AppLovin Corporation: Emerging Ad Tech AI Leader

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

Intro

AppLovin is an ad-tech company that saw a strong acceleration in growth and margins this past year driven by AXON 2.0, an AI-powered advertising engine that efficiently acquires users for mobile game publishers.

At IPO in 2021, AppLovin made most of its revenue from its Apps segment, a portfolio of free-to-play mobile games. This was historically seen as a cost center as AppLovin could gain a valuable trove of first-party data to feed into improving its user acquisition algorithms. However, management has since made an important pivot to grow its Software Platform segment, composed of MAX, its supply side platform (SSP) and AppDiscovery, its demand side platform (DSP).

This was because as MAX grew, AppLovin had a better source of data and gradually restructured its Apps business to focus on maximizing profitability. This transition made sense given the drastically different margin profile of the two segments, with a 15% long-term adjusted EBITDA margin profile for Apps compared to the over 73% adjusted EBITDA margin of the Software Platform segment.

After Apple announced its App Tracking Transparency (ATT) policy in 2021 which limited advertisers’ ability to track users across apps, AppLovin’s data became even more valuable as advertisers sought out AppDiscovery’s user acquisition algorithms to acquire high value users cost-effectively.

Furthermore, AppLovin’s CEO has repeatedly made clear that its AI recommendation engine has applications far beyond mobile gaming. It acquired Wurl, a Connected TV (CTV) SSP, in 2022 as an initial foray into CTV.

With a mobile ad network significantly larger than others in the market, AppLovin’s end-to-end advertising stack gives it a unique data advantage which enables superior algorithms that deliver better ad conversion rates, leading to higher return on ad spend to advertisers and higher spending, which attracts more inventory, leading to even better algorithms and so on.

Provided we can get the stock at a reasonable valuation, due to a durable data advantage, we believe AppLovin will be well-positioned to outperform.

Business Overview

AppLovin’s business consists of two segments: a fast-growing, high margin Software Platform and a slower-growing, lower margin (but still profitable) Apps segment consisting of its portfolio free-to-play mobile games. Our focus is on the software segment as it continues to drive top-line growth, powered by its AXON 2.0 AI-engine which we will discuss below.

Software Platform Segment (66% of Revenue, 87% of Adjusted EBITDA in Q2’24)

AppLovin’s software platform enables mobile gaming publishers to monetize their ad inventory, acquire new users more cost-effectively, and optimize their ad spend through three solutions:

MAX is AppLovin’s mediation platform, a type of supply-side platform (SSP) which is used by publishers to maximize the value they’re able to sell advertising inventory for by running real-time auctions across a wide range of ad networks. The service is free to use for publishers, with MAX charging advertisers a fee of 5% of header bidding. AppLovin acquired MoPub from Twitter for $1.05 billion in cash in 2022, turning MAX into by far the largest mediation platform for mobile gaming today.

AppLovin’s largest competitor in this segment is Unity Software, which has its own “Grow” segment where it offers tools to monetize and acquire mobile gaming users. It completed a $4.4 billion merger with ironSource in 2022, which was intended to remedy Unity’s own troubled mediation software as ironSource had its own leading mediation platform and tools for creating and managing ad campaigns.

AppLovin actually offered to acquire Unity at $58.85 per share in August 2022 before its planned merger with ironSource. Unity turned down the offer and continued with the merger, which has not proven successful. In January 2024, Unity cut 25% of the combined company’s employees and the ironSource founders left shortly afterwards. In its recent Q2’24 earnings report, Unity’s Grow solutions revenue was $296 million, down 9% YoY and up 1% QoQ after two quarters of QoQ declines. This was a far cry from AppLovin’s own Q2’24 result of 75% YoY and 4.9% QoQ growth for its software segment to $711 million.

AppDiscovery, the majority of the software platform’s revenue, is AppLovin’s demand side platform (DSP) that leverages machine learning to identify high value users that are mostly likely to download and engage with an app and help game publishers to earn the highest return on ad spend. Advertisers pay AppLovin, typically on a cost-per-install performance-basis, who passes on the spend to publishers on a cost per impression model.

Adjust is a SaaS solution that provides analytics to optimize ad performance. It generates revenue mainly through an annual software subscription fee.

Finally, Wurl, a company that AppLovin acquired in 2022, essentially does what APP does but for the connected TV industry. It helps video content creators distribute, monetize, and acquire new users. Wurl generates revenue primarily from content companies which typically pay Wurl on a usage-basis.

Apps Segment (34% of Revenue, 13% of Adjusted EBITDA in Q2’24)

AppLovin’s other main business segment is Apps. AppLovin owns or partners with ten studios worldwide which have published over 200 free-to-play mobile games – mostly in casual and card game genres which are more predictable and target a wider audience.

These apps are monetized through in-app purchases by users (68% of apps revenue in H1’24) as well as advertising (32% of apps revenue in H1’24), with in-app advertising growing slightly more at 8.8% YoY compared to in-app purchases growing at 5.1% YoY.

This segment has become a secondary focus for AppLovin, and they’ve stated their openness to divestitures though they are waiting for the market to improve. The number of studios they partner with has also dropped from 14 in Q2’21 to ten today.

AppLovin competes against other publishers like Activision, Tencent, and Zynga. Notably, many of these companies are also customers for the software segment, with the CEO noting on the Q2’24 call:

“At this point, our platform is so successful in mobile gaming, it's very, very hard for any publisher to look the other way. And so we've gotten a lot more adoption across even those publishers. There isn't really a customer that I know of in mobile gaming that does not find success — scalable success on our platform at this point today.”There isn't really a customer that I know of in mobile gaming that does not find success — scalable success on our platform at this point today.”

Acceleration from AI-Powered Platform

AppLovin’s revenue growth saw a dramatic acceleration over the last four quarters, improving from -3.36% YoY growth in Q2’23 to 44% YoY growth in Q2’24, driven by the Software Platform which rose from 54% of revenue to 64% over the same period.

Management accredited a large part of this acceleration to the launch of AXON 2.0 in early 2023, with growth from this pivot first showing up in the numbers in Q2’23. AXON leverages data from its MAX mediation software to train AXON, an AI-powered advertising engine that drives AppLovin’s AppDiscovery product.

MAX gives AppLovin data on what different ad networks are willing to bid for ad placements, allowing AXON to competitively bid for ad placements to maximize return-on-ad-spend.

Management effectively encapsulates why the combination of their algorithm and their data gives them a first mover advantage in the Q1’24 call:

“We built cutting-edge AI technologies. It's a multi-year effort for anyone to be able to look at that and go be able to replicate that. And I don't even think it's conceivable that it's something that can be replicated. So, by the time there's anyone that's actually going to be able to compete against our technology, we will be years advanced from where we are today because we're continuing to evolve the technology.multi-year effort for anyone to be able to look at that and go be able to replicate that. And I don't even think it's conceivable that it's something that can be replicated. So, by the time there's anyone that's actually going to be able to compete against our technology, we will be years advanced from where we are today because we're continuing to evolve the technology.

Second piece is, we can open-source our code tomorrow. We can hand-out the code to competition. It still won't matter because these technologies need data that they're achieving in the marketplace to be able to drive themselves. So, if you think about like AI models, like what makes an AI model impactful? Well, they're utilized and that data feedback that they get from human behavior retrains the model and allows the model to continue to improve itself.”We can hand-out the code to competition. It still won't matter because these technologies need data that they're achieving in the marketplace to be able to drive themselves. So, if you think about like AI models, like what makes an AI model impactful? Well, they're utilized and that data feedback that they get from human behavior retrains the model and allows the model to continue to improve itself.”

Given AppLovin’s reliance on user tracking to feed its algorithms and how its apps business was impacted by IDFA changes in the past, one of the largest risks are privacy initiatives by Apple and Alphabet to limit user tracking. The CEO responded to this by noting on the Q3’23 call:

“Look, we’ve dealt with privacy changes probably since 2014. Every time there’s a change on platform or with regulators, you’ve changed something in your stock, but we’re a nimble company, we’ve rewritten our core technology multiple times over the years, and we are always able to adapt and perform in the face of any of those kinds of changes.”

Management has also hinted at possible applications outside of gaming, with AppLovin launching its first web advertising campaigns for e-commerce in Q2’24 and noting its early success, with material contributions expected as soon as 2025.

“In the quarter, Q2, we launched pilot of our web advertising program…This allows an e-commerce shop that has a website to buy on our in-app inventory, the billion-plus daily active users we see in mobile gaming, a video advertisement routes that user to their shop and purchase that user in the same way that mobile game companies like purchasing users on our platform.

…Results are looking really promising, materially better than what we would have expected this early in our progression in trying to get into web advertising. So this product, we think is something that we're going to invest heavily behind, start scaling out and hopefully will show a material impact in '25 and beyond. And it is not limited to just e-commerce. It opens the door to advertising for any website of any type that wants to drive transactions that are measurable on a performance basis on our platform.”hopefully will show a material impact in '25 and beyond. And it is not limited to just e-commerce. It opens the door to advertising for any website of any type that wants to drive transactions that are measurable on a performance basis on our platform.”

In the Q2’24 call, management expanded on how improving the algorithm both as a function of more data and model improvements can lead to 20 to 30% long-term software segment growth, compared to industry growth in the low-single-digits, without accounting for expansion into new verticals.

“You've got a mobile gaming category. It's got a few percentage points of growth a year now. So let's call that low-single digits. You've got a business that as these models continue to improve from gathering more data, we think that's an extra 3%, 4% a quarter as well. So, that sort of gets you to the low end.as these models continue to improve from gathering more data, we think that's an extra 3%, 4% a quarter as well. So, that sort of gets you to the low end.

And then we've got a team that's constantly working on improving the models and any improvement that's actually develop or driven enhancement to the models that makes them more accurate, then steps you up into the higher-end of that range. And so we've got a lot of confidence in the growth goal we put out there just on a baseline basis the current business.”any improvement that's actually develop or driven enhancement to the models that makes them more accurate, then steps you up into the higher-end of that range. And so we've got a lot of confidence in the growth goal we put out there just on a baseline basis the current business.”

AppLovin Q2 Financials

AppLovin reported a decent Q2’24, with a bottom-line beat and top-line that was in-line with estimates. Guidance also came ahead of estimates on revenue and adjusted EBITDA.

The software segment again was the driver of growth, reporting 75.1% YoY growth, compared to the overall business at 44% YoY growth, but QoQ growth slowed noticeably from recent quarters.

The highlight of the report was the strong margin improvements, driven by both the continued mix shift towards higher margin software revenue as well as outperformance in apps segment margins due to a reduction in costs.

AppLovin’s Q3’24 guidance also continues to assume strong growth; if the apps segment grows at the same rate YoY as Q2, then the guidance implies a slight re-acceleration in the Software Platform segment from 44% YoY growth to 46.6% YoY growth.

Revenue and EPS

Q2 revenue grew by 44% YoY to $1.08 billion. It was in-line with expectations
AppLovin guided for Q3 revenue of $1.125 billion at the midpoint, representing YoY growth of 30.2%, beating $1.10 billion consensus by 2.2% at the midpoint.
Management remains confident that they can grow their software segment at a 20% to 30% CAGR for the long term after first mentioning the goal last quarter.

Margins

Margins remained strong with gross, operating, adjusted EBITDA, and net margins all expanding YoY and QoQ, driven by a mix shift towards higher Software Platform revenue and cost discipline. Management expects these margin improvements to continue, guiding for QoQ expansion in adjusted EBITDA margin.

Gross profit rose 62.2% YoY to $797.6 million. Gross margin was 73.8%, up from 65.5% last year and 72.2% last quarter.
Operating income rose 197.2% YoY to $391 million. Operating margin was 36.2%, up from 17.5% last year and from 32.1% last quarter.

Net income rose 285.7% YoY to $310 million. Net margin came in at 28.7%, up from 10.7% last year and 22.3% last quarter. GAAP EPS of $0.89 beat estimates by $0.16, representing YoY growth of 304.5%.
Quarterly EPS growth is expected to level off with GAAP EPS of $1.01 expected for Q3’24 and the same for Q2’25.
Adjusted EBITDA rose 80% YoY to $601 million, beating guidance by 7.3% at the midpoint. Adjusted EBITDA margin was 55.7%, beating guidance of 52.5% at the midpoint and up from 44% last year and 52% last quarter.
Management guided for further improvement in adjusted EBITDA margins next quarter, targeting $640 million at the midpoint, representing a 57% margin and beating consensus of $587 million by 9%.

Cash and Debt

Operating cash flow was $454.5 million, up 97.8% YoY. Operating cash flow margin was 42.1%, up from 30.6% last year and 37.1% last quarter.

Free cash flow was $445.5 million, up 101.9% YoY. Free cash flow margin was 41.2%, up from 29.4% last year and 36.6% last quarter. For comparison, analysts expect competitor Unity Software to only earn a 12.7% FCF margin in 2024, compared to 8.2% in 2023. Digital Turbine, another ad tech company that offers user acquisition and monetization services is expected to earn just 4.3% FCF margins for FY’25 (ending March 2025) compared to 0.8% in FY’24. Even The Trade Desk, the leading DSP, is expected to earn 27% FCF margins in 2024, compared to 28% in 2023.

For Q2 2024, the company has $3.52 billion in total debt, up slightly from the $3.50 billion in total debt reported in the previous quarter and $3.2 billion last year. AppLovin reported $460.45 million in cash and marketable securities, down from $876.2 million last year but up from $436.3 million last quarter.

AppLovin repurchased 4.2 million shares for $356 million in the quarter. They currently have $500 million remaining in its $1.25 billion repurchase authorization. AppLovin has taken advantage of the drawdown in its share price to repurchase shares, reducing its share count by 10.6% since the end of 2022.

Revenue Segments

AppLovin’s Software Platform revenue grew 75% YoY and 4.9% QoQ to $711 million, marking the sixth consecutive quarter of QoQ acceleration driven by AXON 2.0, though noticeably by a smaller percentage than previous quarters.

AppLovin’s Software Platform adjusted EBITDA grew by 90.7% YoY and 5.8% QoQ to $520.5 million. Software EBITDA margins were 73.2%, up from 72.6% last quarter and 67.2% last year.

AppLovin’s Apps segment revenue grew 7.2% YoY to $369.1 million, marking the second consecutive quarter of YoY growth.

AppLovin’s Apps segment adjusted EBITDA grew 33.1% YoY and 42.2% QoQ. Apps adjusted EBITDA margins were 21.9%, a significant improvement from 18% last year and 15% last quarter. This quarter was a standout due to a readjustment in user acquisition return goals, resulting in a 11% QoQ decrease in app segment costs. Management expects Apps EBITDA margin to normalize at 15% over the long-term.

Key Metrics

AppLovin logged 1.6 million Monthly Active Payers (MAP) for their Apps segment, a decrease from 1.8 million last quarter and 1.7 million last year. However, Average Revenue per MAP grew to $52, up from $48 last quarter and $46 last year.

Regarding the Software Platform, net revenue per installation increased 7% YoY in Q2’24 while the volume of installations increased 77% YoY, both strong indicators on the effectiveness of its AppDiscovery product.

Valuation

On the top line, AppLovin is trading at the highest it’s traded since the 2021 blowoff top at 6.5X Forward PS. We could see a re-rating of stocks to pre-2022 top line valuations, but this is incredibly speculative. Therefore, a 4X Forward PS is a better target, in our opinion. Unity is trading at a 3.7X Forward PS.

On the bottom line, AppLovin trades at a lower multiple relative to its growth rate at 11x NTM EV/EBITDA and 20.5x LTM EV/FCF. Its closest competitor, Unity, trades at 16x NTM EV/EBITDA and its revenue its projected to fall 16% YoY this year due to backlash from the controversial Unity Runtime Fee last year, poor execution on integrating ironSource, and management turnover, compared to AppLovin’s 33% projected growth.

The reason behind this discount seems to be driven by AppLovin’s shrinking Apps segment. Although it reported 7% YoY growth in Q2’24, it was down 20% from two years ago as AppLovin intentionally divests away from the segment to focus on software. However, this segment continues to be profitable, with adjusted EBITDA margins never falling below management’s 15% long-term target over the last two years.

Even if we assign zero value to the Apps segment, the business still trades at 15x LTM EV/EBITDA for the Software Platform segment alone, which grew revenue 80% YoY over the same period and continues to project 20% to 30% growth.

Another concern could be AppLovin’s period of no-growth in 2022, where revenues stagnated YoY. However, this came after blistering 92% YoY growth in 2021 and before the launch of AXON 2.0 which has driven accelerating Software Platform growth since Q2’23.

While the durability of revenue growth associated with AXON 2.0 remains difficult to predict by management’s own admission, the product is becoming stronger every quarter and that is directly translating to efficiency gains and higher growth.

Conclusion

Ad-tech is one of the industries with the most potential to be transformed by AI and AppLovin is emerging as one of the leaders with its AXON 2.0 engine. AppLovin’s core advantage comes from its superior access to data, leading to better targeting, which leads to more data and so on. We see continued strong growth for the Software Platform segment because of this, driving high growth and an improving margin profile for the company.

We continue to watch AppLovin with interest as it continues to take share within mobile gaming and expand its AI engine to additional industries. Although we are not considering a buy at this time, Knox has a trading plan, which he will share with Advanced Members in this upcoming Thursday webinar.

This analysis is a preview of what you can expect in our upcoming Discovery tier, which will provide additional analysis on new idea generation stocks that are not currently in the I/O Fund portfolio. We look forward to launching this tier late August/early September. There will be no changes to our current service tiers, rather I/O Fund Discovery is a service for those who want more new stock ideas beyond what our service currently provides. Stay tuned for more information!upcoming Discovery tier, which will provide additional analysis on new idea generation stocks that are not currently in the I/O Fund portfolio. We look forward to launching this tier late August/early September. There will be no changes to our current service tiers, rather I/O Fund Discovery is a service for those who want more new stock ideas beyond what our service currently provides. Stay tuned for more information!

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Amazon Stock: Nearing $2 Trillion Club From AWS Growth & Ads Catalyst

Posted on May 21, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on May 17, 2024,09:37am EDTForbesForbes on May 17, 2024,09:37am EDT

Amazon shares have climbed to fresh all-time highs following a double beat in the last earnings report. The company is on the verge of joining the $2 Trillion Club, driven by a 4-percentage point accelerating in AWS to 17% YoY growth combined with strong 25% growth in advertising revenue. AWS surpassed a $100 billion annualized run rate in the first quarter, with management noting that they “see more absolute dollar growth again quarter-over-quarter in AWS than we can see elsewhere.”

E-commerce is what Amazon is famous for, however, it’s AWS and advertising that are the core growth engines. This past quarter, the two combined for $37 billion in high-margin revenue. Analyst estimates point toward AWS and advertising exiting 2024 at a combined $160 billion revenue run rate. If this materializes, these segments will combine for one-quarter of Amazon’s total revenue while helping to drive 221% YoY growth in operating income.

The synergies from strong double-digit advertising growth, an AI-driven acceleration in AWS, and an increasing cash flow margin support Amazon’s push to all-time highs. Plus, there are hints that the acceleration could continue as more GPU supply comes online, and as Amazon Prime implements ads in Prime Video.

Q1 Recap

Revenue of $143.3 billion beat estimates by $0.8 billion, marking the fourth consecutive quarter of double-digit growth as Amazon’s revenue growth rate accelerated 310 bp YoY to 12.5%. EPS increased 216% YoY to $0.98, as Amazon continued to realize gains from improved operating leverage, with gross profit rising more than 53% YoY and operating income surging 221% YoY to $15.3 billion.

Amazon’s North America segment and AWS both contributed to this operating income growth. North America operating income increased more 500% to $5.0 billion, from $0.9 billion last year; AWS generated $9.4 billion in operating income, up 84% YoY (and a 37.6% margin). Put another way, AWS contributed more than 61% of Amazon’s total operating income in the quarter despite contributing less than 18% of Amazon’s revenue.

Not only is Amazon showing an ability to expand its gross margin from less than 15% towards 20% in 4 quarters, but it’s also driving more pronounced growth in operating margin, reaching double-digits for the first time.

Pictured Above: Amazon reaches double digit operating margin for the first time. Source: I/O Fund

The tangible improvements to the bottom line are evident as the growth story unfolds. High-margin AWS and advertising revenues are also Amazon’s two fastest growing segments.

AWS Seeing AI-Powered Growth

AWS re-accelerated 4 percentage points to 17% YoY growth in the quarter, as CEO Andy Jassy attributed it partly due to the “combination of companies renewing their infrastructure modernization efforts and the appeal of AWS’s AI capabilities.”

Growth has cooled rather dramatically since early 2022, where AWS was reporting growth rates above 30%, but at a $100B+ scale, AWS is driving the largest absolute dollar growth across the entirety of Amazon’s businesses.

Amazon is not providing a distinct breakout of AI’s contribution like Microsoft Azure, yet CEO Jassy commented that AWS is seeing “considerable momentum on the AI front, where we've accumulated a multi-billion-dollar revenue run rate already.”

AWS re-accelerated 4 percentage points to 17% YoY growth in the quarter, while operating income grew 84% YoY. Source: I/O Fund

In Q1, we saw evidence that AWS is benefiting from strong demand for generative AI offerings with management optimistic that increased capex will continue to bear fruit in terms of growth. Interestingly, operating expenses for AWS declined YoY, from $16.2 billion to $15.6 billion, aiding this growth in operating income.

In addition, rival Microsoft explicitly pointed out that Azure does not have the GPU capacity to meet demand, Amazon also implied that demand is possibly higher than capacity of both third-party GPUs from Nvidia as well as for its custom silicon. Management noted that in the quarter, they “continued to meet growing demand for AWS Trainium and Inferentia chips,” and explained that a “meaningful” YoY increase in capex in 2024 is being driven by high generative AI demand.

One comment in particular hints at possible capacity constraints: “given the way the AWS business model works, [the capex increase] is a positive sign of the future growth. The more demand AWS has, the more we have to procure new data centers, power, and hardware.”

Reading between the lines here implies that Amazon is working to improve availability of its in-house Trainium and Inferentia chips while also expanding its data center infrastructure and purchasing more GPUs to continue to meet high demand gen AI demand. The end result is that AWS will likely accelerate again in future quarters as supply comes online.

A Note on Capex

Amazon did not provide a full-year figure for capex, but management is anticipating a meaningful YoY increase this year, primarily to support AWS’ growth. Q1’s capex was $14 billion, which management expects will also “be the low quarter for the year.” This suggests 2024’s capex could easily top $60 billion, exiting the year in the mid-$60 billion range or higher, representing a YoY increase of at least 24%.

We’re closely tracking Big Tech’s capex plans for 2024 and how this will flow downstream to AI hardware companies. We shared more than half a dozen reports and pre- and post-earnings updates on a handful of AI beneficiaries with our premium members. Learn more here.here.

Advertising Revenue Growth Remains Strong

Advertising is Amazon’s fastest growing segment with 24% YoY growth to $11.8 billion in revenue in Q1 and its rapidly scaling. Amazon recorded its first $10B ad revenue quarter in Q4 2022, and now has reported four quarters in a row above $10B.

On a TTM basis, advertising revenue was just shy of $50 billion, a 51% increase from $32 billion just two years ago. At this rate, Amazon is set to exit 2024 with ad revenues approaching $58 billion annually. Though Amazon does not break out advertising’s operating income like it does other segments, it says it “remains an important contributor to profitability in North America and International segments.” This is primarily made from sponsored ads on Amazon’s e-commerce site and the recent addition of sponsored TV ads, including on Thursday Night Football.

It’s also worth noting that ad-tech typically has some of the best margins in the tech industry, exceeding cloud or e-commerce.

Source: I/O Fund

Analysts are already quite optimistic about the revenue trajectory and potential for Prime Video ads which launched in January of this year. For reference, Netflix reported 23 million monthly active users (MAUs) globally a little over one year after it launched. Amazon is taking a different approach to SVOD ads than Netflix, Disney and others – instead of offering a cheaper, ad-supported tier, Amazon is adding ads to all Prime Video members, and offering an ad-free plan for an additional $3/mo.

By putting ads directly in front of an estimated 150+ million viewers, Amazon can benefit both from ad revenue and incremental revenue from subscribers who pay the ad-free upcharge. Bank of America analysts estimate that Amazon could rake in $3 billion in advertising revenue this year from Prime Video, potentially up to $5 billion when including those users who pay the additional charge. Morgan Stanley is a bit more optimistic about Amazon’s new initiative forecasting $3.3 billion this year, $5.2 billion in 2025 and $7.1 billion in 2026, generating an additional $2.3 billion in EBITDA in 2024. We see a more conservative take from MoffetNathanson, which projects just $1.3 billion in ad revenue this year before rising to $2.3 billion in 2025, with ~$500 million from users paying the ad-free upcharge.

Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, as well as various stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

Unlocking Value via AWS, Ads

AWS and advertising are poised to exit 2024 at a combined $160 billion annualized run rate, or ~25% of Amazon’s estimated FY24 revenue. The two segments may help unlock more value for Amazon, given the gross and operating margin expansion the two segments are driving.

Take AWS – at $100 billion plus ARR, it’s the largest cloud provider compared to Azure at $76 billion ARR, Google Cloud at $38 billion and Oracle at $20 billion. Though AWS’ growth is lower at 17% versus >25% for rivals, it has one of the strongest margin profiles, with a 37.6% operating margin in Q1 and a 30.6% TTM operating margin.

AWS has one of the strongest margin profiles among rival hyperscalers, with a 37.6% operating margin in Q1 and a 30.6% TTM operating margin. Source: I/O Fund

In a sum-of-the-parts view, AWS could be worth $900 billion: this assumes a fair ~9x sales multiple, or a 30x earnings multiple, given that AWS may potentially generate a ~50% YoY increase to ~$30 billion in net income on a 75% YoY increase in operating income towards $40 billion. These multiples are conservatively in-line with current market valuations in cloud and AI – Microsoft trades at 13x forward sales and 33x forward earnings for 17% company wide growth, and Oracle at 6x forward sales and 21x forward earnings for single-digit growth.

Turning to ads, as the segment approaches a $60 billion run rate by the end of the year, it could fetch a $360 billion value in a similar sum-of-the-parts look. With growth likely remaining above 20%, this is again a conservatively fair market multiple of 6x forward sales, compared to a 7.6x forward sales multiple for Meta and a 6x forward sales multiple for Google.

Combined, Amazon’s two fastest growing segments could be viewed as worth at least $1.26 trillion, while also driving significant gross margin and operating margin expansion. When combined with Amazon’s remaining e-commerce and subscription businesses, which could be worth $1.2 trillion at a 2.5x multiple (a 30% discount to Amazon’s 5-year average 3.3x multiple) on an estimated ~$480 billion in revenue in 2024, there is room for Amazon’s valuation to expand towards the $2.5 trillion threshold. However, this outlook is reliant on AWS maintaining this revenue acceleration, as well as ads & AWS driving continual margin expansion.

Valuation Intact, Strong Cash Flow Growth

Amazon’s valuation is not at peak levels, with shares trading far below historical highs, unlike Microsoft which is trading at ‘Mount Everest’ valuations in regards to historical valuation multiples.

Amazon currently trades in line with its 5-year average PS ratio of nearly 3.4x, and at about 3.1x forward PS — although this is a significant increase from the 1.6x multiples at the start of 2023, Amazon’s forward PS ratio is 10% lower than early 2022.

Source: YCharts

Due to strong growth on the bottom line, Amazon is cheap on PE basis for this stock. The current PE Ratio of 52 is one of the lowest we’ve seen in the past few years, and is comfortably below the 3-year median of 67 and the 5-year median of 78. In fact, Amazon is cheaper now than it was in October 2023, despite a nearly 60% rally in shares since then.

Due to strong growth on the bottom line, Amazon is cheap on a PE basis for this stock. Source: YCharts

Earnings growth and operating cash flow growth are both expected to be strong in 2024 and extend into 2025. Amazon is estimated to report more than 56% growth in EPS this year to $4.52 before rising another 27% to $5.74 in 2025. Operating cash flow is projected to increase 45.5% to $123.6 billion in 2024 before rising another 19% to $147.4 billion in 2025.

Conclusion

In a 2022 webinar entitled “The New Kings of Tech,” our firm discussed that the first wave of AI gains will be realized in the enterprise space. We also recently debated on Real Vision that Big Tech has an undeniable advantage in AI due to possessing the capital to make the required hardware investments, and having an immediate product-market fit with their current in-house segments. Meanwhile, mid cap companies and small startups have to find customers for their AI products, and those SMB customers must be willing to absorb the high costs of AI. Meanwhile, Amazon is well positioned to capitalize on surging generative AI demand quickly with a multi-billion dollar run rate in AWS from AI products already. Combined with advertising, the two are driving strong margin expansion and aiding in both top and bottom-line growth; and in turn, this growth is creating an attractive valuation on the bottom line.

The I/O Fund has recently detailed the firm’s favorite AI stocks for premium members. For more in-depth research from Beth, including 15-page+ deep dives on the 10 stock positions the I/O Fund owns, take advantage of our biggest sale of the year in honor of our four-year anniversary and subscribe here.

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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Top 3 Ad-Tech Stocks For 2024

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

This article was originally published on Forbes on Forbes Forbes on Mar 14, 2024,07:01pm EDT

Ad spending growth is widely forecast to accelerate in 2024, after a challenging macro environment significantly dented budgets and growth in 2023. The US advertising market is already showing positive signs of growth, starting off 2024 with a 4.3% YoY increase in January, the strongest January on record and a tenth straight monthly increase.

We’re tracking ad-tech at the moment for three key reasons: a robust ad market backdrop with multiple major event tailwinds, strong cash flow generation, and improvements in operating leverage. We’ve previously covered the 2024 outlook for four major digital advertising verticals in our analysis “Ad Spending Growth to Accelerate In 2024” at the end of December; now, we take a look at three of the advertising industry’s top stocks: Meta, The Trade Desk, and Alphabet.

Meta: The Juggernaut Has Returned

The Juggernaut is back — Meta has been the second-best performing stock of the Magnificent 7, with its 44% return since the end of 2021 and a 301% return since the end of 2022 beaten only by Nvidia. This rally has been supported by significant improvements in operating leverage as revenue growth has reaccelerated to the mid-20% range.

Meta has stood out amongst social media peers for its strong growth in ad impressions, a recovery in ad pricing, and its ability to generate strong cash flows while still spending tens of billions on R&D. We’ve tracked Meta’s strong ARPU acceleration, but the more impressive (and arguably more important) story for Meta is how this translates into a substantial degree of operating leverage.

Meta’s operating margin expanded over twenty percentage points YoY to 40.8% in Q4, returning to a margin not seen since Q1 and Q2 2021. FY23 operating margin improved 990 bp YoY to 34.7%, with room for improvement in FY24. This is helping drive a strong improvement in the bottom line, with Meta reporting a net margin of 34.9%, a second straight quarter above 33% and a strong 2040 bp YoY expansion. Improvement from the 2022 bottom in fundamentals is easily visible in the chart below.

Source: YCharts

The rebound in leverage comes despite Meta pouring tens of billions into Reality Labs – operating loss for Reality Labs totaled ($16.1) billion for FY23, or a massive ~1195 bp headwind to operating margin.

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Meta’s Momentum to Continue in 2024

Meta’s momentum with strong revenue growth is expected to continue in 2024, supported by ARPU trends. In addition, the implementation of AI features, a favorable ad market backdrop, and improving operating leverage supports substantial EPS growth this year.

Meta guided for a very strong Q1, calling for 24.8% YoY growth, a third straight quarter with growth >20%, though it comes against a weak 2.6% YoY comp. Accelerating ARPU in Facebook’s two core geographies, the US/Canada and Europe, supports this revenue growth story.

Source: Meta

Also supporting the growth story is a favorable social media ad spend backdrop, as well as major political and sporting events, namely the US presidential election in November and the Summer Olympics. Globally, social media ad spend has one of the fastest projected growth rates in the ad industry at +13.8%.

In the US, growth is expected at a similar rate, with Insider Intelligence projecting 13.5% YoY growth to $82.9 billion. This represents a $7.8 billion increase from their Q1 2023 forecast, with the market benefiting from “higher ad loads, a focus on lower-funnel ads, and an improved advertising economy,” driven by both Meta and TikTok.

For 2024, key metrics are supporting a return to >40% operating margin for the full year and a possible >33% net margin, driven by increasing ad pricing, strong engagement trends and impressions growth, aided by the release of numerous AI features. Reaching those margins for the full year would imply EPS growth of nearly 38% to $20.50 on $160B in revenue. Meta would be trading at a 24x forward PE ratio under that EPS growth assumption, 15% cheaper than its 5-year average PE of 27x; however, this is the peak multiple we’ve seen so far in Meta’s rally.

The Trade Desk: CTV Tailwinds Offer Growth Outlet

The Trade Desk, which offers a cloud-based digital advertising purchasing and optimization platform for advertisers across many mediums, from CTV to display, audio, digital out-of-home, and more, continues to be one of the fastest growing ad-tech stocks in the industry. Revenue grew 23% in FY23 to $1.95 billion, outpacing a tepid ad market but representing a 9 percentage point deceleration from 32% revenue growth in FY22.

Though revenue has decelerated, profitability has remained solid, and GAAP net income more than tripled YoY to a nearly 10% margin this year, though that is much lower than historical levels. Operating income is showing signs of stability and improvement on a TTM basis, after periods of volatility in 2021 and 2022.

The Trade Desk's operating income has quadrupled from $50 million in early 2017 to $200 million in2023 despite a deterioration in operating margin. Source: YCharts

Despite a steady deterioration in TTM operating margin over the past six years, from the 30% range to the 10% range in FY23 (after briefly dipping negative), operating income has grown, in fact it has quadrupled from $50 million in early 2017 to $200 million in 2023.

The challenge now for The Trade Desk is maintaining this more rapid trajectory in operating income growth through 2024 and into 2025 given that revenue growth is expected to decelerate. This will be critical in driving expansion in GAAP net margin, which hovers just below 10% currently, compared to above 15% as it had maintained for more than three years.

The Trade Desk's net profit margin hovers just below 10% currently, compared to above 15% as it had maintained for more than three years. Source: YCharts

CTV, Kokai Provide Growth Opportunities in 2024

CTV ad spend and the ramp of The Trade Desk’s new AI-powered buying platform Kokai offer two potential growth outlets for 2024.

CTV ad spend is forecast to be digital advertising’s fastest growing channel this year, with Dentsu placing growth at 30.8%, while BIA is expecting growth as high as 39.5%. CTV ad spend in total has surged 400% since 2019, as use of streaming services soared through 2020 and 2021; now, rising adoption for major streamers’ ad-supported tiers beckons to bring more spend through CTV. This trend bodes well for The Trade Desk, as CTV “continues to be the fastest-growing channel at scale” for the company, as it sees that “ad supported streaming is going to be an essential strategy for any successful TV provider moving forward.”

Kokai, which launched in June 2023 as The Trade Desk’s AI-powered buying platform, has been labeled by CEO Jeff Green as the “largest platform overhaul” in its entire history. Kokai will be scaling throughout the year, and promises a new degree of optimization for ad buyers while providing KPIs throughout the entire funnel, instead of simply at the last click. In essence, The Trade Desk sees Kokai as an “upgrade in almost every way” to its existing platform.

Though determining the growth trajectory of Kokai over the next few quarters may be challenging, tracking gross spend and The Trade Desk’s take rate provides insights into revenue acceleration trends, and if Kokai and a strong CTV ad market are driving an acceleration in spend and improvements in take rate.

Source: The Trade Desk

The Trade Desk’s take rate has fluctuated between 19% and 21%, hovering around 20.3% in FY23. While it may seem obsolete to track a metric that fluctuates within a tight 200 bp range, the impact of a 100 bp change in take rate is actually quite large. Take FY21 as an example, when The Trade Desk recorded its lowest take rate at 19.4% — had this been 100 bp higher at 20.4%, revenue growth in the year would have been 700 bp higher, at 50% versus the 43% reported growth.

If gross spend can accelerate via a robust CTV market and Kokai’s improvements and efficiency gains for buyers, maintaining a take rate above 20% or driving growth to above 20.5% can help revenue growth accelerate to the high-20% range. However, the upcoming phase-out of cookies provides a significant risk to take rate, in that if The Trade Desk fails to get significant adoption of UID 2.0, which is the second most-used cookie replacement, it may struggle to command such a high take rate due to a loss of targeting ability in a cookie less digital environment.

Alphabet: Beneficiary of Search, CTV Ad Spend

Alphabet is a beneficiary of both search and CTV ad spend, and has seen growth accelerate this year as it works to integrate generative AI features and AI-based tools to drive improved ROI for advertisers – Alphabet recently reorganized its digital ad business to place more emphasis on generative AI and AI automated ads.

Alphabet reported $65.5 billion in advertising revenue, up 11% YoY, its first double-digit growth rate in six quarters, driven by strength in Search and YouTube. Alphabet has nearly doubled its quarterly run rate in just four years.

Source: Alphabet

Search and YouTube ad revenue growth accelerated in each quarter this year, from the low single-digits to 12.7% and 15.5% in Q4 respectively. What Alphabet is demonstrating is that AI-powered ad solutions are helping drive resilient Search ad revenue growth, at the same time that strong engagement metrics for YouTube Shorts (>2B MAUs, 70B daily views) and increasing watch times for YouTube TV are boosting YouTube’s ad revenue growth.

Source: Alphabet

AI Integrations Provide Opportunity for Growth

Alphabet is steadily making progress in integrating AI features in Search via Search Generative Experience (SGE) and in advertising campaigns via Performance Max (PMax). Executives have previously mentioned how these “AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel.” This is the value-add of SGE and PMax – driving CPM higher from via higher ROIs from improved targeting and optimization, while letting Alphabet toy with new ad placements and formats in Search pages. Alphabet sees “significant opportunities” to “actually deliver incredible ROI at scale” from these AI-powered features.

Alphabet’s Demand Gen is instrumental in driving long-term growth momentum across its more than 3 billion monthly active YouTube and Gmail users. Alphabet explains it as its “big bet to help social advertisers find and convert consumers via immersive, relevant, visual creatives” across these channels. Alphabet shared some color on Demand Gen in Q4, saying that “tens of thousands of advertisers are testing and, on average, seeing 6% more conversions per dollar versus image-only ads in Discovery campaigns.”

Gemini is also playing a more forward facing role in advertising products, powering Alphabet’s new conversational features in Google Ads. While it is still in beta in the US and UK, early tests have shown “advertisers are building higher-quality Search campaigns with less effort,” streamlining the campaign building process.

Cash is King

As the saying goes, cash is king, and Meta, Alphabet, and The Trade Desk stand out for strong cash flow generation metrics. Meta leads the Magnificent 7 with a nearly 53% operating cash flow margin, while The Trade Desk and Alphabet command OCF margins in the low-30% range.

Source: YCharts

To put how strong this cash flow generation is in perspective, Meta and Alphabet have grown operating cash flow 1,400% and 425% respectively. This is incredibly impressive given the scale of the duo’s cash flows, with Meta generating $71 billion and Alphabet $101 billion.

Conclusion

Ad-tech stocks are on 2024’s watchlist for a few reasons: strong cash flow generation and growth, a positive ad-market backdrop buoyed by major political and sporting events, and implementation and integration of AI features to help drive improved ROI for advertisers. Meta, Alphabet and The Trade Desk look best positioned to capture and capitalize on the ad industry’s acceleration this year.

My firm is not buying these stocks at the moment as we believe we can get them lower than where they’re currently trading. Though Meta is trading lower than its 5-year average PE ratio, it’s at the peak level sustained so far during 2023’s rally, leaving less room for upside. On the top line, it trades at a 9.6 with 11 being the highest its traded since 2019 (the stock was valued at 11 during Covid when ad-tech was surging from high social media use). The 3-year median is 6.4 and the 5-year median is 8.3.

Alphabet is the cheapest of the Mag 7, trading at a 20x forward PE although EPS growth is expected to be more tepid at just 17% this year, versus 38% for Meta. The company is trading right at its 3-year median and 5-year median on a PS ratio. Some of the softer price action could be due to the anti-trust lawsuit which has closing arguments set for May.

The Trade Desk is more expensive than the two on the bottom line, trading at 123x forward earnings, although it is expected to deliver 82% growth to $0.66 in GAAP EPS. Its trading at it’s 3-year median and 5-year median with a PS ratio of 20.6.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

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The Magnificent 7 Are Falling Like Dominos; Only 3 Remain

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

This article was originally published on Forbes on Feb 29, 2024, 09:34pm ESTForbes Forbes on Feb 29, 2024, 09:34pm EST

The Magnificent 7, defined as Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla, have seen a “magnificent” run fueled by AI optimism over the past fourteen months. The Magnificent 7 returned more than 106% in 2023, doubling the Nasdaq 100’s nearly 54% gain and significantly outperforming the S&P 500’s 24% gain. At first glance, it may appear that the Magnificent 7 are continuing their outperformance of the broader indexes in 2024.

However, like dominos falling, these market generals are topping out and diverging from the broad market. First Tesla in July of 2023, then Apple and Google in February have topped, and now Microsoft is not making a new high with the broad markets’ most recent run higher.

Source: TwitterSource: Twitter

The Magnificent 7 of 2023 have now become 2024’s Magnificent 3: Nvidia, Meta and Amazon. Of these, Nvidia’s saw a stellar start to the year as shares have gained nearly 60% YTD due to the GPU leader’s beat-and-raise quarters.

Source: TradingView

There are two reasons why this matters – which we also outlined in our analysis “Five Stocks (Not Seven) Can Lead to New Highs” from October – that “a handful of these stocks [the Mag 7] can push the bigger markets higher,” but now we’ll need more than just three to keep the rally going.

First, these 7 stocks hold a significant weighting within the indexes. It will be difficult for a sustained push higher to continue if these FAANGs do not participate, considering their outsized weighting.

The Mag 7 comprises more than 40% of the Nasdaq 100 and more than 29% of the S&P 500.
MSFT, GOOGL, AAPL, and TSLA account for about 18% of the S&P 500 and about 25% of the NASDAQ-100.
For reference, just Apple and Microsoft combined hold a larger weighting in the S&P 500 than Berkshire Hathaway, JP Morgan, UnitedHealth Group, Visa, Exxon, Mastercard, Johnson & Johnson, Procter and Gamble, Home Depot, Costco, Merck, and Chevron combined. If these companies collectively all stalled, it would be a major warning sign. Yet, Apple and Microsoft are both stalling.

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Secondly, when the cycle leaders start to underperform, it tends to mark the start of a trend change. The FAANGs have been the undoubted leaders of this bull run, and we are now seeing them start to trend lower against the indexes. More times than not, the leaders on the way up, tend to be the leaders on the way down.

In today’s bull cycle, this leaves Nvidia, Meta and Amazon as the three remaining generals making new highs with the markets.

Nvidia, Meta and Amazon are the three remaining generals making new highs with the markets. Source: TRADINGVIEW

Combined, the trio account for approximately 15.8% of the Nasdaq 100 and 10.8% of the S&P 500. Nvidia’s post-earnings surge, in which the chip giant added nearly $250B in value, helped the S&P 500 add more than $2 trillion in market cap as it boosted other AI and tech stocks in general. Should the trio begin to follow in the path of the four fallen dominos, setting a high and drifting lower, the market may be at risk of giving up some of its newfound gains, similar to what we had discussed in our analysis “Apple Can’t Save This Tech Rally” at the end of January. In this, we outlined how both the bull and bear cases for the market “are calling for a level of volatility in 2024 that will, at least, retrace the rally we’ve seen since November 2023.”

Concentration Risk Elevated

To an extent, the narrow leadership of this market stemming from the Magnificent 7’s AI-powered gains has raised warning bells for some investors, as the market’s concentration has surpassed levels seen in the dot-com bubble. To be clear, my firm is a pioneer in building an AI portfolio, and a selloff would be a buying opportunity. However, narrow leadership is a problem not to be ignored, and this is best illustrated by the chart below:

Source: CME

As mentioned earlier, the Magnificent 7 account for more than 29% of the S&P 500, more than the 21% concentration of the top 7 stocks in the S&P 500 seen in 1999 and 2000 — keep in mind that Tesla is no longer one of the top 10 largest stocks in the S&P 500, so the concentration of the top 7 today is above 30%. This also marks a dramatic increase from the 14% concentration seen a decade ago.

What this means is that as the Magnificent 7 as a whole continue to outperform – the seven have already gained more than 22% YTD in 2024 – they will continue to cover up the turbulence in the broader market that is brewing under the surface. For example, at the end of February, the Nasdaq 100 and S&P 500 are up nearly 9% and over 7%, respectively, while the equal-weighted S&P 500 has gained just over 2%.

Source: TradingView

This concentrated dominance has helped the S&P 500 push to new highs, more than 6% above its 2021 high, while the equal weight S&P (orange) has yet to reclaim that 2021 high, sitting about 100 points lower. The influence of the Magnificent 7 is clearly visible — the S&P 500 has a 26 percentage point outperformance of the equal-weight index, returning 81% versus 55% over the past five years; this gap has widened throughout 2023, from 8 percentage points in April to 14 percentage points in July to 20 percentage points in October.

Source: YCharts

I/O Fund Portfolio Manager Knox Ridley outlined in our analysis in October, 5 Stocks (Not 7) Can Lead To New Highs that “a handful of these stocks [the Mag 7] can push the bigger markets higher, and even potentially make another high in the NASDAQ-100.” The setup was that the indices were “due for a sizable bounce over the coming weeks – months, which we believe will be led by a handful of Big Tech names.” Now that we are at new highs, we think we will need more than just three of the Mag 7 to keep going.

Valuations Relatively Intact

Though the recent momentum-filled surges in AI favorites including Super Micro and Nvidia have some investors drawing parallels to Cisco’s ascent in 2000, valuations for the Magnificent 7 are relatively intact.

Tesla is struggling with earnings growth as price cuts bite margins, while Apple’s growth headwinds are leading to minimal earnings growth; on the other hand, Amazon is showing strong earnings leverage from improvements in its margins, Google is trading at a near 30% discount to its year-ago PE of 30x, and Nvidia is eerily cheaper now than it was when it had bottomed in October 2022 in the low $100 range.

Source: YCharts

Compare this to Cisco, given the parallels being drawn, which traded at more than 150 times earnings at the peak of the dot-com bubble – or more than twice as high a multiple as the most expensive of the Mag 7 of today.

We discussed on Fox Business News this week that keeping an eye on valuation is important for determining which stocks to buy on dips. The impact AI has had is very visible on the top line with blowout quarters from Nvidia, and on the bottom line with blowout quarters from both Nvidia and Meta. However, AI’s impact on valuations is being overlooked as these valuations are low and setting up a new buying opportunity should the broad market present weakness.

Conclusion

We will continue to track how the Magnificent 3 perform over the next few weeks, and whether Meta, Nvidia, and Amazon will continue to lead or if they will follow the trend of the remaining four in underperforming versus the broader indices.

When these cycle leaders start underperforming, it usually marks the start of a trend change. The FAANGs undoubtedly have led this bull run since 2023. We are now looking for what will lead the market next, and most importantly, when.

If you own AI stocks or are looking to own AI stocks, consider joining us for our next broad market webinar. Every Thursday at 4:30 pm Eastern, the I/O Fund team holds a webinar for premium members to discuss how to navigate the broad market, manage risk, as well as revealing our various long-term game plans regarding stock entries and exits. We offer trade alerts plus an automated hedging signal. The I/O Fund team is one of the only audited portfolios available to individual investors. Learn more here.

I/O Fund Portfolio Manager Knox Ridley and I/O Fund Equity Analyst Damien Robbins contributed to this report.

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Netflix Q4: Paid Net Adds Impress, Return to Double-Digit Growth

Posted on January 24, 2024June 30, 2026 by io-fund

Netflix’s Q4 showed a return to double-digit revenue growth, while paid net additions came in strong at 13 million compared to guidance for 9 million. This helped global paid memberships see a fourth consecutive quarter of accelerating growth. Although Q1’s revenue guide for $9.24 billion came up just short of estimates for $9.26-$9.28 billion, it points to YoY growth of 13.2%, a 70bp acceleration from Q4 and a third straight quarter with accelerating revenue growth. The guide represents growth of 16% on a F/X neutral basis for Q1.

Notably, it’s unusual that Q1 would accelerate compared to Q4 given the seasonal, holiday period. This implies that Netflix will see a strong Q1 on a year-over-year basis for paid net additions, as well. Management stated the following: “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.”

Returning to growth for average revenue per member (ARM) will be an important highlight to watch for next quarter. In Q4, Netflix raised prices for the first time in eighteen months. For reference, when we initiated our position in June of 2022, ARM was in the 7% to 8% range on CC basis. However, for two quarters in 2023, ARM was negative to flat. Management’s comments imply we will see a return to growth for ARM as we move into 2024.

Revenue and EPS:

Revenue of $8.833 billion beat estimates by 1.38%, representing YoY growth of 12.5% and QoQ growth of 3.4%. According to analyst consensus, Netflix bottomed in Q2 of 2023 and has now returned to double digit growth through at least Dec 2025.
EPS of $2.11 grew by 1,658% yet missed estimates by 4.95%, as net margin fell short due to “a $239 million non-cash unrealized loss from F/X remeasurement on our Euro denominated debt (due to the intra-quarter depreciation of the US dollar against most currencies).”
On EPS, Netflix is expected to report double digit growth through June of 2025, and then resume double-digit EPS growth again in the back half of 2025, reflecting improving margins from the ad tier.

Margins:

Margins continue to expand for Netflix across the board. Operating margin is expected to further expand in 2024 from 20.6% in 2023 to 24% in 2024.

As stated in our pre-earnings writeup, thanks to the ad tier, Netflix is expected to be the FAANG which grows the most between now and 2030 in terms of operating cash flow margin (OCF), from 12.4% to 28.5% in 2030.

Gross margin of 39.9% was more than 9 points higher than the year ago quarter at 31.2%
Operating margin for Q4 was 16.9%, ahead of the guided 13.3% figure.
Full year 2023 operating margin was 20.6%, ahead of Netflix’s 20% target and a 280 bp expansion from 17.8% in 2022.
Full year 2024 operating margin is guided to be 24%. Per management: “We are increasing our full year 2024 operating margin forecast from 22%-23% to 24% (based on F/X rates as of January 1, 2024). This reflects the weakening of the US dollar vs. most other currencies since October as well as our stronger-than-forecasted Q4’23 performance and our expectation for how that will carry through 2024.”
Net margin for Q4 was 10.6%, slightly below the guided 11.0% figure due to F/X remeasurement from the Euro, noted above.
Full year 2023 net margin was 16.0%, a 180 bp expansion from 14.2% in 2022.

Cash and Debt:

Cash has grown handily over the past few years and this turnaround is the primary contributor as to why Netflix has returned 150%+ since the June 2022 low. If you look below, you’ll see membership was still trending down prior to 2023, yet strong cash flow carried the stock during that time period.

Operating cash flow in Q4 was $1.66 billion, up 275% YoY. Operating cash flow margin was 18.8%, a ~1320 bp expansion from 5.6% in Q4 last year.
Full year operating cash flow was $7.3 billion, up 265% YoY from $2.0 billion in 2022.
Free cash flow in Q4 was $1.58 billion, up 376% YoY from $332M in Q4 last year. Free cash flow margin was 17.9%.
Full year free cash flow was $6.93 billion, up 328% from $1.62 billion in 2022. As stated in our pre-earnings writeup, $1 billion was due to the Writers and Actors strike.
Cash and short-term investments totaled $7.14 billion.
Gross debt totaled $14.54 billion.

Membership Trends:

Global paid net additions were 13.12 million in Q4, a strong beat considering Netflix had guided that Q4’s global paid net adds would be approximately in line with Q3’s level (implying additions of ~8.76 million).

Global paid memberships totaled 260.28 million at the end of Q4, representing YoY growth of 12.8% and coming in handily above expectations for 10.9% growth to 255.91 million. This was a major milestone as Netflix put up growth that required a pandemic, and not many Covid beneficiaries will be able to return to their former 2021 growth levels.

Paid net additions were >2 million for each geographic segment, marking the third straight quarter in which paid net adds were >1 million in every geography.

UCAN (United States Canada) had a big quarter with 2.81 million added compared to 1 million in the year ago quarter. ARM was up 3% YOY.
EMEA was the biggest contributor at 5.05 million added compared to 3.2M in the year ago quarter. ARM was up 3% YOY
LatAM added 2.35 million compared to 1.76 million in the year ago quarter. ARM was up 4% YOY
APAC added 2.91M compared to 1.8M last year with ARM down (-5%) YOY.

Breaking this down, growth in paid net adds through 2023 has been the strongest in EMEA and UCAN, with both regions seeing strong QoQ growth in each quarter this year.

Average revenue per member increased 1% YoY globally, with a (5%) decline in APAC weighing down on 3% YoY increases in ARM in UCAN and EMEA.

Below, we breakout additional commentary about ARM from the earnings call.

Q1, FY24 Guide

Netflix’s revenue guide of $9.24 billion, though about $40 million below estimates, is pointing to another quarter of acceleration and a second-straight quarter with double-digit revenue growth. On a constant currency basis, Netflix is expecting 16% revenue growth in Q1.

The EPS guide of $4.49 was more than 9% above the consensus estimate for $4.11, driven by a strong QoQ expansion in operating margin — operating margin is forecast to expand 930 bp QoQ to 26.2%, the highest level since Q1 2021.

Netflix added that for 2024, it is expecting “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.” Netflix also increased its 2024 operating margin forecast by 100 bp, from 22%-23% to 24%, though this was entirely driven by FX.

Ad Commentary

Netflix talked up its ads business and was optimistic about the future potential of the segment despite it not yet being a strong driver of growth.

Management said it will “continue to invest in and build our ads business” and expects “strong growth in 2024 but off a small base.” Netflix’s longer-term goal is “to make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyondto make ads a more substantial revenue stream that contributes to sustained, healthy revenue growth in 2025 and beyond,” noting that scaling the ad business offers an “opportunity to tap into significant new revenue and profit pools over the medium to longer term.”

We have seen strong adoption of Netflix’s ad-tiers so far: rising from 5 million in May, to 15 million in November, and to 23 million in early January. Netflix provided more commentary on the growth of ads memberships, saying that similarly to Q3, Q4’s ads membership “increased by nearly 70% quarter over quarterincreased by nearly 70% quarter over quarter, supported by improvements in our offering (e.g., downloads) and the phasing out of our Basic plan for new and rejoining members in our ads markets. The ads plan now accounts for 40% of all Netflix sign-ups in our ads markets and we’re looking to retire our Basic plan in some of our ads countriesads plan now accounts for 40% of all Netflix sign-ups in our ads markets and we’re looking to retire our Basic plan in some of our ads countries, starting with Canada and the UK in Q2 and taking it from there.”

Earnings Call:

Discussion on ARM:

Management didn’t provide much on ARM other than to say it will grow next quarter, and that the price increases and high paid net adds in Q4 will help also contribute to a higher Q1:

Spencer Wang

Great. Thank you, Ted. I'll move this along now to a series of questions regarding our results and the forecast. First, coming from Mark Mahaney of Evercore and this is for Spence. How should we think about ARM growth going forward? Is mid-single-digit percentage increase a reasonable benchmark? And what are the factors that could create either upside or downside to that growth outlook?

Spencer Neumann

Sure, sure. Thanks, Mark. So well, first, stepping back, 2023, as a reminder, was a pretty unusual year for us. It was essentially all member-driven growth because our pricing and plans focus in '23 was on rolling out paid sharing. We had almost no price increases until late in the year in '23.

And even then, it was just a partial quarter impact. As we look to '24, as we noted in the letter for 2024, we expect healthy double-digit FX-neutral revenue growth, including growth in FX-neutral ARM. So we expect continued member growth powered by a grade slate, including the full year impact of our 2023 net adds carrying into 24 and no change to our pricing philosophy. You saw some of that pricing action already in the past quarter. And we should get some help from extra members and starting to scale our ads business.”

More on the Paid Sharing Ramp:

Given it may take until 2025 to see meaningful revenue from the ad tier, one of the more important questions asked if paid sharing is expected to continue to add more subscribers. The answer was long-winded but basically stated they do plan to do what they can to capture more paid sharing members.

Spencer Wang

Thanks, Spence. Doug also has a follow-up question around paid sharing, which I will direct to Greg. How far along are you in terms of the paid sharing benefits? Do you still believe paid sharing will add subscribers for several more quarters? And is there any way to quantify what percentage of the $100 million borrower household population have either become extra members or full paying subscribers?

Greg Peters

Yes. As I mentioned, we've gotten to the point where paid sharing, the paid sharing experience is just something we do at this point. But also, I think it's important to say that like many other things that we do, we also see a real opportunity to continue to materially improve that value translation engine. So we definitely delivered interventions to new cohorts in the last quarter. We're going to continue to deliver to new cohorts in 2024.

But increasingly, I sort of don't think about it as like going after these certain pools, but more about just finding the most effective way to convert folks who are using the service, the right call to action, the right nudge at the right time. And those might have been historical borrowers or folks that are new to the service as well. And we're going to continue to improve that engine. That will continue to improve our growth for years ahead, not just 2024.”

Partner Deal that Could Potentially Double Ad-Tier MAUs:

Spencer Wang

Great. Thanks Greg. A question from Rich Greenfield on advertising. Later this week, T-Mobile's subscriber benefit called Netflix on Us, will convert to Netflix's ad tier unless subscribers upgrade to an ad-free tier? Is it reasonable to assume that your U.S. ad-supported subscriber base will roughly double as a result of this change? And assuming it is, how quickly will you be able to fill that inventory?

Greg Peters

Yes. I won't get into the specifics of a particular deal or provide a forecast for a particular deal, but I'll just say that just as we've done for many, many years, leveraging partner channels is an important part of our subscriber growth strategy. We're applying the same techniques and approaches to scaling our ads membership. And we love having this additional tool. It's 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.

Evidence Competitors are Struggling:

“Spencer Wang

Great. And as a follow-up to that question around licensing, Ted, your competitors have largely abandoned their opposition to licensing catalog content in Netflix. We've seen, for example, NBC Suits, HBOs, Six Feet Under and more recently, a series of Disney TV titles on Netflix. Do you think your competitors should begin licensing you their new original series as well versus keeping them exclusively to their own streaming services?

Ted Sarandos

Yes. I mean I guess I'd call you back to that history again and just say we've got a rich history of helping break some of the TV's biggest hits like Breaking Bad and Walking Dead or even more recently with Schitt's Creek. Because of our recommendation and our reach, we can resurrect a show like Suits and turn it into a big pop culture moment but also generate billions of hours of joy for our members.”

Conclusion:

While many tech companies are struggling to grow in the current environment, Netflix put up a rare acceleration in key metrics and revenue, plus expansion on margins and cash. Netflix not only cleared a high bar of 13.1 million paid net additions but was able to guide a strong Q1. ARM is weak but this is expected to be transitory. The MAUs on the ad tier could grow quicker than expected due to channel partners such as T-Mobile. We often look for the issues in a report first, and then work backward to the positives. However, this report was flawless.

Recommended Reading:

Netflix Q4 Pre-ER: Ad Tier Growth in Focus for 2024

Posted on January 22, 2024June 30, 2026 by io-fund

Over the last two years, Netflix has become a remarkable comeback story on the bottom line as the company improved its cash profile from negative (-$3.3 billion) in 2019 to a positive $1.6 billion in 2022.

By raising free cash flow guidance every quarter this year, FCF for 2023 will now come in at $6.5 billion. Of the $6.5 billion, $1 billion is from the Writers and Actors Strike. When adjusting for this, FCF is at $5.5 billion, which more realistically sets expectations for 2024, when content spending will be higher than in 2023. The FCF guide is significantly higher than the initial $3 billion guide during Q4 2022 results. The growth in cash was central to our original entry and decision to build the position.

Thanks to the ad tier, Netflix is expected to be the FAANG which grows the most between now and 2030 in terms of operating cash flow margin (OCF), from 12.4% to 28.5% in 2030. Notably, most FAANGs are at this percentage today except Amazon. In terms of last year, this helps illustrate the remarkable comeback Netflix has seen on its bottom line.

Cutting off password sharing has propped the company’s growth recently with paid memberships doubling its growth rate from 4.5% in Q3 2022 to 10.8% in Q3 2023. This led to Netflix’s net subscriber additions totalling more than 1 million in every geographic segment in both Q2 and Q3 – the first time in back-to-back quarters in more than 3 years.

Per our last write-up:

“In the June quarter of 2022, Netflix reported negative net additions QoQ. This quarter, Netflix reported some of the best growth in recent quarters. Notably, ads are not contributing meaningfully. Password sharing is helping the company drive growth in paid memberships both YoY and QoQ following the December quarter.

Per management: “The cancel reaction continues to be low, exceeding our expectations, and borrower households converting into full paying memberships are demonstrating healthy retention. As a result, we’re revenue positive in every region when accounting for additional spin off accounts and extra members, churn and changes to our plan mix.”

As stated above, the ad roll-out is not contributing meaningfully yet. Ads are a historical pivot for the subscription video on demand (SVOD) juggernaut, and the roll-out has seen some minor delays. This is the primary focus as we move into 2024, and one that requires some speculation as to how it will perform.

Looking forward, there promising signs that Netflix’s ad tier is beginning to ramp. The company recently announced that the ad-tier had surpassed 23 million MAUs, significantly higher than the 15 million reported in November and 5 million in May. In addition to this, Netflix’s ad revenues are forecast to jump 50% next year to top $1 billion, with Disney+ topping the $1 billion ad revenue mark in 2025. Over 80% of ad revenues will stem from CTV, with the remainder from PC and mobile.

We will be looking for more management commentary in the earnings call regarding expectations for 2024.

Source: Beth’s Twitter

Revenue and EPS

The company’s Q3 2023 revenue grew by 7.8% and 8% YoY in constant currency to $8.5 billion, helped by the membership growth from cutting off passwords. This was the highest growth rate in five quarters. This is an acceleration QoQ from the 2.7% growth and 6% on a CC basis last quarter.

Q4 is also expected to accelerate with management guiding for Q4 revenue of $8.7 billion for growth of 11% and 12% on a CC basis. This will be an acceleration in both QoQ (to be expected due to seasonality) and year-over-year with 10% growth reported on a CC basis in the year ago quarter.

Netflix’s revenue growth is expected to trend upward through the June quarter, which is currently marking peak revenue growth for NFLX per analyst consensus at 15.4%. It will then soften to 13.7% in the September quarter, become slightly stronger in the December quarter at 14%, before settling in the 10% range for 2025.

GAAP EPS came in at $3.73 and beat the analyst consensus estimates by 6.7%. Management guide for the next quarter is $2.15.

EPS is a bright spot for Netflix with FY2024 expected to grow 30% — this will be stronger than 2023’s growth of 23%. For FY2025, EPS is expected to grow 22%.

Margins

The highlight with margins is the expanding operating margin.

The Q3 gross margin was 42.3% compared to 39.6% in the same quarter last year and 42.9% in the previous quarter.

The operating margin came in at 22.4% compared to 19.3% in the same quarter last year and 22.3% in the previous quarter. Despite a guide for 13.3% in Q4, the fiscal year is expected to report 20%. Management expects further improvement to 22% to 23% for FY24. The operating margin has been seasonally low in the Dec quarter and the Dec guide is up from 7% last year.

Net margin was 19.6% compared to 17.6% in the same period last year and 18.2% in the previous quarter. The management guide for next quarter is 11% and is up from 0.7% in the same quarter last year.

Cash Flow and Balance Sheet:

The company’s cash flows were a highlight of the Q3 report. The operating cash flow came in at $1.992 billion, representing a cash flow margin of 23.3% compared to 7% in the same period last year and 17.6% in the previous quarter.

Free cash flow of $1.888B represents a FCF margin of 22.1%. This is up from a FCF margin of 6% in the year ago quarter and 16.4% in the previous quarter.

Management increased its FY23 free cash flow guide to $6.5 billion from the earlier $5 billion. When adjusted for the roughly $1 billion from the writers and actors strikes, it comes to $5.5 billion. The management expects to deliver substantial free cash flow in 2024 despite the expected increase of cash content spending in 2024.

As per CFO Spence Neumann in the Q3 earnings call, “So first, in the letter, we talk about the 2024, we hope to get cash content spend back up to at or near that $17 billion level (up from the expected $13 billion in 2023).

The biggest swing factor is going to be when the SAG-AFTRA strike resolves. And so that will get us to a cash to P&L ratio kind of closer to 1:1.1x. And so we're not putting a specific number out there for free cash flow in 2024. What that gets us to, when you think about the combination of our revenue growth outlook, our margin guidance and target cash content spend, we'll deliver substantial free cash flow in 2024. And then going beyond that, we do expect to tick up our content investment over time as we also prove at sustained healthy revenue growth.”we'll deliver substantial free cash flow in 2024. And then going beyond that, we do expect to tick up our content investment over time as we also prove at sustained healthy revenue growth.”

The company has cash & short-term investments of $8 billion and debt of $14 billion. The company returned the excess cash over the minimum cash level through a stock repurchase of $2.5 billion in the quarter and also increased the share repurchase authorization by $10 billion.

Key Metrics

Netflix reported 8.76 million in paid net additions for a total of 247.15 million paid memberships, representing YoY growth of 10.8%. This is the highest number of paid net additions in recent quarters.

Analyst consensus was between 6.5 million and 6.9 million and this was also significantly higher than the management guide of 5.89 million. Per management, this was due to: “the roll out of paid sharing, strong, steady programming and the ongoing expansion of streaming globally"

Management expects paid net additions similar to Q3 of 8.76M, and the expected paid membership growth will be 10.9% YoY to 255.91 million. TD Cowen expects paid net additions of 9.03 million, bringing the paid memberships growth to 11%, reflecting seasonality and a strong slate of Originals in the quarter. The firm's consumer survey shows Netflix remains the top choice for living room viewing.

Regions:

Average revenue per membership (ARM):

Across the regions, ARM in APAC had the most significant decline at (-9%).
The United States region technically declined (Netflix reporting this as 0%) from $16.37 ARM a year ago to $16.29 ARM in Q3.

Paid Net Additions:

All regions added paid net additions. United States added 1.75M up from 1.17M in the previous quarter. This segment is watched closely.
EMEA added the most paid net additions at 3.95M.
The management mentioned in the Q3 shareholder letter that the “Global ARM in Q4 is expected to be roughly flat year-over-year, primarily due to limited price increases over the last eighteen months.” However, with the price increase announced during Q3 results, we could see ARM resume growth going forward.

Per our last write-up, ARM is something to watch: “The weak spot in the report was average revenue per member, which declined (1%). Ideally, this improves with the price hikes the company announced today. This is reflected by a net paid addition beat that does not result in a revenue beat. With management guiding for similar net paid adds as Q3 (implying 9M) plus higher prices, the market is rewarding the stock because it’s assumed ARM will be higher next quarter. Netflix investors should continue to monitor lower ARM countries as time goes on as outsized growth here can potentially weigh on revenue growth. Last quarter, ARM was (-3%) and (-1%) on a CC basis.

What to Watch For:

Last quarter, there was outsized pressure on margin commentary. In the Q3 post-earnings update, we discussed the clarity given by the CFO following the confusion from his commentary at the Bank of America conference in September. You can read more background on this here (main takeaway is that it’s been resolved).

In the Q3 earnings call, he said, “We understood that investors were – they've been pretty patient with us, so we wanted to demonstrate the scalability and the health of the business model. And so that took us from – it was like 4% OI margin to operating income margin business in 2016 to our current roughly 20% margin. So we think a pretty good indicator that ad scale streaming can be a quite good business. Now stepping back, there's no change in our financial objectives and also no change in our long-term margin expectations, including the fact that we see a – and we don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth.And so that took us from – it was like 4% OI margin to operating income margin business in 2016 to our current roughly 20% margin. So we think a pretty good indicator that ad scale streaming can be a quite good business. Now stepping back, there's no change in our financial objectives and also no change in our long-term margin expectations, including the fact that we see a – and we don't think we're anywhere near a margin ceiling. We've got a long runway of margin growth.

So again, no change in our objectives, no change in our long-term margin expectations. But our current profitability and scale, we think it's prudent to balance that historical pace of margin improvement with growth investments. So you asked about growth investments. We think we've got a lot of places where we can continue to invest, plenty of room to invest further in our existing content categories, we're a small share of viewing in every country in which we operate. Plus building out those ads capabilities that Greg talked about our live offering and new content categories like games. So there's plenty to do.”we think it's prudent to balance that historical pace of margin improvement with growth investments. So you asked about growth investments. We think we've got a lot of places where we can continue to invest, plenty of room to invest further in our existing content categories, we're a small share of viewing in every country in which we operate. Plus building out those ads capabilities that Greg talked about our live offering and new content categories like games. So there's plenty to do.”

Conclusion

Netflix’s performance has shown its ability to adapt and innovate, overcoming past challenges and capitalizing on new opportunities. The strong cash flows, accelerating revenue, improving margins, and subscriber growth show that the company has delivered on its promise to shareholders. This has been especially important given the change in management, from the Street favorite, Reed Hastings, to a more collective approach of two CEOs.

One thing we are on the lookout for is if the ad tier’s initial adoption will begin to slow and/or if Netflix will run out of growth levers. This may be 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.

As always, there is a lot to consider and we will keep you in the loop on how we view Netflix’s inevitable slowing growth come 2025 (or perhaps 2026) in the face of its impressive and expanding margins.

Look for our post-ER report after hours on Tuesday!

Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.

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Social Media Stocks: One Metric Shows Meta’s Clear Leadership

Posted on January 16, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 11, 2024,05:24pm ESTForbes Forbes on Jan 11, 2024,05:24pm EST

Social media stocks Meta (META), Pinterest (PINS), and Snapchat (SNAP) enjoyed strong gains in 2023 as the broader ad market stabilized and fundamentals improved. Social media ad spend is expected to remain robust in 2024, with one of the fastest projected growth rates in the ad industry at +13.8% to reach $227.2 billion, less than 1% shy of search ad spend.

This upbeat ad market forecast leaves investors questioning if more upside awaits social media stocks in 2024. In this analysis, we dig into Meta’s leadership in the space, some improving trends at Pinterest, and how Snapchat has weaker ARPU than its peers.

Meta’s strength in ARPU and cash flow generation stands out here, setting it clearly apart from Snapchat and Pinterest – it can maintain spending 30% of gross profit on R&D while driving significant cash flow growth.

Ad Pricing Recovers While Impressions Remain Strong

Ad impression growth remains strong for Meta and Pinterest, while ad pricing is in the initial stages of a recovery after declining for multiple quarters as companies optimized budgets through much of 2022 and early 2023.

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Meta: Ad Impressions Remain Strong

Meta reported 31% YoY growth in ad impressions in Q3, a second straight quarter with growth above 30% YoY after a string of growth in the teens in 2022. Impression growth was driven by APAC and Rest of World, Facebook’s two largest and fastest growing geographies for daily active users. DAUs rose ~6% higher in both regions to top 1.57 billion combined, equivalent to 75.5% of Facebook’s global DAUs.

Ad pricing declined (6%) in Q3, adding further confirmation that pricing bottomed in Q4 2022. The decline was driven by that strong growth in impressions in APAC and Rest of World, as the two are Facebook’s lowest monetizing regions with ARPU less than half of global ARPU. Meta said that “overall engagement on Facebook and Instagram remains strong,” and Reels “continues to grow and drive incremental engagement.”

What investors should watch for is if improved ad targeting from AI features can help drive ad pricing back to growth, supported by a favorable spending backdrop and continuing strength in ad impressions globally.

Source: Meta

Pinterest: Pricing Remains Depressed

Pinterest reported similarly strong trends in ad impression growth while pricing also remained depressed. Pinterest said in its Q3 earnings call that it has “been able to drive increases in both total impressions and in ad loads simultaneously,” thus driving impression growth of 26% YoY. This marked a significant 10 percentage point increase from the 16% impression growth from Q2 and Q1.

Pricing declined (12%) in Q3, an 8 percentage point sequential improvement from a (20%) decline in Q2. Pinterest chalked up the improvement to “industry-wide demand stabilization” and its “AI-fueled ad stack efficiencies.” However, a double-digit decline for ad pricing is weighing on strong impressions growth, as Pinterest has struggled to meaningfully improve ARPU this year.

Snapchat: Growth Still in Single Digits

While its peers are reporting high double-digit impressions growth, Snapchat’s growth remains in the single-digits, reporting just 7% YoY growth in Q3. This marked a slight 2 percentage point acceleration over Q2, though it remained below the growth levels seen throughout 2022, a stark contrast to both Meta and Pinterest who have witnessed double-digit percentage point accelerations.

Pricing is nearing an inflection, recovering to just a (5%) decline in Q3 compared to an (18%) decline in Q1 as impressions growth continues to outpace demand.

Source: Snapchat

Meta & Pinterest ARPU Accelerating

Meta and Pinterest both are demonstrating accelerating ARPU in core geographies, whereas Snapchat is struggling to improve monetization of its user base, with ARPU in core geographies declining. All three displayed solid double-digit ARPU growth in Europe, a dominant factor in global ARPU growth in Q3.

Meta’s global ARPU increased 19% YoY to $11.23, aided by 34% YoY growth in Europe to $19.04. US & Canada ARPU rose 14% YoY to $56.11, marking a solid acceleration from 7% growth in Q2.
Pinterest’s global ARPU rose just 3% YoY to $1.61, aided by 5% YoY growth in US & Canada $6.46. Europe’s ARPU rose 26% to $0.91 in the quarter.
Snapchat’s global ARPU declined (6%) YoY to $2.93, as North America ARPU fell (4%) YoY to $7.82 as monetization struggles persist. Europe mirrored peers with double-digit growth, at 15% YoY to $2.11.

Source: Company Filings

Over the past two years, Snapchat’s ARPU weakness is visible. Global ARPU is down (16%) relative to Q3 2021, compared to a 12% increase for Meta over the same period. Pinterest’s ARPU is trending relatively in line to 2022’s levels, and looks relatively weak, sitting around half of Snapchat’s ARPU with slow growth reported in Q3. Meta’s ARPU has accelerated through 2023 and is on track to potentially reach a record level in Q4.

R&D Expenditure Trends Highlight Meta’s Leading Position

Snapchat lags both Pinterest and Meta with weaker impressions growth and declining ARPU. That is the key shortcoming in Snapchat’s growth story: an inability to effectively monetize its user base to generate GAAP-profitable growth.

R&D expenditure trends highlight both Snapchat’s inefficiencies, while clearly demonstrating Meta’s ability to maintain high R&D spend and be a cash machine.

Source: Ycharts

Snapchat is putting more than 44% of its revenue into R&D, compared to 36% for Pinterest and nearly 30% for Meta – the three have all increased R&D expenditures as a percentage of revenue since 2022, for the development and deployment of AI and ML features as well as other product innovations. Snapchat’s primary R&D investment is augmented reality, both to increase user engagement – more than 60% of DAUs interact with AR features – and to drive increased ROI and click-through rates for advertisers.

However, the real issue for Snapchat — what sets it apart from Pinterest and Meta and the reason it will struggle to reach and generate GAAP profitable growth over the medium term – is that it is spending around 80% of its gross profit dollars on R&D.

Source: Ycharts

Essentially, Snapchat is spending a disproportionately high amount on R&D relative to peers while failing to increase ARPU and monetization within its user base. This is creating a downward spiral for GAAP profitability from operations, with GAAP operating margin below (30%) in each quarter in 2023 and below (22%) for seven straight quarters.

What sets Meta apart is that it can maintain a high level of R&D spend – at more than 33% of gross profit in Q3 and above 36% YTD through Q3 – while remaining a cash cow with strong operating cash flow and free cash flow growth. Meta’s operating cash flow margin rose to nearly 60% in Q3 as it generated $20.4 billion in OCF during the quarter. Meta is on track to deliver nearly 50% growth in OCF in 2023 to nearly $75 billion, assuming OCF margin in Q4 stays in line with Q3’s level. Free cash flow totaled $13.64 billion in Q3, a 40% margin, while YTD free cash flow was $31.51 billion, a 33% margin.

Valuation

Snapchat’s 90% rally in Q4 has taken its valuation on an EV to revenue basis nearly in line with Meta and Pinterest, though Snapchat is much more expensive than the two on an EV to operating cash flow basis.

Source: Ycharts

Snapchat is trading at nearly 5.9x EV/revenue, compared to 6.7x EV/revenue for Meta and 7.5x EV/revenue for Pinterest. Forecasted revenue growth rates for the three currently sit in the teens: 13.4% for Snapchat, 16.5% for Pinterest, and 13.0% for Meta.

In terms of EV to operating cash flow, Snapchat trades at a high premium given it sees inconsistent growth in OCF – it currently trades at 71.1x OCF, versus 38.5x for Pinterest and 11x for Meta. Pinterest’s operating cash flow growth has also been lumpy, though its cash flow generation remains stronger than Snapchat’s. Meta is significantly cash flow positive, and may deliver nearly 50% growth in OCF in 2023 to nearly $75 billion.

Source: Ycharts

Conclusion

Bullishness on social media stocks has risen rapidly – Meta leads the tech universe with the most analyst buy recommendations heading into 2024 with 41, and bullishness on Pinterest has reached 2021 levels, with approximately 70% of analysts giving it a buy rating.

Source: Bloomberg

Meta’s ability to drive significant growth in multiple key metrics sets it apart from Snapchat and Pinterest as a clear leader in the social media sphere. The Facebook and Instagram parent continues to witness strong growth in ad impressions as pricing recovers, driving ARPU higher, while its superior margin profile allows it to spend 18x more than Snapchat on R&D while generating substantial cash flow.

Pinterest’s ARPU is relatively in line with 2022’s levels, but single-digit growth raises red flags as ARPU is much lower, around half of Snapchat’s and less than one-tenth of Meta’s. Snapchat is struggling to effectively monetize its user base, and is spending substantially more of its gross profit dollars on R&D without seeing material benefits to growth.

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

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Ad Spending Growth to Accelerate In 2024

Posted on January 1, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 27, 2023, 07:15 am ESTForbes Forbes on Dec 27, 2023, 07:15 am EST

Ad-tech stocks have generally enjoyed strong returns in 2023, buoyed by a rather fierce tech rally. Ad spending growth showing initial signs of stabilizing in the back half of the year, with ad spend growing YoY in each month from July to October.

Ad spending growth is widely forecast to accelerate in 2024, after a bumpy start to 2023 stemming from macro uncertainty as growth forecasts were pulled lower mid-year. The market looks to be cheering on a return to higher growth in 2024, along with new synergies from generative AI advertising offerings from Big Tech and pockets of stronger growth in digital and retail media ad spend.

Lower budgets in 2022 and early 2023 affected nearly every ad-tech stock, including companies that draw audiences in the billions – on a three-year basis, only three of ad-tech’s primary names have a positive return: The Trade Desk (TTD), Alphabet (GOOG), and Meta (META), and the latter two only recently broke back into positive territory. The rest of the sector is still struggling to cope with a significant slowdown in growth, from 19.6% in 2021 to the low single digits in 2023.

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Growth Forecast to Gain Steam

Growth forecasts from Magna, Dentsu and GroupM generally point to an acceleration next year, at around 5.7% on average between the three, compared to 4.7% in 2023.

Source: I/O Fund

Dentsu is projecting 4.6% YoY growth in 2024, almost 2 percentage points higher than its final 2.7% growth forecast for 2023. This outlook is positively impacted by stronger growth in CTV, digital and retail media ad spend. However, Dentsu sees media price inflation contributing 2.1 percentage points of growth in 2024; stripping out that effect, global ad spend is expected to increase just 2.5% YoY, a slight deceleration from 2023. media price inflation contributing 2.1 percentage points of growth in 2024; stripping out that effect, global ad spend is expected to increase just 2.5% YoY, a slight deceleration from 2023.

Magna tends to lean more bullish in its forecasts compared to Dentsu, projecting 5.5% growth in 2023 and a 1.7 percentage point acceleration to 7.2% in 2024. Magna’s outlook is boosted by “economic stabilization and lower inflation,” themes that have been broadly supported by a slew of macroeconomic data over the past two months. Magna and Dentsu both see positive effects from political spend, and major sporting events including the UEFA EURO 2024 and the Summer Olympics.

GroupM is forecasting a 0.5 percentage point deceleration to 5.3% growth in 2024, with this weaker outlook driven primarily by “uncertainty in some markets and interest rates.” Despite the weaker forecast, GroupM is more positive on retail media ad spend, similar to Dentsu, seeing the segment growing 8.3% in 2023.

Below, we will take a look at some of the dominant names across four major digital advertising categories: search, social media, streaming/CTV, and retail media for more color on the ad industry in 2024.

The I/O Fund provides entries and exits through real-time trade alerts for the stocks the portfolio owns. The team is ramping our analysis for our 2024 portfolio now. Learn more here.here.

Search Ad Spend to Decelerate, But AI Showing Promise

Search ad spending is projected to decelerate in 2024, dropping from an expected 12.5% in 2023 to a projected 9.5% next year as advertisers shift dollars to other mediums, primarily social media and CTV. Even with this deceleration, search ad spend is still projected to outpace global ad spend’s growth.

Google has seen Search revenue growth accelerate in each quarter this year, from just below 2% in Q1 to 11.3% in Q3 – the highest growth in five quarters driven by retail vertical growth. What Google is showing in Q3, and likely in a similarly strong Q4, is that AI-powered ad solutions are helping drive resilient Search ad revenue growth.

Google is rolling out AI-driven features and is now reorganizing its digital ad business to place more emphasis on generative AI and AI automated ads. SVP Phillip Schindler explains that these “proven AI-powered solutions like Search and PMax are helping retailers drive reliable, strong ROI and meet customers wherever they are across the funnel.” Increased ROI and improved targeting help keep advertisers engaged and could potentially draw some additional advertising spend to Search.

Source: I/O Fund

We discussed in the past how Google is on the precipice of a multi-decade disruption driven by generative AI: Google is showing early promise with Search Generative Experience (SGE), while Microsoft is actively deploying generative AI to search via Bing Chat.

Deploying generative AI search experiences opens the door for different ad formats and placements, as well as an increase in surfaced links and content. AI can also drive help revenues higher from bid optimization. Google’s AI campaigns, including Performance Max and Smart Bidding, are tapping AI and machine learning tools to analyze millions of data signals to better predict future ad conversions and improve bidding performance.

Today, Google dominates the search advertising market, with estimates placing the giant holding over 60% of the market, however, anti-trust risk is still present for Google as regulators seek to determine if the company has been engaging in anti-competitive behavior across its search engine and demand-side platform (DSP).

For a deeper dive into Alphabet and how the Search giant is entering its Year of Execution, read more here.here.

Social Media Ad Spend Remains Robust

Social media ad spend is expected to remain robust in 2024, and may potentially overtake search ad spending this year, according to estimates from WARC. This medium will enter 2024 with one of the fastest projected growth rates at +13.8%, with spend estimated to climb to $227.2 billion, or less than 1% below search advertising’s $229.2 billion.

Social media’s share of total daily time spent on the internet remains above 35%, at more than 2 hours and 20 minutes per day on average. Combine that with billions of MAUs across the most popular platforms, and it’s easy to see why social media continues to be a popular place to park ad dollars.

Meta dominates the market with more than 60% share and has shown positive trends heading into the end of 2023 that are likely to carry over into 2024. Advertising revenues rose 23.5% YoY to $33.6 billion in Q3. This was driven by 34.2% growth in Europe to $7.77 billion as ARPU rose 33.8%, and 16.8% growth in US and Canada to $15.19 billion.

Pinterest (PINS) and Snapchat (SNAP) also mirror the trend of strong European growth, with Pinterest reporting European revenues rising 33% to $618 million as ARPU increased 26% in Q3. Pinterest said that its shift to Direct Links generated “88% higher outbound click-through rates and a 39% decrease in cost per outbound click for CPC objectives” for early adopters.

Snapchat’s European revenues rose 19.6% as ARPU rose 15.3%, the slowest of the three but much quicker than its overall revenue growth of 5.3%.

Source: I/O Fund

There are two factors currently driving this strong increase in revenues, especially for Meta – a surge in ad impressions to >30% YoY growth, and a recovery in ad pricing, which is nearing an inflection back to growth after declining throughout 2022 and 2023 to-date.

Engagement trends also remain positive, from both a user and advertiser standpoint. Meta noted that “AI-driven feed recommendations continue to grow their impact on incremental engagement,” driving a “7% increase in time spent on Facebook and a 6% increase on Instagram” this year.

Streaming/CTV to See Double-Digit Growth

With 91.8% of internet users between ages 16 to 64 watching content via streaming services, it’s easy to see why advertisers are favoring CTV and YouTube over linear TV. CTV ad spend has risen 400% since 2019, as use of streaming services surged through 2020 and 2021, while linear TV spend has been declining. CTV ad spend is forecast to be the fastest growing channel next year – Dentsu places growth at 30.8%, while BIA expects growth as high as 39.5%.places growth at 30.8%, while BIA expects growth as high as 39.5%.

Major streaming providers had expanded into ad-supported tiers, which are demonstrating both strong growth and strong ad revenue generation. Netflix’s ad-supported tier accounted for 30% of all sign-ups in September and now accounts for ~6% of all US subscribers, per Antenna.

Netflix is projected to reach $1.03 billion in ad revenue in 2024, an estimated 50.3% increase from ~$684.6 million in 2023, according to Insider Intelligence.
Disney+ is expected to see a slower ramp in ad revenue, with a projected 16.1% increase to $911.9 million in 2024 followed by a 20.2% increase in 2025.
Amazon is rolling out its ad-supported Prime Video tier next year, and is projected to generate $3.13 billion in CTV ad revenue, topping Roku to become the third-largest CTV ad platform.
YouTube is also sharing in these gains, with ad revenues rising 12.5% to $7.95 billion in Q3, the fastest growth rate in six quarters.

Source: I/O Fund

Although Roku saw strong contributions from video advertising, it added a bit a caution on the market, saying that the “macro environment continued to pressure the overall U.S. advertising market” in Q3. Roku sees video ads continuing this trajectory in Q4 as it witnesses positive ad momentum driven “in part by diversifying demand sources of advertisers on our platform and expanding partnerships.”

The Trade Desk CEO Jeff Green summed up the CTV opportunity perfectly: “‘Executives at every major streaming giant with both an ad-supported and an ad-free tier, (including Disney, Netflix, Paramount, Warner Bros Discovery and NBC Universal) say that total revenue per user is higher on the ad-supported plan than it is on the ad- free plan.’ Not only do media companies generate more revenue per user within an ad supported option, but the potential for growth is much greater. Ultimately, there’s a limit to how much viewers will spend on subscriptions. Economic pressures on the consumer, right now, are increasing the appeal of a free or low-cost option, that is supported by ads. However, this model is only sustainable if the ad load is significantly lower than traditional linear TV. And the only way we get there is if the ads are relevant to the viewer, so that advertisers are willing to pay more for each of them.”

Retail Media Emerging as One of the Fastest Growing Categories

Retail media ad spend is quickly emerging as one of the fastest growing digital ad categories — US retail media ad spend is forecast to grow nearly 23% next year to more than $55 billion before almost doubling by 2027. Globally, retail media ad spend is expected to increase 10.4% to $141.7 billion, driven by this US growth. Amazon and Alibaba are a dominant duo in this market, with nearly 70% estimated share in 2023, but Walmart, Etsy, eBay and other retailers and e-commerce platforms share in the gains.

Retailers and advertisers are prepping for a longer and stronger holiday season, with holiday spending on the rise despite weaker consumer sentiment. Amazon is “still seeing a lot of strength in the lower-funnel ad products like sponsored products,” even as companies remain a bit more cautious on upper-funnel ads such as display and video.

Amazon’s ad revenues grew 26% YoY in Q3 to more than $12 billion, setting up for a potential $14 billion quarter in Q4 with supporting seasonal strength. For 2024, Amazon is expected to drive a majority of the market’s growth, as it is forecast to see ad revenues rise 16.7% from $45.4 billion to $52.7 billion. Amazon’s Q4 and Q1 ad revenue growth will give a clue into how retail ad spend growth may unfold.

Source: I/O Fund

Other benchmark companies are showing similarly strong trends: Meta noted that its “online commerce vertical was the largest contributor” to growth in Q3, while its AI tools for Advantage+ shopping campaigns “reaching a $10 billion run rate” with more than half of its advertisers using those tools.

2024 Outlook

2024 is widely expected to see an acceleration in ad spending, with major sporting events and political spend aiding the growth forecast. Retail media is expected to see 23% growth in the United States as it begins to shift to other mediums. CTV’s rapid growth outlook of 30% to 40% is boosted by major streaming media companies introducing ad-supported tiers. CTV ads are currently expected to be the strongest growing segment of the four covered here.

Although search ad spending is forecast to soften, Google’s reorganization of its digital ad business to further integrate and utilize generative AI shows promise in reinvigorating growth. Social media ad spend remains robust, and improving pricing trends combined with strong impression growth and AI opportunities could send growth higher next year.

Macro uncertainties are not completely out of the picture. 2022 and early 2023 saw ad-tech stocks get pummeled as growth slowed dramatically from macroeconomic headwinds, so a resurgence of economic growth concerns and any potential budget optimization trends among major advertisers could dent the strong returns enjoyed by a plethora of ad-tech stocks this year. What’s most important to remember is that ad spending can be paused very quickly or resumed quickly, and so this sector is known for sharp moves. We continue to monitor this sector as we build our 2024 portfolio.

I/O Fund Equity Analyst Damien Robbins contributed to this report.

Recommended Reading:

Ad-Tech Sector: Q2 2023 Overview

Posted on July 5, 2023June 30, 2026 by io-fund

Adtech has seen extreme volatility over the past few years with Covid causing some stocks to see 1,000% gains in a brief period of time between 2019-2021, and then plummet by up to 80% in 2022. For the current year-to-date, many have rebounded despite reporting depressed growth levels.

Below, we review the stocks in the ad-tech sector to find out which companies have performed well in the recent quarter results and which companies stand out in revenue growth estimates, profits, cash flows, earnings surprise, and we also look into management insights.

Pictured Above: Ad-tech returns from Jan 1, 2022 to Dec 31, 2022. Source: YCharts

Pictured Above: Ad-tech returns since Jan 1, 2023 Source: YCharts

Top Ad-Tech Stocks with the highest revenue growth rates in Q1

Source: YCharts

Unity sits at the cross-section of cloud and ad-tech. The company’s revenue grew by 56% YoY to $500 million in the recent quarter, however, the revenue was down (2%) YoY on a pro-forma basis to reflect the ironSource merger that was completed in November 2022. The company beat its own guidance of $470 million to $480 million and the analyst’s revenue estimates by 4.3%.

Unity’s guidance for the next quarter is $510 million to $520 million, representing a YoY growth of 72% to 75% and 6% to 8% YoY on a pro-forma basis. Management is expecting the overall advertisement sector to be flat QoQ. Per the macro-outlook, they are still cautious, as the company’s CFO Luis Visoso said in the earnings call that “the economic environment is still volatile and uncertain.”

Perion Network is a small cap ad-tech stock with a market cap of $1.4 billion that has sustained a stronger bottom line than its peers. We covered this stock here. Revenue grew 16% YoY to $145.2 million. Management stated the company is likely to raise its revenue growth in 2023, when CEO Gerstel stated: “Given our current visibility, and the sustainability and predictability of our business model, we feel confident in raising annual guidance for the full year 2023.”

The company’s new 2023 revenue guidance is $725 million to $745 million, representing YoY growth of 15% at the mid-point, up from the previous guidance of $720 million to $740 million.

Quarterly Revenue Surprise.

Source: YCharts

Fubo beat analyst revenue estimates by 6.9% in the Q1 results, which led the ad-tech sector. The company’s revenue grew by 34% YoY to $324.4 million, and its North American business grew by 34% YoY to $316.5 million.

The company’s North American revenue guidance for the next quarter is $292.5 million to $297.5 million, representing a YoY growth of 36% at the mid-point. It also raised FY2023 North American revenue guidance to $1.235 billion to $1.265 billion, representing YoY growth of 27% at the mid-point, up from the previous guidance of $1.195 billion to $1.225 billion. It also reiterated its goal of being cash flow and adjusted EBITDA positive by 2025.

The company sees some improvement in its advertising business as the company’s CFO, John Janedis, answered to an analyst question on CTV advertisement demand trends. “And so when we looked at our Q1 results, to your point, we came in about flat on ad revenue. From a monthly perspective, let me just talk you through that and then I'll also go through 2Q in some of the categories. March was better than February, which is better than January. And I'd say if I sort of give you some of the numbers around that, January was down slightly, February, call it, flattish and then March was up a bit, maybe call it mid-singles. And then we're seeing further acceleration now into April and 2Q and so far April, I think finished up in the double-digits. So, we're encouraged by what we're seeing in terms of some of the trends.”

Revenue Growth Estimates for Q2

Source: YCharts

Unity leads with the highest growth estimate for the next quarter. Per what was already discussed, this is due to the ironSource acquisition. Unity is followed by Fubo and DoubleVerify. DoubleVerify’s revenue grew by 27% YoY to $122.6 million.

Revenue guidance for the next quarter is $131 million to $135 million, representing YoY growth of 21% at the mid-point. Analysts expect revenue to grow 22% YoY to $133.5 million.

Needham analyst Laura Martin raised the firm's price target on DoubleVerify (DV) to $45 from $35 and kept a Buy rating on the shares after attending an investor call with its CEO Mark Zagorski.

According to her note, Meta Platforms (META) accounts for half of the company's total social revenue, and the firm now believes that measurement revenue from Meta could double over the next 12-24 months after DoubleVerify adds brand safety suitability to its product suite, the analyst told investors in a research note. Retail media networks will drive total addressable market and revenue upside for DoubleVerify as more brands insist on closing the loop between ad spending and sales, the firm added.

Revenue Growth Estimate for Current Fiscal Year

Source: YCharts

For the current fiscal year, analysts expect Unity to have the highest revenue growth estimate among ad-tech stocks. It is followed by Fubo, which analysts expect to grow by 28% and DoubleVerify is expected to grow by 25%.

P/S Ratio (Forward)

Source: YCharts

Most ad-tech stocks are trading at a low valuation. The Trade Desk has the highest forward P/S ratio of 19.5. The Trade Desk has been trading at a premium valuation as its revenue growth has been stronger and its bottom line is better than its peers. The company’s 2022 revenue grew by 32% YoY to $1.58 billion. This revenue growth was exceptional while other ad companies struggled with growth last year, such as Meta, which reported a decline of (1%) in revenue.

The company’s CEO and Founder, Jeff Green, highlighted in the Q4 earnings call, “Specifically in the last 6 months of 2022, The Trade Desk started to separate from much of the digital advertising market in terms of relative outperformance. In the third quarter, we have reported 31% growth while our competitors were either in retreat or posting single-digit growth. That same trend continued into the fourth quarter as we grew 24% and most of our large competitors were posting between negative 9% and negative 2% growth. I don’t think we have ever had the level of industry outperformance in our 6 years or so as a public company as we did in 2022.”

Analysts expect revenue to grow 22% in FY2023 and continue to grow over 20% till 2030, with a revenue growth forecast of 30% for FY2028.

The company’s recent quarter revenue grew by 21% YoY to $383 million. While macro conditions remain uncertain and advertising budgets are carefully scrutinized, the management sees some improved visibility. Laura Schenkein, the new CFO of the company, said in the earnings call, “Turning now to our outlook for the second quarter. While macro conditions remain uncertain, visibility has improved slightly since the beginning of the year. We are cautiously optimistic and estimate Q2 revenue to be at least $452 million which would represent growth of 20% on a year-over-year basis.”

The company reported an operating loss of ($23.3) million compared to ($17.1) million for the same period last year. The increase in operating loss was due to increased operating expenses related to in-person events and travel this year that was stopped briefly post Covid. We have noted later in our article that ad-tech stocks have a weak bottom line. The company has a better bottom line than most adtech stocks, and in the recent quarter, it ranks 7 in the operating margin among the 17 stocks we track in the sector. The company reported an adjusted EBITDA margin of 28% compared to 38% in the same period last year.

Morgan Stanley analysts recently upgraded the stock to overweight from equal weight. “We see growth in ad-supported streaming and retail media as two of the strongest growth areas in online advertising and see the US CTV market growing at a ~18% '22-'25 CAGR while we forecast retail media (global ex-China) to grow at a ~17% CAGR. As the leading independent demand-side platform (DSP), TTD is well positioned to benefit from both trends,” the analysts said in a client note. “We believe TTD will be able [to] leverage its position as an independent player to sign more retail media partners…and ultimately be a leader in offsite retail media advertising,” they added.

Free Cash Flow Margin

Source: YCharts

Ad-tech is a very cash-efficient industry, evidenced by the robust free cash flow (FCF) margins, as seen in the above chart. The Trade Desk has the highest free cash flow margin of 46%, followed by Pinterest with 30%, and Netflix with 26%.

We had highlighted the Netflix’s cash flow turnaround in our editorial in July 2022 when we said, “The most important line item for Netflix is the company’s cash flow. Looking back, this has been troublesome for Netflix as the company lost $3.3 billion in cash in 2019 as it built up its original content pipeline. However, the company is on an entirely new trajectory with $1 billion in free cash flow expected this year and “substantial” free cash flow in 2023, per Netflix management.”

Operating Margin

Source: YCharts

Only five of the ad-tech stocks have positive GAAP operating margins in the recent quarter. Meta leads the sector, followed by Google and Netflix. We believe focusing on profitable companies or those with strong profitability paths is prudent during a time of current macro uncertainty.

Highlights from Google I/O 2023

Posted on May 18, 2023June 30, 2026 by io-fund

Google recently held its annual developer conference Google I/O 2023. Google is a large real estate owner with arguably more data than any other tech company in the world. This advantage cannot be overstated when it comes to training large language models (LLMs). In addition to having a strategic advantage for future development of LLMs with data, Google can offer advertisers instant ROI.

The primary announcements from the event were:

Google drops the waitlist for Bard and announces new features.
Google launches new Large Language Model, PaLM2
Unveils its new AI-powered Search.
Google Cloud announces new A3 supercomputer VMs built to power LLMs.

Google drops the waitlist for Bard and announces new features

Among the more exciting announcements at Google I/O, the company dropped the waitlist for Bard and the chatbot is now available in 180 countries and territories. Bard supports English, Japanese, & Korean languages, and will soon support more than 40 languages. Google is also rolling out features such as better source citations, the ability to export content generated in Gmail and Google Docs, support for more visuals and an upcoming Google Lens integration to analyze pictures and write captions.

Background on Google’s Bard:

Earlier this year, Google’s stock (Alphabet) tumbled 7% when chatbot Bard was unable to complete a search with 100% accuracy. During the demonstration, Bard returned incorrect information about which telescope was the first to take pictures of a planet outside the Earth’s solar system. This was a minor mistake given how far large language models and generative AI has come, rather it was the timing that was a bit flawed as OpenAI’s ChatGPT, the chatbot powering competitor Microsoft Bing, had been dominating headlines since its November 30th launch.

Microsoft, being an opportunist, took it a step further and announced Bing would now be powered by a faster and more accurate version of GPT-3.5 one day after Bard’s failed demonstration: “We’re excited to announce the new Bing is running on a new, next-generation OpenAI large language model that is more powerful than ChatGPT and customized specifically for search. It takes key learnings and advancements from ChatGPT and GPT-3.5 – and it is even faster, more accurate and more capable.”

Both companies have been preparing for this moment for many years. Microsoft invested $1 billion into OpenAI a few years ago with a new $10 billion round announced last month. Meanwhile, Google acquired DeepMind in 2014. Google also previously developed conversational neural language models such as LaMDA, which is used by Google’s Bard for its conversational AI technology.

Despite the mishap with Bard, it would be a human-generated mistake to think Alphabet does not command a place of leadership right now in generative AI. Alphabet was one of the first tech companies to focus and invest on AI and natural language processing (NLP). We pointed out to our premium research members in July of 2022 that ChatGPT is based on transformer architecture that Google initially introduced in 2017 when we said:

“Transformers are becoming one of the most popular neural-network models by applying self-attention to detect how data elements in a series influence and depend on one another.

Sequential text, images and video data are used for self-supervised learning and pattern recognition, which results in more data being used to create better models. Prior to transformer models, labeled datasets had to be used to train neural networks.

Transformer models eliminate this need by finding patterns between elements mathematically, which substantially opens up what datasets can be used and how quickly.

Google first introduced transformer models in 2017 and transformers are used in Google and Bing Search. Transformers also led to BERT models, which stands for Bidirectional Encoder Representations from Transformers, and is commonly used for text sequences. Transformers are also used in GPT-3 (it’s the T in GPT) which improved from 1.5 billion parameters to 175 billion parameters. GPT-3 has the ability to report on queries it has not been specifically trained on.”

Earlier this month, Google’s CEO, Sundar Pichai, gently reminded the AI community of how cutting edge Google’s research is when he stated, “Transformer research project and our field-defining paper in 2017, as well as our important advances in diffusion models, are now the basis of many of the generative AI applications you're starting to see today.”

BERT was designed to help Google better understand search intent, as despite billions of searches every day, about 15% of those searches are for brand new terms. This prompted Google engineers to develop a model that could self-learn.

The result is that searches results are more accurate by taking into consideration the nuances of language.

Google launches new Large Language Model, PaLM2

Google launched a new Large Language Model, PaLM2, that will power the updated Bard AI chat tool and more than 25 other new products & features including productivity software (Gmail, Google Docs), Healthcare and Security.

PaLM 2 has the following capabilities:

Multilingual: The LLM is trained on more than 100 languages, which increases language proficiency
Reasoning: The LLM’s dataset has improved logic, common sense reasoning and mathematics
Coding: The LLM can generate code including programing languages such as Python, JavaScript and specialized languages such as Prolog, Fortran and Verilog.

Google Unveils its new AI-powered Search

The company has unveiled its new generative AI-powered search that will be subject to a waitlist. Google cites the example of the following search “what's better for a family with kids under 3 and a dog, bryce canyon or arches.” Previously, you had to break the question down into smaller ones, sort through the vast information available, and then put things together yourself. Now with generative AI, search will be able to better understand the question.

Generative AI will also provide a better experience for online shopping by instantly getting relevant information like reviews, images, and ratings. The new shopping experience is based on Google’s Shopping Graph, which has more than 35 billion product listings.

The company announced the ‘About this image’ feature, allowing users to identify fake images. It mentioned in its press release, “When the image and similar images were first indexed by Google, Where it may have first appeared, and Where else it’s been seen online (like on news, social, or fact checking sites)”.

Google launches new Large Language Model, PaLM2

The company launched the new Large Language Model, PaLM2, that will power the updated Bard AI chat tool and more than 25 other new products & features announced during the Google I/O 2023.

Its predecessor PaLM, launched in April 2022, was a 540 billion based parameter, and the company did not provide this detail for PaLM2. PaLM stands for Pathways Language Model. “What we found in our work is that it’s not really the sort of size of model — that the larger is not always better,” DeepMind VP Zoubin Ghahramani said in a press briefing ahead of the announcement. “That’s why we’ve provided a family of models of different sizes. We think that actually parameter count is not really a useful way of thinking about the capabilities of models and capabilities are really to be judged by people using the models and finding out whether they’re useful in the tests that they try to achieve with these models.”

PaLM2 is faster and more efficient than previous models. Some of the improvements highlighted by the company are that PaLM2 is trained for improved multilingual text, spanning over 100 languages, reasoning, and coding, including popular languages like Python & JavaScript. For example, due to the multilingual capabilities of PaLM2, it has helped Bard to expand to new languages. PaLM2 is available in four sizes: Gecko, the smallest, followed by Otter, Bison, and Unicorn. Other use cases include improved Workspace features while working in Gmail, Google Docs, and Google Sheets. PaLM2 can also be used for enterprise use cases like Med-PaLM2 in medical research and Sec-PaLM in cybersecurity.

The company also said that it’s working on a more powerful model called Gemini and it will also be available in various sizes so that it can be easily deployed to various products.

Google Cloud announces new A3 supercomputer VMs built to power LLMs

Google Cloud announced the A3 GPU supercomputer that can be used to train and run Artificial Intelligence and Machine Learning models. While the A3 GPU supercomputer is on a private preview waitlist, the previously announced G2 VMs are now in general availability. The G2 VMs are powered by the new Nvidia L4 Tensor Core GPUs. The company said that it is the first cloud provider to offer these new GPUs for serving generative AI workloads.

The A3 GPU VMs are made of eight Nvidia H100 Hopper architecture GPUs, 3.6 TB/s bisectional bandwidth between A3’s 8 GPUs via the Nvidia NVSwitch and NVLink 4.0, 4th Gen Intel Xeon Scalable processors, and 2TB of host memory.

The A3 supercomputer can deliver up to 26 exaFlops of AI performance, thereby improving the time and cost of training large machine learning models. The A3 workloads will be run on Google’s Jupiter data center networking fabric which the company states “scales to tens of thousands of highly interconnected GPUs and allows for full-bandwidth reconfigurable optical links that can adjust the topology on demand.”

Conclusion:

I would not be surprised if we exit 2023 with a reimagined way to use Search Engines. The iteration cycle here is likely to move quickly compared to AVs or the Metaverse, as there are real-world applications where AI can be applied without safety issues (AVs) or friction in terms of user adoption (Metaverse/VR headsets). Instead, the scale has already been built with Search being a viral, daily activity used by nearly every human on earth. AI advancements will simply improve what is already in place.

Cutting-edge chatbots can be quickly deployed on the search engines that already exist, and this is a substantial difference from other overhyped, early-stage technologies. Their accuracy may still need time, but they're probably not too far off from being deemed “reliable enough.”

Investors should expect that AI will become a winner(s)-take-all market. In time, the difference in how search and other applications operate in terms of user experience plus ROI for advertisers will help carve a larger lead.

Premium Members should check the forum for updates on our timing for an entry into the stock.

Business Overview

Software Platform Segment (66% of Revenue, 87% of Adjusted EBITDA in Q2’24)

Apps Segment (34% of Revenue, 13% of Adjusted EBITDA in Q2’24)

Acceleration from AI-Powered Platform

AppLovin Q2 Financials

Revenue and EPS

Margins

Cash and Debt

Revenue Segments

Key Metrics

Valuation

Conclusion

Q1 Recap

AWS Seeing AI-Powered Growth

A Note on Capex

Advertising Revenue Growth Remains Strong

Unlocking Value via AWS, Ads

Valuation Intact, Strong Cash Flow Growth

Conclusion

Meta: The Juggernaut Has Returned

Meta’s Momentum to Continue in 2024

The Trade Desk: CTV Tailwinds Offer Growth Outlet

CTV, Kokai Provide Growth Opportunities in 2024

Alphabet: Beneficiary of Search, CTV Ad Spend

AI Integrations Provide Opportunity for Growth

Cash is King

Conclusion

Concentration Risk Elevated

Valuations Relatively Intact

Conclusion

Revenue and EPS:

Margins:

Cash and Debt:

Membership Trends:

Q1, FY24 Guide

Ad Commentary

Earnings Call:

Discussion on ARM:

More on the Paid Sharing Ramp:

Partner Deal that Could Potentially Double Ad-Tier MAUs:

Evidence Competitors are Struggling:

Conclusion:

Revenue and EPS

Margins

Cash Flow and Balance Sheet:

Key Metrics

Regions:

What to Watch For:

Conclusion

Ad Pricing Recovers While Impressions Remain Strong

Meta: Ad Impressions Remain Strong

Pinterest: Pricing Remains Depressed

Snapchat: Growth Still in Single Digits

Meta & Pinterest ARPU Accelerating

R&D Expenditure Trends Highlight Meta’s Leading Position

Valuation

Conclusion

Growth Forecast to Gain Steam

Search Ad Spend to Decelerate, But AI Showing Promise

Social Media Ad Spend Remains Robust

Streaming/CTV to See Double-Digit Growth

Retail Media Emerging as One of the Fastest Growing Categories

2024 Outlook

Top Ad-Tech Stocks with the highest revenue growth rates in Q1

Quarterly Revenue Surprise.

Revenue Growth Estimates for Q2

Revenue Growth Estimate for Current Fiscal Year

P/S Ratio (Forward)

Free Cash Flow Margin

Operating Margin

Recommended Readings:

Google drops the waitlist for Bard and announces new features

Background on Google’s Bard:

Google launches new Large Language Model, PaLM2

Google Unveils its new AI-powered Search

Google launches new Large Language Model, PaLM2

Google Cloud announces new A3 supercomputer VMs built to power LLMs

Conclusion:

Recommended Reading: