNIE on a larger scale.

Daily queries on ERNIE rose 190% QoQ to more than 50 million. ERNIE also reached a 100 million user milestone in December, less than five months after launching in August. OpenAI reported in November that ChatGPT had approximately 100 million weekly active users.

Baidu App’s Monthly Active Users (MAUs) grew by 3% YoY to 667 million in December 2023 and has been slightly lower than 5% growth in September 2023.

In Q4, Apollo Go rides grew by 49% YoY to 839,000. The company achieved 5 million cumulative rides from Apollo Go in January this year, marking a major milestone.

Conclusion:

Given the emphasis on AI in the markets combined with China pushing for its domestic tech to be the predominant tech used by its citizens, we foresee a scenario where Baidu emerges as a strong choice for those who want to participate in lower valuations. China’s population can be a catalyst for ERNIE to exceed Chat-GPT in user adoption. With that said, China is risky, ERNIE’s success is still quite speculative given the low revenue, and this is not a stock we can consider as quality. We will use technical analysis to its fullest as we attempt to participate.

Royston Roche and Damien Robbins, Equity Analysts at the I/O Fund, contributed to this article.

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I/O Fund Catapults to 131% Cumulative Performance Due to Leading AI Allocation: Official Press Release

Posted on April 3, 2024June 30, 2026 by io-fund

Actively managed portfolio and research site announces triple-digit returns over a four-year period.

I/O Fund, a tech research site that actively manages a real-time portfolio, announces returns of 57% in 2023 with a cumulative return of 131% since inception. This compares to popular tech ETFs that have cumulative returns of (-10%) in the same time period for an outperformance of 141% in less than four years.

In 2023, the I/O Fund had seven positions beat the Nasdaq-100. According to the Wall Street Journal’s Winners’ Circle ranking of hedge funds, a performance of 57% would hypothetically rank the I/O Fund portfolio as #4 across 1,191 funds.

Leading AI Allocation Drives Impressive Cumulative Returns

Since its inception, the I/O Fund has rivaled and exceeded Wall Street’s best firms. A few highlights of the I/O Fund’s performance include:

The I/O Fund’s cumulative returns since inception of 131% compared to popular tech ETFs at (-10%) with a relative outperformance of 141% in less than four years.
The I/O Fund’s cumulative returns outperformed the Nasdaq-100 by 49% and outperformed the S&P 500 by 68%.
Since inception, the I/O Fund has a lead over institutional technology portfolios by as much as 157%.
In 2021-2022 we issued 9 buy alerts for Nvidia with the lowest at $108.51 on October 13th, 2022 for gains of up to 775% in eighteen months.

Impeccable timing on Nvidia and other AI stocks led to the I/O Fund having one of the highest allocations to AI on record at 45%. Previously, our firm was early to cloud in 2019, then rotated into AI in 2022.

Our high allocation to AI of 45% in 2023 was timely as it allowed us to beat Wall Street to the explosive trend of AI. Nvidia was a strong call by our firm and was our largest position at the time of its knockout report. Most importantly, our track record places us as a front runner within this trend, and we are confident we will find additional winners. We exited the year with an AI allocation of 52%.

The I/O Fund began as an experiment to see if a team of retail investors can beat Wall Street. We are setting out to answer the million-dollar or billion-dollar question, which is how to safely participate in tech while limiting the downside. We do not believe this question has been truly answered. Hedge fund managers often pick one tech stock or a few tech stocks and place them alongside a diversified portfolio as a means of limiting the downside. However, tech is the world’s most valuable industry – no other industry offers you the opportunity for life-changing gains repeatedly, year after year. Therefore, diversifying away from tech certainly helps protect the downside but it greatly limits the upside, as well.

That leads to our mission, which is to offer an all-tech portfolio that participates in the upside yet aims to limit the downside. That’s how we hope to set our portfolio apart. Our comparison chart proves we are off to a great start in answering this problem.

These results were independently audited by an accounting firm in San Francisco. More details can be found on the I/O Fund website.

If you had invested $10,000 with the I/O Fund’s picks versus other all-tech portfolio at inception, the difference would be a portfolio value of $23,052 with IOF versus $8,982 with institutional tech-focused portfolio. The difference in value is 157%.

You can read the official Business Wire press release below. A copy of the verified procedures and the verified performance percentage is shared with I/O Fund customers in the paywall article “2023 Audited Returns.” To become a customer of the I/O Fund, learn more here.2023 Audited Returns.” To become a customer of the I/O Fund, learn more here.

Full Press Release from BusinessWire:

Published March 27th, 2024

The I/O Fund grew to prominence in 2023 due to famously calling Nvidia an AI stock in 2018 and repeating the thesis over 25 times including Tier 1 media appearances. In 2021, the firm publicly stated that Nvidia would surpass Apple to become the world’s most valuable company. At the time, this was inconceivable.

Since its inception, the I/O Fund has rivaled and exceeded Wall Street’s best firms.

The I/O Fund’s cumulative returns since inception of 131% compared to popular tech ETFs at (-10%) with a relative outperformance of 141% in less than four years.
The I/O Fund’s cumulative returns outperformed the Nasdaq-100 by 49% and outperformed the S&P 500 by 68%.
Since inception, the I/O Fund has a lead over institutional technology portfolios by as much as 157%.

These results were independently audited by an accounting firm in San Francisco. More details can be found on the I/O Fund website.

“We are unrivaled when it comes to choosing artificial intelligence winners. Nvidia was our highest allocation, yet there are many other AI winners the I/O Fund is poised to capture. We beat Wall Street to an explosive moment for AI and we plan to beat Wall Street again to other AI leaders,” said Beth Kindig, CEO and Lead Tech Analyst.

Lead Tech Analyst, Beth Kindig, was dubbed “Queen of Nvidia” by Fox Business News when she stated on live TV that her firm was sticking with Nvidia after the company reported a $2.5 billion revenue miss in 2022.

Kindig’s firm sent out 9 trade alerts under $200 for Nvidia in 2021 and 2022 with one trade alert as low as $108.51 on October 13th, 2022 for gains of up to 775% in under eighteen months. Due to Kindig’s unique approach to tech analysis, the portfolio holds a handful of stocks she believes will ultimately become large AI winners.

Impeccable timing on Nvidia and other AI stocks led to the I/O Fund having one of the highest allocations to AI on record at 45%. Previously, the firm was early to cloud in 2019, then rotated into AI in 2022.

“We were early to Nvidia’s AI story and we are confident we will be a frontrunner in finding the next big AI stock. The AI trend is the best investment opportunity of our lifetime, and we offer an invaluable resource to those who want to capture it,” said Beth Kindig, CEO and Lead Tech Analyst.

In 2023, the I/O Fund had five positions with returns over 100% and seven positions beat the Nasdaq-100.

The I/O Fund portfolio manager, Knox Ridley, uses risk management tools such as intermarket analysis, Elliott Wave and Gann theory to increase the resiliency of the portfolio returns compared to a buy-and-hold approach.

“The million-dollar or even billion-dollar question that has yet to be answered is how to not simply participate in tech, which anyone can do, but rather how to safely participate in tech. The I/O Fund set out to be the first to answer this question, which is why our returns significantly outperform buy-and-hold strategies,” said Knox Ridley, Portfolio Manager.

In 2022, the I/O Fund partnered with Vincent Duchaine of WealthUmbrella to develop an automated hedging signal. Duchaine is an A.I. and Machine Learning University Professor who worked with Ridley to create an automated risk-on/risk-off signal for retail investors. The hedge is the primary tool the I/O Fund uses to hold onto gains from AI and other profitable tech trends irrespective of a broader selloff.

Ridley and Duchaine provide exceptional analysis for crypto markets including Bitcoin. The duo published analysis that was prescient in identifying the bottom in 2022 at $16,500 after identifying the previous top in 2021 at around $58,000.

The I/O Fund hires an independent accounting firm to conduct its periodic audits. It reviewed statements from January 1st, 2023 through December 31st, 2023 from the company’s brokerage and blockchain accounts and found no discrepancies.

For more information, including pricing plans for the I/O Fund’s research, visit their website at https://io-fund.com. Premium members access a portfolio of 10+ positions, webinars, institutional-level research, real-time trade notifications and more. The firm also offers a free weekly newsletter.

Commitment to Transparency and Accountability

At the heart of I/O Fund, we believe that transparency is key to our success over the last few years. We keep our members in the loop with real-time trade alerts and audited performance reviews. This raises the bar on accountability as no other retail site goes to these lengths by offering an actively managed and transparent portfolio.

Over the past three years, the I/O Fund has invested over $165,000 into accountability and transparency for our members. When we launched in July of 2019, for the first year or so, we used a forum hosted by Tribe for our trade alerts. By January of 2021, we had migrated to SMS and email tools that were the least likely to experience an outage for our real-time trade alerts. This costs us $30,000 to $40,000 per year, depending on our trading frequency.

In addition to this, we use an auditor from a large firm in San Francisco to mathematically review and verify the performance of our I/O Fund portfolio trading account and crypto account. The process is quite extensive and it takes up to four months to complete. This costs $4,500 per audit and we’ve completed five audits for a total of $22,500 spent on this process.

Premium members can access the verified procedures, verified performance and engagement letter behind our paywall in the article “2023 Full Year Audited Returns.”

I/O Fund Analyst, Beth Kindig, recently wrote “The Importance of Verified Returns and Risk Management for Retail Investors” which identifies three key reasons retail tends to underperform professional investors. The I/O Fund has worked diligently and made sizable investments to empower retail investors by addressing these issues which include automation, risk management tools and being the only retail firm to offer a verified performance.

The I/O Fund Experiment: Empowering Retail Investors

The I/O Fund's mission since inception is to help retail investors beat Wall Street in the competitive and complex tech sector. Our experiment in providing institutional-level research and tools to retail investors has been successful since we first launched in 2019. This includes having a cloud-focused portfolio in 2020, beating our other all-tech portfolios in the tough years of 2021 and 2022, and pivoting to a high AI allocation well ahead of 2023, which helped us triple our performance on a cumulative basis.

If you are ready to optimize your investment strategies, join the I/O Fund Community and experience the advantages of accountability, innovation, and exceptional performance. Subscribe to our premium analysis service to access real-time trade alerts, weekly webinars that review our positions plus the broad market, a forum to connect with other skillful investors, and deep dive research from a Silicon Valley trained analyst who is frequently in Tier 1 media. Learn about our Premium Services here or Explore Pricing Options here.