Super Micro FYQ3: Cash is the Achilles Heel

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

This quarter, Super Micro reported revenue of $3.85 billion, reflecting a staggering growth rate of 200.7% YoY. This technically missed estimates by 1.3%. Management increased guidance to between $5.1 billion to $5.5 billion, up from $4.9 billion, indicating year-over-year growth of 142.6% at the midpoint.

The company's GAAP EPS of $6.56, surpassed analyst expectations of $5.16. Next quarter, the expected GAAP EPS ranges from $7.20 to $8.05 compared to analyst expectations of $6.87 EPS.

What lies beneath this phenomenal growth rate is the need to raise cash to fund operations, which for Super Micro means buying excess inventory to prepare for future growth, especially as it relates to liquid cooling. Inventory of $4.1 billion amounts to 85% of revenue, whereas SMCI held closer to 70% of revenue in the past.

This quarter, the operating cash flow margin was (-39.5%) and the free cash flow margin was (-42%). This is a material change to the story given the current macro environment, and management did not indicate it will get better in the near-term as it’s related to components for liquid cooling systems. Per management: “We continue to face some supply chain challenges due to newer products that require new key components, especially, specifically, DLC related components, and believe this situation will gradually improve in the coming quarters.”

Revenue and EPS

For the third quarter of fiscal year 2024, Super Micro reported revenue of $3.85 billion, up $2.57 billion, or 200.7%, compared to $1.28 billion for the same quarter in the previous year. This growth was slightly under the projected midpoint based on management’s previous guidance of revenue in the range of $3.7 billion to $4.1 billion.

For Q4 FY24, management is guiding for revenue in the range of $5.1 billion to $5.5 billion, representing YoY growth of 142.6% at the midpoint. This compares to analyst estimates for $4.9 billion and growth of 124% going into the print.

There is a drop off in Q2 FY25, which is calendar year Dec 2024, and hopefully revisions flow through to increase this growth rate. It may seem far off, but this is a high beta stock that sees volatile price action based on signs of weakness or strength.

Management raised full year revenue growth to 109.3% for revenue of $14.9 billion. This is up from guidance for revenue of $14.5 billion last quarter.

SMCI also established full year GAAP EPS and non-GAAP EPS guidance for FY24. GAAP EPS is guided to $21.61 to $22.46, compared to GAAP EPS of $11.43 for FY23. This would mark a 92.9% increase YoY at the midpoint of guidance. Management expects non-GAAP EPS to be in the range of $23.29 and $24.09 for FY24. This would be YoY growth of 100.6% at the midpoint compared to FY23 non-GAAP EPS of $11.81.

GAAP EPS for March was $6.56 compared to analysts’ consensus of $5.16. This is 28.6% higher sequentially with $5.1 GAAP EPS in the previous quarter and is 328.8% growth from the year-ago quarter. Adjusted EPS was $6.65 for similar YoY and QoQ growth.

Looking forward, next quarter’s GAAP EPS is expected to be between $7.20 and $8.05 for over 122.3% growth from the year-ago quarter. Adjusted EPS of $8.02 at the midpoint will see similar YoY growth. This compares to analyst estimates of $7.16.

Margins

Gross margin was 15.5% in Q3 for gross profit of $597.4 million. The company is guiding to a lower gross margin next quarter. An analyst on the call implied it would be 13.5% to 14% next quarter.
Operating margin was 9.8% for operating profit of $378.3 million and adjusted OPM was 11.3%.
Net margin was 10.5% for net profits of $402.5 million. Adjusted net margin was 10.7%.

Adjusted gross margin was 15.6% for Q3, improved slightly QoQ from 15.5%, however, adjusted gross margin was down 210 bps YoY compared to 17.7% in the same quarter a year ago. On the adjusted gross margin declines, management stated it is due to product/customer mix and focus on market share gains.

Note: Margins on SMCI tend to be thinner than most semiconductors, which is a key topic of analysts’ focus during each earnings call. The CFO has stated the target margin is between 14% and 17%.

Cash Flow and Balance Sheet

Cash flow used in operations for Q3 was $1.5 billion compared to cash flow usage of $595 million during the previous quarter as the company grew inventory and accounts receivable for higher levels of business.

Cash flows from strong profitability was offset by higher Inventory, a large portion of which was received late in Q3, and higher Accounts Receivable from increasing revenues. The Q3 closing inventory was $4.1 billion, which increased by 67% QoQ from $2.5 billion in Q2 due to the purchase of key components. Capex was $93 million for Q3 resulting in negative free cash flow of $1.6 billion for the quarter.

On its balance sheet, the company reported $2.12 billion in cash and cash equivalents and $1.86 billion in debt, up from $726 million in cash and debt of $376 million in the previous quarter. Consequently, the net cash position stood at $260 million, declining from $350 million in the last quarter.

During the quarter, SMCI announced a $1.5 billion principal amount of convertible senior notes that will be due in 2029. The company also announced a public offering of common stock as SMCI raises capital to support operations, including purchases of inventory and other working capital needs, manufacturing capacity expansion and increased R&D investments.

Key Metrics:

Server and Storage Systems & Subsystems

Server and storage systems were $3.7 billion in revenue for growth of 218% YoY and was 96% of Q3 revenue.
Subsystems and Accessories were $152 million, up 27% YoY and was 4% of Q3 revenue.

Vertical Markets

OEM Appliance & Large DC: 50% of total revenues, down from 59% last quarter and up from 47% a year ago.
Organic (Enterprise & Channel), AI/ML: 49% of revenues, increasing from 40% of revenues last quarter, and slightly down from 50% of revenues a year ago.
5G, Telco & Edge/IoT: 1% of revenues, flat compared to last quarter and down from 3% of total revenues a year ago.

According to the CFO: “One existing CSP large data center customer represented 21% of Q3 revenues and one existing enterprise channel customer represented 17% of revenues.” This compares to last quarter’s customer concentration of 26% and 11%, respectively.

Inventory:

Inventory days increased to 92 days compared to 67 days in the previous quarter. The company’s Q3 closing inventory was $4.1 billion, which increased by 67% quarter-over-quarter from $2.5 billion in Q2 due to the purchase of key components.

This was asked about on the call and we detail it for you below. It’s also reflected in the steep, negative operating cash flow reported this quarter.

Geography:

All revenues were up by a wide margin QoQ.

United States was 70% of revenue, and increased 242% YoY and 3% QoQ.
Asia was 20% of revenue, and increased 257% YoY and 17% QoQ.
Europe was 7%, and increased 30% YoY and 3% QoQ
ROW was 3%, and was up 87% YoY and was down 11% QoQ
China accounted for 1% of total revenue.

Earnings Call:

Inventory increase:

The inventory days increasing doesn’t entirely explain the steep $4.1 billion in inventory. Rather, the company has to hold more inventory while waiting for key components related to liquid cooling. This is out of character for Super Micro to hold this much inventory and this will not be comfortable for the Street to accept given the company has diluted shareholders and raised debt in the past quarter.

Question
Aaron Rakers (Analysts)

Yes. I'll try and slip in 2 here, if I can. So I guess one of the just kind of housekeeping questions is a very significant increase in inventory this quarter. I know you said that it came in towards the end of the quarter. How do we think about the trajectory of inventory as the supply comes on? Do you expect inventory to stay at this level? Do you expect it to start to come down? I'm just kind of curious how we think that flow through kind of looks as you take on more supply […]

Answer
Charles Liang (Executives)

Two reasons we had to increase inventory: One is because Q4, I mean, June quarter, we will have a strong revenue growth; a second reason because we're preparing for high-volume liquid cooling. Again, we have more than 1,000 of 100k watt, I mean, liquid cooling rack we have to ship to customers in Q4. And liquid cooling as you know, is pretty new. So we had to prepare enough inventory so that we can deliver liquid cooling rack scale product to customer on time or with minimal lead time. So both factor, indeed, is a positive factor. And with our economic scale continuing to grow, indeed, our inventory average [ daily ], indeed, will slightly improve.

Answer
David Weigand (Executives)

Yes. So Aaron, my take on that is I hope that our inventory continues to grow because that means there's a reason behind it, so — and it's tied to sales.

–End quote

Here was another discussion around the inventory levels:

Question
Nehal Chokshi (Analysts)

Congrats on a strong guide here. Talk about the guide here. Inventory increased $1.5 billion Q-over-Q. And Dave, as you mentioned, you'd like to see inventory increase. I do too because it's a strong indicator of things to come. And you guided June quarter to increase by $1.6 billion Q-over-Q. If I do this math, where I'm looking at the inventory at the quarter end and then the [ fourth ] quarter revenue, typically, it's around 60% to 70% of revenue. But with your March Q ending inventory and your current [ June, too, ] guidance, that equates to about 85% of projected revenue. So can you just explain what seems to be a little bit more usual inventory buildup given the revenue guidance range?

Answer
David Weigand (Executives)

Sure. Absolutely. That's a fair question. So we actually got a substantial amount of inventory in the last week of the quarter, okay, which obviously, we're not going to be able to ship, but we took in $700 million in the last week of the quarter. So that's not something — that's something that has to do with when inventory arrives. And so we — it hurts our cash flow, but you know what, it doesn't matter, because we need that inventory for Q4 shipments.

Answer
Charles Liang (Executives)

Yes. Again, 2 reasons, right? Q4, we will have a strong revenue, so we had to prepare for Q4. And also, I mean, liquid cooling, I mean, it's new. So we had to prepare enough safety inventory for liquid cooling demand for June quarter and September quarter as well. So that's another reason why we have a slightly higher inventory now.

Answer
David Weigand (Executives)

Yes. And I want to add, Nehal, that, that's exactly why we did capital raises, too, is to prepare for these Q4 shipments, and — so that we could make those large purchases, and we hope to continue that.

–End Quote

Sequential Growth is the New Normal

My ears perked up on this comment, when the CEO was asked if they are capable of future sequential growth:

Answer
Charles Liang (Executives)

Yes. As you know, traditionally, in the last 10 years, right, I mean, the September quarter and March quarter, always our soft quarter. But now with AI, we've been growing so strong. So we basically are able to grow sequentially. So although March and September be a little weak, but basically, because of strong AI growth and our market share growing, so the sequential growth will become the normal. And basically, I mean, we have even better technologies than before ever, and now economic scale become much bigger. Malaysia campus production will be ready by end of this calendar year, so we see a lot of positive factors to grow our business.

–End Quote

SMCI Likely to Raise more Capital

This is likely the comment that caused the stock to go down 10% AH despite the strong beat and raise. An analyst asked the CFO if he foresaw a need to raise more capital. Here was his reply:

Answer
David Weigand (Executives)

Yes. So the way I would answer that is, is that I hope that I have — I need more capital, Jon, because that means that we're booking — that we're growing revenues even faster. So we've got capital adequate to get us through the current market, which means today. But in a week, that — we hope that, that changes, and we hope that we've got orders that require even more capital. So all I can say is I hope that — I'm hoping for the need for more capital.

Answer
Charles Liang (Executives)

Yes. We believe our revenue will continue to grow strong. And that's why we need more capital to grow faster. If we grow 20%, 30%, we may have enough capital now, but it will grow much faster. Then for sure, we need more capital to grow stronger.

–End Quote

My comment: this is not what the market wants to hear right now, which is that you have to raise capital to fund growth. Supermicro is an incredible company situated perfectly between hyperscalers and the world’s best design companies. However, this is not the right macro environment to need to raise capital. Not even an AI bullet train can change those facts.

Conclusion:

There is no doubt, we rode a phenomenal wave with Supermicro over the past few months. The comment that sequential growth will be the new norm is music to our ears, as growth investors. However, we can’t fight the Fed. This is a good time to put the surf board down for a little while and let the next wave gather strength before we attempt Supermicro again.

In our pre-earnings writeup, I had stated: “it’ll be negative cash flow margins and/or dilution that penalizes the stock,” as well as: “The stock seems to be on a never-ending winning streak, however, what could be Super Micro’s Achilles heel is the cash issue — as the company must grow capacity to keep up with the revenue growth, yet to do so will require cash.”

If it were just about inventory, to where the shipments came in late in the quarter but was spoken for the following quarter, then that would not be an issue. From this report, the concern is the large appetite the company has to raise more cash to support growth. The tie-up on inventory for the direct liquid cooling components is an additional concern but it’s the primary issue around having to raise more cash that ultimately doesn’t meet our criteria at this time.

As you are aware, Super Micro is a high beta stock and we plan to adhere to our line in the sand. The good news is that we’ve made sizable profits and plan to put those to work at lower levels.

Recommended Reading:

Super Micro Q3 Pre-Earnings: Puts and Takes for the AI Bullet Train

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

In our last write-up, we called Super Micro the “AI Bullet Train” due to neck-breaking growth rates. Last quarter, the company reported a notable 103% year-over-year growth, with revenues surging to $3.66 billion. Management's projections are for nearly double the growth, anticipating Q3 revenues to range between $3.7 billion and $4.1 billion, or growth of 204.7% year-over-year at the midpoint. Consensus estimates are for $3.92 billion, for 206.3% growth expected in tomorrow’s print.

Such predictions underscore a consistent upward revision in earnings guidance, reflecting anticipated strong growth for the remainder of the fiscal year and extending into 2025.

To understand how we got here, it was through multiple analyst revisions. For example, the March quarter started with estimates of $2.1 billion in August for growth of 45% but were revised by 160 points (!) to $3.92 billion for growth of 205.7%. The June quarter was seen upward analyst revisions increase by 92 points, and the September quarter’s numbers revised by 82.7 points in the span of one quarter!

Here's what that looks like:

The takeaway is that Super Micro’s bullet train-like price action is based on upward revisions, which is unique from earnings beat/raise or simply strong estimates. In fact, the stock was down (-12%) following its last earnings report and is now up 80% since that call with gains as high as 135%. This is a stock that does not rely on earnings pops, like most growth stocks, and rather, it requires a bit of tenacity as the intra-quarter changes have been quite profitable.

With that said, below is a deeper look into SuperMicro, including the underlying factors contributing to these impressive figures ahead of tomorrow’s Fiscal Q3 results and the risks that accompany this high beta stock.

Revenue and EPS

Last quarter, the company’s Q2 FY2024 revenue grew by 103% YoY to $3.66 billion. Management Q3 guidance is in the range of $3.7 billion to $4.1 billion, representing YoY growth of 204.7% at the mid-point. The consensus analysts’ estimate is $3.92 billion, representing a YoY growth of 206.3%. The guidance has increased consistently through recent months as strong growth is expected for the remaining quarters of the fiscal year and into 2025.

The drop off in Q2 FY25, which is calendar year Dec 2024, will be key to keep an eye on following this earnings report. It may seem far off but this is a high beta stock that gets slammed on any weakness. The opposite can also happen, which is that we see more revisions which supports the price action extending, as outlined in the introduction above.

Fiscal year estimates were revised upward over the past year by 87.8 points for growth of 105.5% and revenue of $14.6 billion. This is higher than the midpoint of management guidance for revenue of $14.5 billion, at the midpoint. Next fiscal year ending June 2025 has been revised upward 33 points to 44% growth. We will be watching these estimates closely as we manage our position intra-quarter throughout the next few months.

GAAP EPS for December was $5.10 compared to analysts’ consensus of $4.90. This is nearly 80% higher sequentially with $2.85 GAAP EPS in the previous quarter and is 62% growth from the year-ago quarter. Adjusted EPS was $5.59 for similar YoY and QoQ growth.

Looking forward, next quarter’s GAAP EPS is expected to be between $4.79 and $5.64 for over 240% growth from the year-ago quarter. Adjusted EPS of $5.60 at the midpoint will see similar YoY growth.

Note: Normally, we’d be hesitant to see the slowing growth on both top line and bottom line pictured above as moving from hypergrowth to average growth tends to cause a re-rating in valuation. However, we’d like to see if SMCI will continue its pattern of seeing upward revisions given the strength of the AI trend.

Margins

Gross margin was 15.4% in Q2 for gross profit of $564.4 million
Operating margin was 10.1% for operating profit of $371.5 million and adjusted OPM was 11.3%
Net margin was 8% for net profits of $295 million. Adjusted net margin was 9%

Adjusted gross margin was 15.5% for Q2, compared to 17% in Q1 and 18.8% in the same quarter a year ago. On the gross margin declines, management stated: “in order to take market share, we will take opportunities by being more competitive on pricing.”

The gross margins guide for Q3 is expected to be “slightly lower than Q2 levels.” This indicates another YoY and QoQ decline in gross margins if the management’s guide is correct. The goal is that margins will return to baseline once the company is operating at scale. However, it’s worth mentioning that stocks with thin margins tend to underperform in a Fed-driven market. This is one reason we will adhere to stops with SMCI.

Margins on SMCI tend to be thinner than most semiconductors, which is a key topic of analysts’ focus during each earnings call. The CFO has stated the target margin is between 14% and 17%.

Cash Flow and Balance Sheet

Operating cash flow reached (-$595) million, with a margin of (-16.2%). This performance contrasts with the positive margins of +12.8% and +9% reported in the September quarter and the June quarter, respectively.

The CFO explained that the cash outflow in operations for Q2, totaling (-$595) million, was a shift from the $271 million generated in the prior quarter. Despite robust profitability and an increased level of accounts payable, this was counterbalanced by a rise in inventory and accounts receivable, driven by preparations for Q3 and shipment timings in Q2.

Cash flow will be a primary focus on the call as any additional quarters that report negative free cash flow will force investors to price-in future stock dilution and cash raises. This line item can cause the stock to be re-rated should it continue to be weak.

Free cash flow was also negative at (-$610) million, representing a (-16.6%) margin, compared to positive margins of +12.7% last quarter and +8.4% in the corresponding quarter of the previous year.

On its balance sheet, the company reported $726 million in cash and $376 million in debt, up from $543 million in cash and net debt of $146 million in the previous quarter. Consequently, the net cash position stood at $350 million, slightly down from $397 million in the last quarter.

The company boosted its cash reserves with an equity offering. As stated by the CFO, the proceeds from the equity offering will be used to strengthen working capital, continued investments in R&D and expand global capacity.

Key Metrics:

In the latest quarterly financial update, the OEM Appliance and Large Data Center segment led the company's revenue streams, contributing $2.15 billion, which accounts for 59% of total revenue. This segment saw significant growth of 175% year-over-year and 83% quarter-over-quarter.

The Organic (Enterprise & Channel), AI/ML segment followed with $1.48 billion, making up 40% of the revenue and growing by 55% year-over-year, fueled by enterprise AI initiatives and CPU upgrade programs. The 5G, Telco, and Edge/IoT sectors, however, represented just 1% of revenue at $35 million.

In terms of the revenue mix, server and storage systems generated $3.4 billion and comprising 94% of the quarter's revenue, reflecting a year-over-year growth of 107%. Subsystems and Accessories contributed $229 million, accounting for the remaining 6% of revenue and marking a 61% increase from the previous year.

Inventory management improved, with inventory days reducing to 67 from 91 in the previous quarter, indicating a tightening of supply as noted by the management.

What to look for in the earnings report:

1) Declining margins are going to be a key focus of analysts.

Notably, Super Micro has weaker margins than Wall Street prefers and tend to be weaker amongst its peers. It’s no surprise when analysts pick up on this during the call and slide in a question or two on it.

Last quarter, there was a large revenue beat that did not flow through to a higher gross margin or operating margin, and in the following Q&A session, the CFO stated: “And so, at this time we are we are growing really quickly. And in order to do that and in order to take market share, we will take opportunities by being more competitive on pricing.” The CEO followed up with: “The good thing is that when we continue to grow our economies of scale, our operation margin indeed will be still able to keep in healthy position.”

2) Nvidia Relationship – Liquid Cooling Reaches Inflection with Nvidia’s B100s

Super Micro is primarily air cooled right now, yet liquid cooling is growing. Per the CEO in the opening remarks, we can expect major updates in the coming quarters on their progress: “By this June quarter, we will have high volume, dedicated capacity for manufacturing 100 kilowatt to 120 kilowatt racks with liquid-cooling capabilities, providing DLC, direct liquid cooling racks capacity up to 1,500 racks per month and our total rack production capacity will be up to 5,000 racks per month by then.” To read more on liquid cooling, reference our previous Super Micro analysis here.

3) Conservative Commentary by Management

This word, “conservative,” has been continually referenced by management in recent quarters. We hope to continue to hear the twelve-letter C-word from SMCI tomorrow evening!

David Weigand

“[…] And so really as Charles mentioned earlier, our only constraint is supply. However, the good news is, the supply is improving. And so, to your point, we have to be somewhat conservative, because we are constrained still by supply.”

Conclusion:

Despite facing declining gross margins, the firm's substantial year-over-year revenue and EPS growth underscore its product strength and positioning in a fiercely competitive environment. In case it’s not clear, Super Micro is an outlier and it all comes down to product differentiation, which you can read about here.

The stock seems to be on a never-ending winning streak, however, what could be Super Micro’s Achilles heel is the cash issue — as the company must grow capacity to keep up with the revenue growth, yet to do so will require cash.

Due to the high beta nature of Super Micro, I foresee us trying to ride this wave a few more times in the coming years. We will play this one with the understanding that volatility goes both ways, armed with the information that it’s the upward revisions that reward this stock (mainly intra-quarter), and it’ll be negative cash flow margins and/or dilution that penalizes the stock.

Overall, for our risk profile, entries in high beta stocks are accompanied by a strategy and with predetermined stops. You can read more about our line in the sand here along with upper price targets.

Chad Shoop, Equity Analyst for the I/O Fund, contributed to this analysis

Recommended Reading:

Marvell Q4: Data Center Strong but AI Slow to Materialize

Posted on March 8, 2024June 30, 2026 by io-fund

Marvell’s Q4 was primarily in line with consensus, though GAAP EPS reported a rather large miss. The Q1 forecast across the board was very weak, with revenues guided 16% below consensus with margins firmly negative.

Q4 saw a marginal YoY increase in revenue, breaking a three-quarter string of declining growth, but Marvell guided for a (13%) YoY decline in revenue in Q1 at midpoint, suggesting that it is not yet out of the woods with weak growth in all of its end markets except for data center. Management dangled some carrots in the earnings call, primarily that Q1 would mark the bottom and that qualifications for ASICs are now moving to production for full ramp in FY26 (one year from now).

Revenue and EPS:

Q4 revenue was $1.43 billion, beating estimates by $10 million, and representing YoY growth of 0.7%.
Q1 revenue guidance missed at $1.15 billion, +/-5%, representing a YoY decline of (13%) at midpoint. As stated above, this is 16% below consensus with expected revenue of $1.37 billion.
FY24 revenue was $5.51 billion, a decline of (6.9%) YoY. Prior to the report, analyst consensus was for an acceleration in FY2025 to 11.1% YoY to $6.11 billion and 19.9% YoY to $7.33 billion in FY2026. The acceleration will likely still materialize but could be delayed given the weak Q1.
Q4 adjusted EPS was $0.46, meeting estimates and representing flat YoY growth. GAAP EPS was ($0.45), missing estimates for $0.00.
Management guided for Q1 EPS of ($0.23) +/- $0.05 and adjusted EPS of $0.23 +/- $0.05. This is a miss compared to consensus for $0.40 adjusted EPS.
FY24 adjusted EPS was $1.51, a decline of (40.4%) YoY. GAAP EPS was ($1.08), compared to ($0.19) in FY23. Previously, EPS was expected to rebound to 33.1% YoY growth to $2.01 in FY2025 and 40.4% YoY growth to $2.82 in FY2026. These estimates may come down given the weaker Q1 guide.

Margins:

Margins were weak, as Marvell reported a negative GAAP operating margin whereas it had guided for a thinly positive operating margin in Q4.

Q4 GAAP gross margin was 46.6%, compared to 47.5% in the year ago quarter. The adjusted gross margin was 63.9%, up from 60.6% in the previous quarters. Per management last quarter: The CFO, Willem Meintjes, said in the earnings call, “Our forecast for this large sequential improvement is driven by expectations of a significantly stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter.”stronger product mix and our ongoing cost optimization activities. Looking forward, we expect that product mix as well as the overall level of revenue will remain key determinants of our gross margin in any given quarter.”
Q4 GAAP operating margin was (2.3%) versus its guide for 1.6% at midpoint. This compares to 1.6% in the year ago quarter. GAAP operating margins for Q1 are expecting to fall further, with management guiding Q1’s GAAP operating margin at (12.3%) at midpoint, a 1000 bps sequential decline. Regarding GAAP OPM, management stated this includes “stock-based compensation, amortization of acquired intangible assets, restructuring costs and acquisition-related costs.” Stock based compensation was $155.3 million, or 11% of revenue.
Adjusted operating margin was 33.8% for adjusted operating profits of $482.6 million. This fluctuates due to seasonality in payroll taxes and employee salary increases.
Q4 GAAP net margin was (27.5%), compared to (1.1%) in the year ago quarter and (11.6%) in Q3. Adjusted net margin was 28.2% for adjusted net profits of $401.6 million.
FY24 GAAP gross margin was 41.6%, compared to 50.5% in FY23. Adjusted gross margin was 61.2% compared to 64.5% FY23.
FY24 GAAP operating margin was (10.3%), compared to 4% in FY23. Adjusted operating margin was 29% down from 36% in the previous year.
FY24 GAAP net margin was (16.9%), compared to (2.8%) in FY23. Adjusted net margin was 23.8% down from 30.8% the previous year.

Cash and Debt:

Q4 operating cash flow was $547 million, representing a 38.3% margin.
FY24 operating cash flow was $1.37 billion, an increase of 6% YoY.
Cash, equivalents and short-term investments totaled $950.8 million.
Debt totaled $4.16 billion. Gross debt-to-EBITDA ratio was 2.19X and net-debt-to-EBITDA ratio is 1.69X. This has been slightly trending down but is still a concern.

Inventory at the end of the fourth quarter was $864 million, down by $77 million from the prior quarter. DSO was 77 days, decreasing by a day from the prior quarter.

The company returned $52 million to shareholders through cash dividends and repurchased $100 million of our stock during the fourth quarter, double from the prior quarter. The company expects to further increase repurchases in the first quarter of fiscal 2025.

Marvell's Board approved the largest repurchase authorization in company history, increasing the current plan by $3 billion, for a total available authorization of $3.3 billion

Key Segments:

Data Center:

Data center revenue was the strongest point of the report, with growth at 54% YoY in Q4, breaking a four-quarter string of declining growth. Data center revenues increased 38% QoQ, ahead of the mid-30% range management had guided and a sharp acceleration from 21% QoQ growth in Q3 and 6% QoQ in Q2.

Data center accounted for 54% of revenue in the fourth quarter, a large increase from 39% in the prior quarter. According to the opening remarks, it was a mix of primarily traditional data center and some AI driving this increase: “The strong revenue growth in the quarter was driven by the cloud portion of our data center end market. While AI has been a key growth driver, I am pleased that our standard cloud infrastructure revenue has also grown every quarter, and we see that continuing next year. Our 800-gig PAM solutions led our growth in the fourth quarter. We also benefited from higher sequential demand for our storage products as that portion of our data center end market continues its recovery. Revenue from our Teralynx, Ethernet switches also grew sequentially in the quarter.”

Management said data center revenue for next quarter will be in the low single digits QoQ: “Turning to the first quarter of fiscal 2025. We expect our overall data center revenue to grow in the low single digits sequentially on a percentage basis. We expect revenue from both AI and standard cloud data centers to continue to grow sequentially. We project our [ Electro ] optics revenue to continue to be strong, and we also expect to benefit from the initial shipments of our cloud optimized AI silicon programs. Partially offsetting this growth, we are projecting a more than seasonal sequential decline in revenue from enterprise on-premise data centers.”

The main carrot that was dangled on data center as it pertains to AI is for H2 growth. I’ve included that commentary below.

Enterprise Networking & Carrier Infrastructure – Steep declines in Q1, Mgmt says will mark the bottom

Enterprise Networking revenue was $265M (down 28% YoY, down 2% QoQ).
Enterprise is expected to decline 40% QoQ in Q1.
Carrier Infrastructure (5G) revenue of $170M (up 38% YoY, down 46% QoQ).
Carrier is expected to decline by 50% QoQ in Q1.

Per the comments on the call, Q1 is expected to be the bottom.

“As we have been communicating, these end markets [enterprise and carrier] have been dealing with a period of soft industry demand. As a result, both were down sequentially in the fourth quarter and we expect them to decline again in the first quarter […] Looking ahead, we expect revenue declines in these end markets to be behind us after the first quarter and forecast a recovery in the second half of the fiscal year. Longer term, these are large and enduring end markets, which are critical to the global economy. As a result, we expect both of these end markets to eventually return to contributing over $1 billion each in revenue on an annual basis once demand normalizes, and we begin to realize the benefits of upcoming Marvell-specific product cycles.

Consumer:

Consumer revenue of $143.9M (down 20%, down 15% QoQ). Consumer is expected to decline (70%) QoQ in Q1.

Per management remarks: “This forecast reflects the completion of deliveries for an end-of-life program in the prior quarter as well as significantly weaker demand from the game console market.”

Automotive:

Automotive/Industrial revenue of $82.3M (down17% YoY, down 23% QoQ). This is a small segment for Marvell that has been impacted by the softness in EVs. For the fiscal year 2024, automotive was up double digits YoY. It’s expected to be flat QoQ in Q1.

Earnings Call:

AI Revenue Ramping in H2 & Beyond

Marvell has to find a way to impress Wall Street on AI despite the fact that it’s ramping much slower than its peers. If we read between the lines, a run rate of about $500 million will happen early FY2026. That’s my rough math, but given commentary in the opening remarks, we are looking at $200M per quarter right now on AI networking/optics and can expect $200M by Q1 FY2026 on ASICs/compute. So, if we assume AI networking grows by 50% this year, we arrive at $500M in about 12 months from now.

Here's the commentary I’m basing that on – it’s the second paragraph that has more information on AI revenue specifically:

“We now have a clear view of demand for both this fiscal year as well as fiscal 2026. We have been working closely with our suppliers and are confident that we have secured capacity for the ramp. With the visibility we now have for these programs, along with many new opportunities, we are very excited about the potential scale of long-term revenue for Marvell from this business. As the initial set of design wins reach its full run rate, we expect annual revenue from cloud optimized silicon has the potential to rival our fast-growing data center optics business, which, for reference, grew to over $1 billion in fiscal 2024.”

Additionally, management offered a few more breadcrumbs as to AI revenue, such as: “AI was a key driver of our data center growth in fiscal 2024, contributing over 10% of total company revenue, well above our initial forecast. This was a substantial increase from approximately 3% in the prior year. Our momentum accelerated throughout the fiscal year with AI revenue well over $200 million in the fourth quarter, driven mostly from Optics […] In fact, as our cloud optimized AI silicon programs reach high-volume production, we expect our overall cloud optimized revenue to exceed $200 million exiting the fourth quarter. As a result, on a run rate basis, this momentum would put our overall cloud optimized silicon revenue above the annual $800 million target we had provided at our last Investor Day. And with the full year of contributions in fiscal 2026, we expect to be way ahead of the prior target. In aggregate, we see a favorable setup for the second half of this fiscal year, driven by continued growth from our data center end market, ongoing growth from automotive, and a recovery in carrier, enterprise and consumer.”

Later in the Q&A, this was the better question in terms of discussing potential AI revenue in custom silicon moving from qualification to production:

Question
Harlan Sur (Analysts)

Matt, you mentioned the initial shipments of your AI ASIC program. Can you just clarify because I know last you updated us, these programs were in qualification. So have you guys passed Qual on both these programs? And is it sort of the initial start of the full production ramp? Or maybe you're still in Qual, but you've got enough line of sight to passing the Qual just given you're at the tail end of this process? And maybe more importantly, have you guys secured the follow-on AI programs for these two initial projects?

Answer
Matthew Murphy (Executives)

So yes, we are in the initial start of the production ramp on both products. And then as far as the follow-on, like I said, the opportunity funnel we see across all of the various opportunities right now is significant, and we're involved in, we believe, we think, every single one of them. So yes, and there'll be more to come sort of at our AI day, but I would just say our 3-nanometer funnel and our 3-nanometer hit rate and design win rate is very encouraging and it really gives us this tremendous confidence in where this business is headed. It also has a side benefit by driving this advanced technology for the custom ASIC side, is it's pulling along the technology development that benefits all the other businesses in Marvell, like our high-performance switching, our DSP for optics, et cetera. So there's actually kind of a virtuous cycle happening where being at that bleeding edge is now we're able to show our other solutions that interoperate with this custom silicon, really a best-in-class road map there.

Q1 is the Bottom

The CFO later reiterated that Q1 will be the bottom:

“Yes, so we're really working with customers to focus on Q1 being the bottom, really confident that, that's the bottom. And then we see growth resuming in the second half across enterprise networking, carrier and consumer so really just trying to make sure that we put this behind us really quickly and see growth in the second half.”

Conclusion:

As I left the Marvell call and moved along to join the Broadcom earnings call, there is no doubt which company is stronger right-here, right-now. It’s Broadcom. Marvell has a strong product story but it’s in a sea of AI whales that are ramping quickly. The $500M in AI revenue per quarter (run rate) estimated to be reported in about 12 months time is a strong start, but the stock is trading quite high. Also, the need to impress the market is high and Marvell management is trying hard with this very-forward-looking commentary.

At the right price, Marvell will make a great stock. But unfortunately, it’s the opposite which is that at this valuation, we plan to sell Marvell. The PE Ratio is similar to PS Ratio, which is that it’s trading in a range that the stock struggles to maintain.

In previous quarterly webinars, we’ve pointed out that Marvell is our weakest stock in an environment where rates remain elevated given its debt-to-equity ratio and GAAP profitability issues. Meanwhile, Nvidia’s PS Ratio and PE Ratio is near it’s October 2022 lows and Broadcom stated today it’s expecting $10B in AI Revenue this year, or 20% of its total revenue for this calendar year compared to Marvell’s 13%. Given Q1 is quite troublesome for Marvell with steep sequential declines and AI revenue that is likely priced in, we will look to trim or exit and buy lower. You can also expect us to re-allocate some of this to AVGO in the meantime. Or, perhaps, we will buy more Nvidia as we go along. Overall, we see both as stronger choices at the moment, and will revisit Marvell when it’s either cheaper or moving quicker in terms of its AI growth trajectory.

Recommended Reading:

AI Driving Acceleration For Big 3 Cloud Stocks

Posted on February 13, 2024June 30, 2026 by io-fund

This article was originally published on Forbes on Forbes Forbes on Feb 8, 2024,07:01pm EST

Big Tech’s participation in the market’s push to all-time highs is becoming increasingly narrow, with Nvidia, Meta, Microsoft and Amazon serving as the primary contributors to 2024’s rally. Though Alphabet fell more than 7% on somewhat disappointing Google ad revenue, Alphabet’s Google Cloud, Microsoft’s Azure, and Amazon’s AWS shined as generative AI products drove an acceleration in cloud revenue growth in the recent quarter.

Source: Trading View

The Big Three’s cloud segments are crucial to business performance on both the top and bottom lines: Azure sits as Microsoft’s fastest growing segment (excluding Xbox’s more than 40 percentage point impact from Activision in Q2), AWS is driving a lion’s share of Amazon’s operating income, while Google Cloud is now generating more than 10% of revenue as Alphabet’s fastest growing segment while expanding its operating margin.

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Microsoft’s Azure

Azure witnessed the strongest AI contribution by far, as Microsoft works to extend its lead as the first major tech player to monetize enterprise and consumer AI subscriptions at scale. Azure also is powering a handful of the largest LLMs and AI assistants on the market, from OpenAI’s ChatGPT to Meta’s Llama and Llama 2 to Microsoft’s own Bing Copilot.

We highlighted in October in our free newsletter that AI would help drive a ‘noticeable acceleration’ for Microsoft’s revenue this year, and that’s exactly what we’re seeing: revenue growth accelerated from 8.3% YoY in fiscal Q4 2023 (calendar Q2) to 17.7% YoY in fiscal Q2 2024 (calendar Q4).

Azure growth was 30% in fiscal Q2, a 200 bp QoQ acceleration driven by strong demand for consumption-based services. Yet AI’s impact was quite notable: Microsoft said the 30% growth rate for Azure included “6 points from our AI services.”

Source: Microsoft

This 6 point contribution is impressive, given that AI services contributed 3 points to growth last quarter and 1 point in fiscal Q4 — a significant ramp considering the scale that this growth is attached to, with Azure’s revenue at a $74 billion run rate. This AI-related growth has helped Azure’s growth re-accelerate after seeing decelerating growth for five straight quarters.

Azure’s AI customer growth has also been rapid, and Microsoft is seeing an increase in larger commitments for Azure. Microsoft reported that Azure AI customers totaled more than 53,000 last quarter, with one-third of these new customers over the past twelve months. That implies customer growth rate of approximately 50% YoY, given that Microsoft added nearly 18,000 customers through 2023. More than half of the Fortune 500 are using Azure OpenAI Services, highlighting the strength of Microsoft’s AI offerings.

For Azure specifically, management said on the earnings call that “customers continue to choose Azure to simplify and accelerate their cloud migrations. Overall, we are seeing larger and more strategic Azure deals with an increase in the number of $1 billion-plus Azure commitments.” An increase in customer count and an increase in deal size are foundations for sustainable long-term growth and supportive of further acceleration in the coming quarters.

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Amazon’s AWS

Q4 was a busy quarter for Amazon as it rolled out many new features, capabilities and hardware designed to capture generative AI demand, with AWS showing a hint of accelerated growth. AWS finally accelerated in Q4 for the first time in 2 yearsQ4 for the first time in 2 years, with Amazon reporting 13.2% growth in Q4, up just over 1 point from Q3’s 12%. AWS is now quickly approaching a $100 billion annual run rate, delivering $24.2 billion in revenue in Q4 and $90.8 billion in revenue for 2023.

What’s more important is that AWS’ operating leverage has improved over the last two quarters, with operating income growing at 3x the rate of revenue in Q4.

Source: Amazon

AWS’ operating income increased 39% YoY on a constant currency basis in Q4, with operating margin increasing 530bp YoY to 29.6%. For the full year, AWS’ operating margin was 27.1%, down 140bp YoY as operating leverage decreased in the first half of the year as growth decelerated from the 20% range to the 12% range.

AWS remains Amazon’s primary generator of operating income (67% of Amazon’s total operating income in 2023), a trend that can strengthen with AI driving accelerated customer and revenue growth and decreased costs. CEO Andy Jassy explained that AWS “added more than $1.1 billion an incremental quarter-over-quarter revenue, which on an FX neutral basis is more than any other cloud provider as far as we can tell.”

AWS’ existing customers “are renewing larger commitments over longer periods and migrations are growing,” and “while cost optimization continued to attenuate larger new deals also accelerated.” That includes recent agreements with Nvidia to be the first CSP to deploy the GH200 Grace Hopper Superchips with multi-node NVLink technology, and with Salesforce to deepen AI and data integrations between the two.

Bedrock is already witnessing strong adoption, with management seeing “many thousands of customers using the service after just a few months” as AWS continues to add “new models from Anthropic, Cohere, Meta with Llama2, Stability AI and our own Amazon Titan family of LLMs.”

Although AWS’ quarterly growth rates look paltry compared to Azure’s 30% and Google Cloud in the high-20% range, it is still showing all the ingredients for a sustained AI-driven acceleration.

Google Cloud

Google Cloud revenue accelerated four points from 22% in Q3 to 26% in Q4, topping $9 billion for the first time, helped by an increasing contribution from AI. Q4’s $9.2 billion in revenue implies that Google Cloud is just crossing above a $36 billion annual run rate, less than half of Azure’s run rate and 60% below AWS’ $90 billion run rate.

Google Cloud’s operating margin in Q4 came in at 9% compared to 3% in the previous quarter and (0.2%) in Q4 last year. Margins are naturally worse than AWS and Azure as Google Cloud does not benefit from the same efficiencies at scale; however, it is positive to see strong QoQ and YoY improvement in operating margin as it bodes well for future performance at a larger revenue scale.

Source: Alphabet

This acceleration in Q4 also helped narrow the gap to 4 percentage points with Azure, compared to 7 percentage points in the previous quarter. Google Cloud had previously topped Azure’s growth rates in late 2022 and the first half of 2023 before a rather swift deceleration in Q3. What’s crucial here over the next few quarters is Google Cloud continuing to close this growth rate gap with Azure, and possibly surpass Azure once more — it should be theoretically easier to realize higher growth rates at a smaller scale, more so when leveraging AI.

Like AWS and Azure, Google Cloud is seeing strong momentum with AI products. Management said that the “strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area,” while its generative AI portfolio helped win and expand deals. CEO Sundar Pichai said that “greater than 70% of gen AI unicorns are using Google Cloud,” and customers including Anthropic and Mistral AI are building and serving LLMs on Google Cloud’s AI Hypercomputer, which combines Google’s “TPUs and GPUs, AI software and Multislice and Multi-host technology to provide performance and cost advantages for training and serving models.”

Google Cloud led the charge in monetizing AI via subscriptions with Duet AI for $30/month, and management noted that customers are “increasingly choosing Duet AI” to “boost productivity and improve their operations.” Duet AI will soon incorporate Google’s Gemini, its multi-modal family of LLMs developed to challenge OpenAI’s GPT-4. Google Cloud is “intensely focused on bringing the benefits of Gemini” to its cloud customers, and the rollout of the top iteration, Gemini Ultra, at a $20/month subscription could help Google gain share away from OpenAI and thus Azure while increasing revenue.

Conclusion

Big Tech’s cloud units reported strong growth in calendar Q4, with AI helping drive a noticeable acceleration for Azure while AWS and Google Cloud touted strong contributions from generative AI products. The trio all possess the necessary ingredients for sustained accelerations or maintained growth at higher levels: increased customer migrations, larger and longer duration contracts, monetization opportunities within the suite via subscriptions, and improvements in productivity and cost reductions for cloud customers.

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

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.

Recommended Reading:

Cloud Earnings Review: Signs of Stabilization

Posted on December 19, 2023June 30, 2026 by io-fund

The rise of generative AI has necessitated hyperscalers to develop their own large language models (LLMs), build platforms that enable their customers to create AI applications, and also offer AI in their product offerings. AI has been a boon for hyperscalers that were otherwise affected by tightening budgets due to challenging macro conditions.

We have been following the cloud sector closely with a regular review of hyperscalers and the best-of-breed cloud companies. This analysis shows that the hyperscalers are showing signs of stabilization. In a positive development, the best-of-breed cloud company’s expected sequential deceleration is slowing from a decline of 11 points in Q1 to Q2 of this year to a decline of 4 points in Q3 to Q4 of this year. This means we may near a bottom. We also discuss various financial metrics that can help determine which cloud companies will lead once the declining growth does find a bottom.

Notably, cloud has lagged broader tech’s rally this year, and on a 3-year basis, returns are still negative. Cloud ETFs like SKYY are down (-8.9%), CLOU down (-18.8%), and WCLD down (-35.1%) compared to a 27.4% gain for the QQQ. Timing has been crucial for cloud given the 1-year returns (from Jan 1st 2023) look nearly identical to the 4-year returns (from Jan 1st 2020), meaning there were losses in-between that took time to recoup.

Big Tech is the Best Proxy for Cloud

The Big 3 cloud providers are considered the best proxy for gauging overall cloud market trends because their reports reflect the most resilient cloud infrastructure layer with the highest market concentration. Cloud IaaS services are less prone to churn due to high switching costs, and the Big 3's dominance in this market (66%) provides a more concentrated view of the overall cloud landscape. By analyzing the Big 3's performance, we can comprehensively understand the infrastructure that supports the cloud ecosystem.

Microsoft Azure’s Q3 growth rate was the outlier among the Big 3 as its growth rate accelerated by 3%, while AWS remained steady albeit at a slower growth rate, and Google Cloud decelerated by 6%. The steep deceleration in Google Cloud was a negative surprise as analysts were expecting it to grow 26% compared to the actual 22%.

Microsoft

Azure grew by 29% and 28% YoY in constant currency, including about 3% incremental gain from AI services. OpenAI and Microsoft are estimated to hold a combined 69% share of the generative AI model and platform market, followed by AWS at 8% and Google at 7%.
Growth accelerated from 26% in the previous quarter yet was down year-over-year from 35%.
The company’s guide for next quarter is 26% to 27% in constant currency. Azure's consumption business is driving growth, and the company expects this trend to continue in the next quarter.

The company’s CFO Amy Hood said in the recent earnings call, “While the trends from prior quarter continued, growth was ahead of expectations, primarily driven by increased GPU capacity and better-than-expected GPU utilization of our AI services, as well as slightly higher-than-expected growth in our per-user business.”

The company’s CEO, Satya Nadella, highlighted its efforts to offer AI in its product offering. He said, “With Copilots, we are making the age of AI real for people and businesses everywhere. We are rapidly infusing AI across every layer of the tech stack, and for every role and business process to drive productivity gains for our customers.”

AWS

AWS revenue grew by 12% YoY to $23.1 billion.
The growth has stabilized as AWS grew 12% in the previous quarter. However, it decreased significantly from 27% in the same period last year.

Our previous analysis highlighted optimizing due to the tough macro environment. Now the company is seeing a reduction of cost optimization by its customers as companies deploy new workloads, which is positive. A similar trend was observed in the previous quarter.

The company’s CFO Brian Olsavsky said in the recent earnings call, “On a quarter-over-quarter basis, we added more than $900 million of revenue in AWS as customers are continuing to shift their focus towards driving innovation and bringing new workloads to the cloud. Similar to what we shared last quarter, while optimization still remain a headwind, we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”we've seen the rate of new cost optimization slowdown in AWS and we are encouraged by the strength of our customer pipeline.”

Google Cloud

Google Cloud revenue grew by 22% YoY to $8.4 billion.
The growth is lower than the 28% in the previous quarter and 38% in the same period last year.

Optimization continues to weigh on the slowdown of growth. The company’s CEO, Sundar Pichai replied to an analyst’s question on deceleration in Cloud and optimization. “On Cloud, maybe what I would say is, overall, we had definitely started seeing customers looking to optimize spend. We leaned into it to help customers given some of the challenges they were facing. And so that was a factor. But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”But we are definitely seeing a lot of interest in AI. There are many, many projects underway now, just on Vertex alone, the number of projects grew over 7x. And so we see signs of stabilization, and I'm optimistic about what's ahead.”

The bottom line is that cloud growth is lumpy across key players with a positive surprise from Microsoft, yet a steep, negative surprise from Google Cloud. We see similar trends in Best-of-Breed.

Best of Breed

We took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin, and valuations.

The best comparison is the sequential growth from Q3 to Q4 in 2022 compared to sequential growth in Q3 to Q4 2023 estimates as this will take into account any seasonality from the Q4 period.

Per our last write-up in June: “We now see an improvement in the recent quarter, as the best-of-breed cloud stocks are guiding for a 72% slowdown in QoQ/YoY growth for Q2 guides – from an average 15% QoQ last year to 4% this year.”

We saw a further improvement in the current quarter, as the best-of-breed cloud stocks are expected for a QoQ/YoY decline of 47% from Q3 to Q4 estimates – from an average 9% QoQ last year to 5% this year.

All the best-of-breed cloud companies showed a deceleration. Bill Holdings has minimal deceleration as the company’s QoQ growth was 13% last year and is expected to be 12% this year. ServiceNow ranks next as it grew 6% last year and is expected to grow 5% this year. MongoDB was accelerating by 1 point in our June analysis yet is now decelerating 8 points in the upcoming period.

Source: YCharts

Earnings Beats

MongoDB is the leading stock with a revenue beat of 7.2%. The strong performance of the Enterprise Advanced Business largely drove the solid beat. The company’s revenue grew by 30% YoY to $432.9 million. However, the deceleration is expected to persist in the upcoming quarter, as the company’s revenue guidance of $429 million to $433 million represents a YoY growth of 19% at the mid-point.

GitLab’s revenue exceeded analyst expectations by 6.1%. The company’s revenue grew by 32% YoY to $149.7 million. The guide for the next quarter is $157 million to $158 million, representing a YoY growth of 28% at the mid-point. The deceleration of four points is reasonable compared to peers.

SentinelOne ranked third with a revenue beat of 5%. The revenue grew by 42% YoY to $164.2 million. The guide for the next quarter is $169 million, representing YoY growth of 34%.

Source: YCharts

GitLab’s adjusted EPS came in at $0.09 compared to a (-$0.10) for the same period last year, with an adjusted EPS beat of 1710%. HashiCorp reported $0.03 compared to (-$0.13) for the same period last year, with a beat of 169%. It was the company’s first quarter with positive adjusted EPS. MongoDB reported $0.96 compared to $0.23 for the same period last year, with a beat of 93.5%.

Source: YCharts

Bottom Line and Free Cash Flow

GAAP profitability is another crucial metric to monitor closely, especially with macroeconomic uncertainty. Most of the names listed in the chart below are unprofitable on a GAAP basis as they are paying high stock-based compensation. ServiceNow has the best operating margin among the cloud companies with 10%, followed by CrowdStrike at break even, and Datadog at (-1%).

Many cloud companies have been improving their margins, which is positive. In our premium analysis of CrowdStrike, we said, “A key item in the report was that Q3 marked CrowdStrike’s first quarter with positive operating income. CrowdStrike now has to prove that it can continue to expand operating margin further into positive territory.”

Bill Holdings has improved its operating margin to (-19%) from (-38%) in the same period last year. Similarly, Gitlab’s has improved to (-27%) from (-50%), HashiCorp to (-38%) from (-62%), SentinelOne to (-50%) from (-90%), and Zscaler to (-9%) from (-19%).

Source: YCharts

Zscaler has the highest free cash flow margin of 45%. It has improved from 27% in the same period last year. CrowdStrike ranks second with a free cash flow margin of 30% and Datadog ranks third with 25%.

Source: YCharts

Stock-Based Compensation

Stock-based compensation is a non-cash expense that is added back to adjusted earnings. However, in practice, this is an expense as per GAAP rules. Among the best-of-breed cloud stocks, Snowflake has the highest stock-based compensation as a percentage of revenue at 40.6%, followed by SentinelOne at 33.4%, and HashiCorp at 30%. The high level of stock-based compensation reflects what the competitive cloud industry must do to retain talent. However, it is a double-edged sword since it dilutes ownership of existing shareholders.

Source: YCharts

Valuations

Snowflake has the highest fwd P/S ratio of 22.5 among the best-of-breed cloud stocks. It is followed by Cloudflare at 20.2 and CrowdStrike at 19.1.

Source: YCharts

Ranking based on revenue estimates change for next quarter

Gitlab’s revenue estimates have been revised by 5.9% after the company’s recent strong results. MongoDB’s estimates have been changed by 4.8% followed by SentinelOne by 1.6%.

Source: Seeking Alpha

Ranking based on adjusted EPS estimates change for the next quarter

MongoDB’s adjusted EPS estimates have been revised up by 29.9%, followed by Bill Holdings by 0.5% and CrowdStrike by 0.4%.

Source: Seeking Alpha

Highlights and Lowlights in Q3

GitLab reports first positive non-GAAP operating profit

GitLab reported a revenue beat of 6.1% and an adjusted EPS beat of 1710%. The company reported its first adjusted operating income in the recent quarter and guides a positive adjusted operating income for the next quarter. GAAP operating margin improved from (-50%) to (-27%).

The company’s CFO, Brian Robins, mentioned in the earnings call that sales cycles have lengthened and buying behavior in the enterprise segment has stabilized. Mid-market and SMB customers continue to be cautious.

He said, “Looking back at the quarter, I want to share some of the areas we have been closely monitoring. These include sales cycles, win rates, contraction, and Ultimate. In comparing Q3 with Q2 of FY ‘24, we have seen overall sales cycles lengthen. During Q3 buying behavior in our enterprise segment stabilized. However in the mid-market and SMB, we see customers continue to be cautious in the uncertain macro environment. […] Contraction during Q3 also improved for the third consecutive quarter and is in-line with levels from Q3 last year.”

Solid Results from SentinelOne

SentinelOne stood out as one of the only companies with QoQ acceleration in billings at 33% YoY and 2% QoQ. We covered here a few stocks that struggled with billings, in particular. Revenue grew by 42% YoY to $164.2 million, with a revenue beat of 5% and an adjusted EPS beat of 63.7%.

ARR grew by 43% YoY to $663.9 million and net new ARR grew by 11% YoY. The adjusted operating margin improved by 32 percentage points to (-11%). Free cash flow margin improved by 40 percentage points to (-16%). Management expects the company to achieve positive free cash flow in the second half of next year.

Dave Bernhardt, the company’s CFO, said in the recent earnings call, “Our margin improvement is indicative of healthy pricing and the value and innovation we deliver to customers. It also demonstrates the success of our land and expand strategy. Our unified security and data architecture in a single platform is delivering meaningful value for SentinelOne as well as our customers.”

HashiCorp reports first positive non-GAAP net income

HashiCorp reported a 2% revenue beat. However, the revenue YoY growth was 17%, ranking at the bottom of the best-of-breed cloud stocks. Operating margin improved from (-62%) to (-38%) and adjusted operating margin improved 17 percentage points to (-7%). Free cash flow improved 18 percentage points to 4% and was the company’s second positive free cash flow. The management expects positive free cash flow going forward other than in Q2, which is low due to booking seasonality. The adjusted EPS beat was solid 169% and the company reported the first positive adjusted net income.

Zscaler reports strong billings growth. However, full-year guidance unchanged

Zscaler reported a 4.9% revenue beat and a 36.9% adjusted EPS beat. The company’s operating margin improved by 10 percentage points to (-9%) and the adjusted operating margin improved by 6 percentage points to 18%. The free cash flow margin improved by 18 percentage points to 45%, ranking the top among the best-of-breed cloud stocks.

Billings growth remained strong, at 34% YoY to $456.6 million. However, management did not raise its full-year billings outlook as it tends to do. Its outlook remained unchanged at 24% to 26% YoY growth or $2.52 billion to $2.56 billion. That outlook suggests that billings growth will decelerate through the remainder of the fiscal year. We have discussed the company further in our Cybersecurity analysis here.

MongoDB solid beat, however, cautious management tone

MongoDB reported a solid 7.2% revenue beat and a 93.5% adjusted EPS beat. As observed in the above paragraphs, the analysts have also increased their estimates after the company’s strong results.

Dev Ittycheria, CEO of the company, said in the earnings call, “We had a healthy quarter of new business acquisitions, led by continued strength in new workload acquisition within our existing customers. In addition, our Enterprise Advanced business again exceeded our expectations, demonstrating strong demand for our platform and the appeal of our run-anywhere strategy.”

However, the results failed to impress investors due to management’s comments on macro conditions. We have discussed the consumption business model here in depth. In this model, the revenue can be lumpy.

Michael Gordon, CFO of the company, said in the earnings call, “As a reminder, we recognize Atlas revenue primarily based on customer consumption of our platform and that consumption is closely related to-end user activity of the application, which can be impacted by macroeconomic factors.”

Conclusion

The cloud sector has demonstrated resilience amid the recent macro uncertainty and exhibits signs of stabilization. We added two cloud companies in September and October to our portfolio partly informed by scans such as these, which revealed bottom line strength coupled with strong growth. We will continue to look for outliers in the cloud category as we move into next quarter’s earnings season.

Advanced Signals Members receive real-time trade alerts for our entries and in-depth technical analysis from the Portfolio Manager, Knox Ridley. Learn more here.here.

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

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Palantir, Three Other Cloud Stocks Poised For An Acceleration In 2024

Posted on December 19, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Dec 14, 2023,10:42pm ESTForbes Forbes on Dec 14, 2023,10:42pm EST

Cloud stocks have been a mixed bag for investors heading into the end of the year, as a handful of names — Confluent, Sprinklr, HashiCorp, Bill, Paycom — plunged following their earnings reports with growth set to slow, while others — Datadog, Elastic, Salesforce – soared on renewed optimism about AI prospects.

Overall, cloud has lagged broader tech’s rally this year, and on a 3-year basis, returns are still negative, compared to a 27.4% gain for the QQQ. Many cloud darlings in 2020 and 2021 remain far below those highs – take Fastly, for example, where quarterly growth has slowed from the 40% range to the teens, with shares nearly (-80%) lower.

Source: I/O FUND

2023 was a stock picker’s market, and 2024 likely will be as well, with revenue growth rates for a majority of the sector set to slow. Only a few cloud stocks are expected to see revenue growth rates accelerate in 2024. We detail for you the four stocks set to accelerate below.

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Palantir

Palantir is one of the Street’s AI favorites this year with a 179% YTD return. The company is exhibiting multiple signs of acceleration heading into 2024 with an improved fundamental backdrop driven by increasing AI demand. Palantir’s Artificial Intelligence Platform (AIP) is driving a significant acceleration in its US commercial business, while underlying metrics and the bottom line are rapidly improving: Palantir posted its first GAAP profitable quarter in February and has since reported four consecutive GAAP profitable quarters.

Customer and US commercial customer growth remains solid, growing 34% and 37% YoY respectively in Q3. CRO Ryan Thomas noted that the US commercial business accelerated in Q3, and excluding strategic commercial contracts, it grew 52% year-over-year and 19% sequentially. Total contract value in the segment increased 55% year-over-year on a dollar-weighted duration basis, with an “acceleration of larger deals and shorter times to conversion and expansion.” He attributed this growth partially to the AI Platform, as the “rapid expansion of AIP at both our existing and new customers, and the impact it is having on their operations is nothing short of remarkable.”

The AI Platform’s growth since its launch in June has also been remarkably strong, with Palantir nearly tripling the number of users in the past quarter, with over 300 organizations using the product in 5 months. Palantir’s profitability is allowing it to continue to “more aggressively invest” in the AI Platform without sacrificing margins, a key differentiator from a majority of cloud AI plays, who are investing in growth at the expense of margins.

Fundamentally, Palantir is becoming stronger. GAAP gross margin expanded above 80% for the first time in Q3, GAAP operating margin has expanded to 7.2%, and GAAP net margin has risen to 12.8%. Palantir’s EBITDA margin also reached 16% in Q3, its first quarter with a double-digit positive margin, while adjusted free cash flow margin reached 25%. Margins have expanded sequentially in both Q2 and Q3, so the next hurdle will be showing further expansion in Q4 to set up for an increasingly positive trajectory in 2024.

Source: I/O FUND

Revenue growth is poised to accelerate in Q4 and through 2024, boosted by AI demand, a reacceleration in Palantir’s US government segment, and continued strength in the US commercial segment stemming from the Artificial Intelligence Platform. Palantir is currently projected to report 18.5% YoY growth in revenues in Q4, the highest in five quarters, pulling 2023’s full-year revenue growth rate up to a projected 16.5%. 2024 is expected to see an acceleration, with current projections pointing to a 320 bp acceleration in Palantir’s revenue growth rate to 19.7% YoY.

Source: SeekingAlpha

Palantir’s underlying metrics support the revenue reacceleration story, but the stock is by no means cheap at 14.2x 2024 EV/revenue and approximately 52x 2024 operating cash flow. Palantir also noted in Q3 that its net dollar retention rate was 107%, with adverse impacts from its European commercial business. This presents a risk that a land-and-expand strategy places more emphasis on signing more customer deals each quarter, and a slowdown in customer additions raises the risk that the expected revenue acceleration won’t pan out as projected.

Shift4 Payments

Payments processing firm Shift4 Payments is not a traditional cloud stock, but it has seen significant momentum within its cloud product, SkyTab, alongside positive momentum in a land-and-expand model for its software offerings. Shift4’s recent M&A activity with Appetize and Finaro are expected to significantly contribute to revenue and EBITDA, playing a role in its 1140 bp projected revenue growth acceleration from 31.3% this year to 42.7% in 2024.

Shift4 says it is currently “in the midst of a very successful consolidation” of SkyTab POS, with some of the success owing to a significant total cost of ownership (TCO) advantage relative to competitors. Shift4 installed 8,254 SkyTab systems in Q3, or more than 35% of its cumulative install volume since its launch. Bringing existing customers over to SkyTab boosts ARPU as it is resulting in higher subscription fees per merchant.

Finaro and Appetize’s acquisitions are expected to be accretive to revenue and EBITDA growth starting this quarter and expanding in 2024. Combined, the two are expected to contribute nearly $25M in gross revenue less network fees and $6M in EBITDA in Q4. With Finaro in particular, Shift4 is expecting “a very strong Q4 ahead” as “numerous enterprise accounts have begun processing.”

Financially, Shift4 is the strongest of the four, hitting records across a majority of its metrics, from end-to-end payment volumes, revenue, gross profit, and margins. Gross profit rose 34% YoY to $171M and reached a record 26.7% margin, leading to more operating leverage down the line as operating margin expanded to a record 7.9%, up 490 bp YoY. Net margin improved for a second straight quarter to 4.8%, though it remained 310 bp lower relative to a peak at 7.9% in Q3 last year. Adjusted free cash flow grew 69% YoY to $75.5M.

Source: I/O FUND

In 2024, revenue growth is forecast to be >40% YoY in each quarter, from ARPU expansion from SkyTab, net new merchant additions, and contributions from M&A synergies. This represents a rapid acceleration after a four-quarter deceleration, with quarterly revenue growth rates back to levels seen in 2022. However, the main risk to this case is that a pretty swift deceleration is projected in 2025, with revenue growth dropping back to the 28% range. A more uncertain macro backdrop may create some headwinds in 2024 and lead to early signs of a deceleration sooner than expected in late 2024 or 2025.

AvePoint

AvePoint provides cloud migration, management, and data protection solutions primarily for Microsoft 365, with a suite of products and AI/ML offerings for both cloud and hybrid/on-prem workloads. CEO TJ Jiang is aiming for the company to become a “key enabler of generative AI adoption within enterprises in the coming years,” as he believes AI “will drive a wave of enterprise transformation across all industries.”

Generative AI “obviously is playing a part into the future quarters,” according to Jiang. The launch of Microsoft’s Copilot AI assistant for enterprise 365 users serves as a major tailwind for 2024. This boost, alongside a continued shift to the cloud in Microsoft Office’s commercial customer base, is underpinning an expected 70 bp acceleration in revenue growth to 16.4% in 2024 before a stronger 330 bp acceleration in 2025 to 19.7% growth.

Customer expansion can also help this acceleration pan out, especially if advanced talks with large customers can translate to expanded deal sizes in Q4 and early 2024: AvePoint is in talks with a long-time customer to accelerate their cloud migration, another customer is in “advanced talks” to purchase AvePoint’s Opus solution, and a UK customer is considering expanding the scope of their deployment of AvePoint’s Secure Backup Service Solution.

Source: I/O FUND

AvePoint’s financials are improving, though it is not yet GAAP profitable, reporting a GAAP operating loss of ($0.3 million) in Q3, or a margin of (-0.4%). GAAP net margin was (-5.8%), a solid improvement from the (-12%) to (-24%) range reported over the last six quarters. EBITDA margin was 1.2%, the first positive quarter; moving forward, AvePoint needs to keep improving these metrics and post consecutive quarters with positive EBITDA and move closer to GAAP profitability on the bottom line.

Source: I/O FUND

However, there is one red flag, and that’s in AvePoint’s ARR. ARR growth has been decelerating, from the high 30% range in 2021, to 23% in Q3, and now to a guided 22% YoY in Q4 to $262M. The bull case will be looking for this to bottom in Q4, and the company’s history of raising guidance each quarter this year suggests Q4’s ARR growth could come in slightly above the guide at 23%. In addition, Q4’s net new ARR guide is pointing to a sequential decline to ~$11.4M, but management clarified that this stems partially from macro headwinds but also from a spike in government strength and subsequent revenue pull-forward in Q3.

Source: I/O FUND

This guided sequential decline in net new ARR raises another hurdle for the bull case – a resumption of sequential growth in net new ARR in Q1 and Q2 next year will support this view for revenue acceleration. A further deceleration in net new ARR or ARR will raise the risk that revenue growth fails to accelerate YoY.

AvidXchange

Accounts payable automation and payment solution provider AvidXchange rounds out the list with a minimal 30 bp revenue growth acceleration from 18.6% in 2023 to 18.9% growth in 2024. AvidXchange has posted nine consecutive quarters exceeding its guided outlooks, and this momentum adds a layer of confidence to the acceleration story since a few key metrics continue to decelerate.

Healthy top of funnel growth and a partnership with AppFolio coming online in Q1 next year are two growth levers driving revenue growth higher. AppFolio’s partnership could help drive a reacceleration in transaction volume and payment volume, as AvidXchange will be the first AP application solution in AppFolio with access to more than 19,000 customers.

Fundamentals are improving, but similar to AvePoint, AvidXchange is not yet GAAP profitable. GAAP gross margin is steadily expanding, and is now nearing the 70% level after crossing the 60% threshold in Q1 2022. GAAP operating and net margins improved significantly, by more than 1200 bp sequentially. However, AvidXchange does not yet have the operating efficiency nor leverage to take last quarter’s GAAP net margin of (-8.7%) to GAAP profitability within a few quarters.

Source: I/O FUND

Revenue growth is expected to bottom in Q4 and then accelerate in each quarter next year. Q4’s guide is implying a 500 bp sequential slowdown, so the challenge will be quickly bouncing back to >18% revenue growth. However, this acceleration story comes with two main risks – decelerating growth in both TPV and processed transaction volume. Both metrics have decelerated rather sharply, and have not yet shown signs of stabilizing or reaccelerating.

Source: I/O FUND

Conclusion

Cloud has proven to be a very volatile sector over the past few months. Multiple companies have seen 20% or larger moves in either direction following earnings as investors praised hints of accelerating growth or slammed decelerating metrics. Only a handful of cloud stocks are expected to see revenue growth accelerate in 2024 based on current estimates, and only two of the four covered here have substantial near-term tailwinds from AI, but all are seeing steadily improving fundamentals with a handful of intact growth levers for 2024.

Missing expectations is a risk to any of the four, but more so for AvePoint and AvidXchange given that their expected acceleration is minimal. Palantir’s near 200% YTD surge has been warranted because of a shift to GAAP profitability, but its valuation remains expensive and at risk if growth slows slightly. Shift4 arguably holds the strongest fundamental picture of the four, but a higher degree of risk stems from a quick return to decelerating revenue growth in 2025.

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

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Cloud Earnings Review: Signs of Stabilization

Posted on December 19, 2023June 30, 2026 by io-fund

Big Tech is the Best Proxy for Cloud

Microsoft

Azure grew by 29% and 28% YoY in constant currency, including about 3% incremental gain from AI services. OpenAI and Microsoft are estimated to hold a combined 69% share of the generative AI model and platform market, followed by AWS at 8% and Google at 7%.
Growth accelerated from 26% in the previous quarter yet was down year-over-year from 35%.
The company’s guide for next quarter is 26% to 27% in constant currency. Azure's consumption business is driving growth, and the company expects this trend to continue in the next quarter.

AWS

AWS revenue grew by 12% YoY to $23.1 billion.
The growth has stabilized as AWS grew 12% in the previous quarter. However, it decreased significantly from 27% in the same period last year.

Google Cloud

Google Cloud revenue grew by 22% YoY to $8.4 billion.
The growth is lower than the 28% in the previous quarter and 38% in the same period last year.

The bottom line is that cloud growth is lumpy across key players with a positive surprise from Microsoft, yet a steep, negative surprise from Google Cloud. We see similar trends in Best-of-Breed.

Best of Breed

We took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin, and valuations.

The best comparison is the sequential growth from Q3 to Q4 in 2022 compared to sequential growth in Q3 to Q4 2023 estimates as this will take into account any seasonality from the Q4 period.

Source: YCharts

Earnings Beats

SentinelOne ranked third with a revenue beat of 5%. The revenue grew by 42% YoY to $164.2 million. The guide for the next quarter is $169 million, representing YoY growth of 34%.

Source: YCharts

Bottom Line and Free Cash Flow

Many cloud companies have been improving their margins, which is positive. In our analysis of CrowdStrike, we said, “A key item in the report was that Q3 marked CrowdStrike’s first quarter with positive operating income. CrowdStrike now has to prove that it can continue to expand operating margin further into positive territory.”

Source: YCharts

Stock-Based Compensation

Source: YCharts

Valuations

Snowflake has the highest fwd P/S ratio of 22.5 among the best-of-breed cloud stocks. It is followed by Cloudflare at 20.2 and CrowdStrike at 19.1.

Source: YCharts

Ranking based on revenue estimates change for next quarter

Gitlab’s revenue estimates have been revised by 5.9% after the company’s recent strong results. MongoDB’s estimates have been changed by 4.8% followed by SentinelOne by 1.6%.

Source: Seeking Alpha

Ranking based on adjusted EPS estimates change for the next quarter

MongoDB’s adjusted EPS estimates have been revised up by 29.9%, followed by Bill Holdings by 0.5% and CrowdStrike by 0.4%.

Source: Seeking Alpha

Highlights and Lowlights in Q3

GitLab reports first positive non-GAAP operating profit

Solid Results from SentinelOne

HashiCorp reports first positive non-GAAP net income

Zscaler reports strong billings growth. However, full-year guidance unchanged

MongoDB solid beat, however, cautious management tone

MongoDB reported a solid 7.2% revenue beat and a 93.5% adjusted EPS beat. As observed in the above paragraphs, the analysts have also increased their estimates after the company’s strong results.

Conclusion

The cloud sector has demonstrated resilience amid the recent macro uncertainty and exhibits signs of stabilization. We added CrowdStrike and Cloudflare to our portfolio partly informed by scans such as these, which revealed bottom line strength coupled with strong growth. We will continue to look for outliers in the cloud category as we move into next quarter’s earnings season.

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

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Supermicro Fiscal Q1: “Conservative” Guide

Posted on November 2, 2023June 30, 2026 by io-fund

Supermicro beat this quarter and raised for next quarter. The fiscal year was raised, as well. Overall, the quarter was strong with the only blemish a vague comment that AI revenue was “over 50%.” Management did not give an exact number, and there are reasons to believe that due to a low quarter seasonally, that AI revenue was below the 52% it was last quarter.

There was not an exact confirmation on the number, but I lay reasons below as to why it’s likely it was between 50% to 52% (lower than last quarter). The most obvious one is that revenue decelerated QoQ, and at half of the company’s revenue, it’s likely AI-related revenue tracks total revenue and also decelerated QoQ. Semiconductor companies are lumpy. For example, next quarter SMCI will grow 32.1% QoQ. Therefore, by my estimation, this is not a concern within the scope of a seasonally low quarter, and it should resume growth along with total revenue for the December quarter.

The gross margin and operating margin declined both QoQ and YoY, yet it’s the expectation these will improve over time. Given the strong earnings, this is less of a concern as the company is certainly GAAP profitable. Management indicated that gross margin will improve as AI continues to ramp, and as they expand facilities in Malaysia and Taiwan. Cash came in strong, which is what we wanted to see.

By far, the most important question on the call was if management was being conservative in their fiscal year guide OR are there challenges ahead for the March and June quarter? Management provided a straightforward answer that Q4 and the fiscal year guides are conservative, implying that we have chance for a beat again in the near-term. I’ve included this part of the transcript below.

Revenue and EPS:

Revenue of $2.12 billion for growth of 14% YoY came in above expectations of $2.06 billion for 11.4% growth.

For the next quarter, the company guided $2.80B at the midpoint, for growth of 55.6% compared to expectations of $2.52B for growth of 40%.

The combined beat and raise were for $340 million in revenue. Meanwhile, management raised guidance for the fiscal year by $500 million. The previous guide was for $10B at the midpoint, and is now at $10.5B at the midpoint.

Adjusted EPS of $3.43 beat expectations of $3.25 and beat management guidance of $3.13 at the midpoint. GAAP EPS of $2.75 also beat management guidance for $2.41, at the midpoint.

For the next quarter, management came in above consensus with guidance of $4.64 EPS at the midpoint compared to $4.11 EPS expected. You can easily see why a gross margin and operating margin that is a bit lower is less of a problem with this kind of earnings strength.

Margins:

There are some puts and takes with the margins. Gross margin was down by 30 basis points QoQ and down YoY by 210 basis points.

Adjusted operating margin was in line at 10.8%, however, the GAAP operating margin was lower QoQ by 230 basis points at 8.1%. Both were down YoY – adjusted OM was down 170 basis points and GAAP OM was down 380 basis points. Stock based compensation increased to $57.38 million, up from $11 million in the year ago quarter. This is at 2.7% of revenue compared to 0.59% in the year ago quarter.

The net margin of 7.4% was in line for GAAP profits of $157M, and as stated, EPS was strong.

Cash Flow:

Operating cash flow was strong at $270.5 million for a margin of 12.7%. This is a seasonally strong quarter for free cash flow with $268 million and $3 million in capex. This is low capex compared to what we can expect the rest of the year. Next quarter, capex is expected to increase to $22 million, at the midpoint, and will be at $110 million for the fiscal year, at the midpoint.

Key Segments:

The OEM appliance and large data center revenue of $1.17B was up 26% YoY and was flat QoQ.
Enterprise and channel vertical reported $917M for 43% of revenue, down (-6%) QoQ by 200 basis points, and was up 10% YoY due to seasonally lower enterprise spending
5G, Telco and Edge/IoT reported $31M and was 2% of total revenue

These flat to negative QoQ growth in these segments helps illustrate why management may have declined to give an exact number for AI-related revenue until the seasonally low quarter is behind them.

The exact statement was this: "AI/GPU and rack-scale solutions again represented over 50% of our total revenues this quarter with AI/GPU revenues in both the enterprise/channel and the OEM appliance and large data center verticals."

The United States region was up 25% YoY yet was down 3% QoQ. Another hint that AI revenue may have been down QoQ is that all regions declined QoQ except Rest of World, which was up 38%. It’s likely AI revenue is coming from more developed regions, such as United States, Europe and APAC.

Server and storage systems are 93% of revenue while subsystems are 7% of revenue.

Inventory increased to 91 days, up from 75 days. Per management: “we built inventory for a seasonally strong Q2.”

Earnings Call & Additional Notes:

The headline of my post-ER write-up last quarter was Half of Revenue is from AI with a focus on the 52% AI-related revenue that was posted last quarter. Therefore, I immediately noticed the “AI, GPU and rack-scale solutions again represented over 50% of our total revenues this quarter” was a change from providing a precise number.

As stated under the Key Metrics section, the September quarter is seasonally soft, as it was down (-3%) QoQ. Therefore, this number may have not improved due to seasonal reasons and they didn’t want to spook the market given the outsized pressure on AI mentions. In this case, the number may have been between 50.1% and 51.9% and they felt it wasn’t necessary to highlight this considering it will improve quickly next quarter and beyond. Needless to say, we are monitoring this closely.

It was asked about on the call but to no avail:

“Nehal Choski

Okay. And can you give a little bit more precise number as far as what the exposure was in the September quarter other than greater than 50%?

David Weigand

That’s — we are giving that approximate figure and that’s our guide.”

By far, the most important question on the call was about the Q4 guide and fiscal year guide and whether management consider it to be conservative. Here is what was stated:

“Ananda Baruah

That’s actually really helpful context. I appreciate it. And then, I guess, sort of dovetailing from that, Charles. So the midpoint of the implied guide for the fiscal year, the raised guide, $10.5 billion, implies that the March quarter and June quarter would also be about $2.8 billion, which is the midpoint of your December quarter guide. And then you also, though, made mention of growth accelerating. And so — and that — and it seems like supply is getting better. You also have co-op capacity coming on, going into the year. So I guess the question is, is there conservatism built in into even the implied fiscal year guide that’s been raised or is there some pull-forward in December quarter that you think might be challenging to duplicate in the March and June quarter? It seems like conservatism, but just wanted to check that? Thanks.

Charles Liang

Yeah. Thank you. Again, we continue to gain lots of design win. So our back order has been growing faster than what we forecast in reality. So at this moment, $2.7 billion to $2.9 billion for December should be a very conservative number. And for our whole fiscal year, $10 billion to $11 billion, again, should be a conservative number. So I feel very optimistic to continue to grow quickly and that’s why we continue to grow our rack-scale, including a difficulty rack-scale rather than production capacity. Likewise, just, before we have 4,000 rack per month capacity and now pretty much we will grow to 5,000 rack per month capacity very soon. So we are very optimistic for the future growth.”

Conclusion:

This was a straight forward report, and we are not concerned with the 100 or 200 basis points that may be in question for AI revenue given the 300 basis point decline QoQ in total revenue. Next quarter will quickly resolve the issue with 32.1% QoQ total revenue growth. Management stating they are being conservative was a nice bonus to the raise and beat. This report helps us firm up SMCI as a 2024 position.

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Big Tech Stocks: Q3 Earnings Preview

Posted on October 22, 2023June 30, 2026 by io-fund

This article was originally published on Forbes on Forbes Forbes on Oct 19, 2023,10:47pm EDT

Earnings season has officially kicked off, with Big Tech headlining a busy week next week: Microsoft and Google report on Tuesday, followed by Meta on Wednesday, and Amazon on Thursday. Big Tech stocks have seen their dominance over the broader indexes soar this year, with the Magnificent 7 reaching nearly 30% of the S&P 500’s weighting, higher now than at its peak in 2022 and up from 20.0% at the beginning of this year.

In the Nasdaq 100, the combined weighting of Big Tech stocks is even higher, at 44.8%. The Nasdaq 100’s rebalance earlier this year in July dropped the overall weighting of the group from 55% to ~38%, but already, we’ve seen a 6 percentage point increase in just over one quarter.

This outsized influence that the Magnificent 7 has over the indexes is just one of the many reasons that Big Tech earnings reports next week will be some of the most closely watched this season. EPS estimates for the group will be in focus – estimates have all pushed higher during Q3, with Amazon, Meta, and Nvidia seeing some of the largest increases, and investors will likely be assessing how the group stacks up against heightened expectations.

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Microsoft: AI to Help Drive A ‘Noticeable Acceleration’ This Year

For Microsoft, a noticeable acceleration is expected this year, with revenue growth accelerating back to the low-double digits through FY25. For the quarter, revenue growth is estimated to be about +8.8% YoY to $54.5 billion, with EPS forecast to grow +12.6% to $2.65. Revenue growth is currently forecast to return to +10% to +12% growth over the next three quarters through calendar Q2 2024.

Source: SEEKING ALPHA

Azure and AI will be two of the key areas to watch, given the overlap between the two. Microsoft is devoting 13% of Capex to AI in 2023, the most among the top cloud service providers.

Azure’s growth in the prior quarter was 27% in constant currency, including about 1% from AI services, a decline from 31% two quarters ago. Excluding currency impacts, growth slowed to 26% from 27%, hinting at a possible inflection point back to higher growth.

Source: MICROSOFT

Microsoft also stands to benefit from its consumption pricing model for OpenAI’s APIs, given that the APIs are all new workloads for Azure this year. Microsoft said last quarter that it had “great momentum across Azure OpenAI Service” with around 100 customers added each day, bringing total customers to more than 11,000.

In addition, commercial subscriptions for Office 365’s Copilot AI assistant are expected to start on November 1, at a $30 per month per user price point, opening up a potential multibillion-dollar revenue opportunity over the next few years, with the first insights likely to come next quarter.

Alphabet: Search & Cloud Momentum to Continue

Like Microsoft, Alphabet is expected to see revenues reaccelerate to the low double-digits through Q2 2024, a marked acceleration from forecasts at the beginning of the year. Revenue for Q3 is forecast to rise +9.6% YoY to $75.7 billion, with EPS growing +36.0% YoY to $1.44.

Source: SEEKING ALPHA

The combination of resilient Search growth, strong Cloud performance, and the integration of AI into Alphabet’s services is driving revenue growth expectations higher. Forward revenue growth rates for the next two quarters have risen upwards of 2 percentage points since the beginning of the year.

Source: SEEKING ALPHA

Search and Other advertising growth is picking up, rising 5.4% QoQ to $42.6 billion, as Google begins “building the next major evolution in Search” with AI integrations driving a higher ROI. As the I/O Fund highlighted previously, Alphabet’s Search “has proven resilient because it provides advertisers an attractive ROI on their ad spend. Looking ahead, Search Generative Experience, [Google’s generative AI-powered search tool], will improve advertisers’ ROI and will likely provide Alphabet additional pricing power. This will also improve their retail vertical” – a trend already surfacing, with Q2’s Search growth driven by retail alongside SGE’s launch.

Google Cloud will also be under the microscope, after posting two consecutive quarters of operating profitability, with operating margin reaching almost 5% last quarter. Revenue for Cloud stabilized at 28% growth YoY in both Q1 and Q2, as the platform remains a leading choice for training generative AI models. As enterprises start to think more deeply about AI and integrating AI across their organizations, Google Cloud stands to benefit in multiple ways – via its large language models such as Bard, its generative AI offerings including the recently launched Duet AI, offering AI model training with multiple AI supercomputers, and by “expanding our total addressable market and winning new customers,” according to CEO Sundar Pichai.

However, Google is in the midst of its antitrust trial, with regulators concerned that Google has been keeping an illegal monopoly on search. Google is reportedly paying Apple nearly $20 billion per year to remain the default search engine on Apple’s devices, are at the forefront of the case.

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

Meta: Ad Impressions to Drive Revenue Growth

Meta’s Q3 EPS estimate surged during the quarter, rising $0.60 from an estimate of $2.98 on June 30 to $3.58 by September 30. Meta returned to positive growth in Q1 this year, with revenues up +2.6%, and has since seen revenue growth accelerate – Q3 and Q4 are both expected to see YoY revenue growth up more than +20%.

Meta also has seen improvements in operating efficiency this year. Operating margin has expanded 9 percentage points in just two quarters, from 20% in Q4 to 29% in Q2. Revenue growth reaccelerating to more than +20% through the end of the year is set to drive EPS growth in the triple-digits as operating margin expands further.

Source: SEEKING ALPHA

Q3 is expected to be a banner quarter setting Meta up for a strong end-of-year finish: Meta is estimated to post 119% EPS growth to $3.58, with revenues expected to rise 20.6% to $33.4 billion. As an advertising-driven company, with more than 98% of revenues coming from ads, the mix of ad impressions and ad pricing will determine growth. So far this year, ad impressions have served as the primary driver, rising 26% YoY in Q1 and 34% YoY in Q2, offsetting weak pricing, which declined 17% YoY in Q1 and 16% YoY in Q2.

Source: I/O FUND

Over the past four quarters, advertising spend looks to have bottomed out, recovering from Q4’s (-22%) decline, while ad impressions continue to accelerate past 30%. Impression growth has been driven by APAC and Rest of World, which, as lower monetizing regions, have contributed to that decline in pricing. AI is only just beginning to scratch the surface in optimizing ads and increasing ROI for advertisers, and Meta is seeing “strong advertiser demand,” with almost all of its advertisers “using at least one of [its] AI driven products.” Meta is continuing to release new AI advertising products, such as Meta Lattice for predicting ad performance and AI Sandbox for generative AI-powered ad generation.

Amazon: AWS Growth in Focus

Amazon is expected to see a slight acceleration in revenue growth through the end of the year, with Q3 and Q4 forecast to see revenues increase 11.4% and 11.7% respectively, following Q2’s 10.9% growth. EPS estimates for Q3 point to +114% growth to $0.60, as operating margins for North America are expected to continue a 5-quarter streak of improvement.

Source: SEEKING ALPHA

AWS will also be a major focus of the upcoming report, as its revenue growth rate has declined for 7 straight quarters, from 40% growth in Q4 2021 to just12% growth in Q22023. Operating income has declined for three consecutive quarters but is on the verge of inflecting back to growth.

Source: AMAZON

While AWS generates just ~17% of Amazon’s total sales, its influence down the line is increasingly large. In Q2, AWS contributed nearly 70% of Amazon’s $7.7 billion of operating income; on a TTM basis, AWS generated $21.1 billion in operating income, or 119% of Amazon’s total $17.7 billion, weighed down by losses on the e-commerce side.

Given that outsized impact on Amazon’s bottom line, an inflection in both AWS’ revenue growth and a pivot back to growth in operating income will help drive more confidence in Amazon’s high EPS growth rates over the next couple years – earnings are forecast to grow 43% and 41% in FY24 and FY25, respectively. However, should AWS fail to show that inflection in revenue growth and post a fourth consecutive quarter of declining operating income, higher EPS estimates over the next three to four quarters could come under pressure.

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Conclusion:

Heightened expectations stemming in part from surging AI interest and cloud spend stabilizing are the major theme heading into Big Tech’s earnings week next week. Meta and Google are forecast to see the strongest revenue accelerations over the next two to three quarters, while Amazon is expected to see a small bump up with AWS’ growth a prime factor. Microsoft’s AI initiatives are expected to drive revenue acceleration over the next four quarters as the company devotes more than 13% of its Capex to AI.

We have buy levels we are targeting for Big Tech, which we share with our premium research members each week as the stocks progress. We believe our target buy levels will set us up for gains in FAANG stocks when the next bull cycle begins. We provide in-depth macro and individual stock analysis so that readers can better understand why we buy/sell. In this market, we frequently take gains. You can learn more here including information on our weekly webinar series, where we review our positions live and discuss some of the top stocks of the week.

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

Cloud Q1 Update: When Will the QoQ Decel Find a Bottom?

Posted on June 16, 2023June 30, 2026 by io-fund

Cloud stocks have treated investors well with recurring revenue, resiliency during Covid, and some of the strongest examples of product-market fit available on the public markets. However, not even this can overcome the effects of lower budgets and cloud spending, which is the top driver in terms of year-over-year comparisons. Due to macro uncertainty, companies are optimizing their cloud spending.

We track the results of big tech companies and best-of-breed cloud stocks to gauge the sentiment of the cloud sector. We came up with our premium analysis in December when we said, “Cloud spending may turn out to be softer than industry surveys indicate, especially until inflation cools off. This is because surveys capture a perception while earnings results are the culmination of a 7.1% inflation rate, plus a softer Chinese market and a softer European market.”

We noticed the sequential decline in cloud stocks in December and saw a steeper decline during our analysis in March. Best-of-breed cloud reported a 71% slowdown in QoQ/YoY growth for Q4 guides and a 83% slowdown in QoQ/YoY growth for Q1 guides. There’s technically an improvement in the recent quarter, as the best-of-breed cloud stocks are guiding for a 72% slowdown in QoQ/YoY growth for Q2 guides.

However, the drastic slowdown will begin to run out of room until either one of two things happen:

The low comps that cloud begins to lap in Q3 becomes a tailwind and companies are able to bounce back from the sudden drop off in growth that was reported last year, beginning in Q3.
Or, the sequential growth will soon turn negative, which will result in a negative reaction in the market. The objective data below shows which stocks are most at risk for this happening.

Cloud Trends: Big Tech is the best proxy.

Big Tech Companies are more insulated than Best-of-Breed, yet offer a 360-degree view as to how the cloud industry is faring. We had said the following in our premium analysis in December.

“The Big 3 are the best proxy because their reports represent the layer in the tech stack that tends to be the most resilient in terms of churn. The switching costs are quite high for cloud IaaS services. The Big 3 also afford a more concentrated view by owning 66% of market share across three companies whereas SaaS is spread across thousands of companies.”

If the Big 3 are decelerating it simply makes it much harder for Best-of-Breed to accelerate given the Big 3 represents an appetite for cloud budgets and provides strong clues if we are in a period of expansion or a period of optimization and digestion.

Source: Company Results

Key Highlights from the Big Three Earnings:

Microsoft

Azure grew by 27% and 31% YoY in constant currency.
The growth is down 31% in the last quarter and 46% in the same period last year.
The company’s guide for the next quarter is 26% to 27% (in constant currency), an expected deceleration of 4-5% from the recent quarter.
Even though cloud growth is decelerating, there are some bright spots like AI and the guide for the next quarter includes roughly 1% from AI services.

The company’s priorities are related to the cloud, and subsequent AI spend. Satya Nadella said in the earnings call, “We continue to focus on three priorities. First, helping customers use the breadth and depth of the Microsoft Cloud to get the most value out of their digital spend. Second, investing to lead in the new AI wave across our solution areas and expanding our TAM.” Second, investing to lead in the new AI wave across our solution areas and expanding our TAM.” He further highlighted that Azure is taking market share, especially benefiting from the AI trend.

You can read our recent editorial on Microsoft here.

AWS

AWS revenue grew by 16% YoY to $21.4 billion.
The growth is lower than the 20% the last quarter and is a remarkable slowdown from 37% in the same period last year.
Management discussed in the earnings call that April revenue growth for AWS further decelerated to 11%. This is due to the ongoing tough macro environment, causing customers to optimize their cloud spending in the recent quarter.

The company’s CEO, Andy Jassy, highlighted that enterprise customers were being cautious. “In AWS, what we’re seeing is enterprises continue to be cautious in their spending in this uncertain time. Customers are looking for ways to save money however they can right now. They tell us that most of it is cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”cost optimizing versus cost cutting, which is an interesting distinction because they say they’re cost optimizing to reallocate those resources on new customer experiences.”

Google Cloud

Google Cloud revenue grew by 28% YoY to $7.45 billion.
The growth is lower than the 32% growth reported last quarter and 44% in the same period last year.

The company’s CFO, Ruth Porat, said in the earnings call, “Our investments in product innovation, our go-to-market organization and our partner ecosystem delivered strong results as customers across industries and geographies increasingly rely on Google Cloud to digitally transform their businesses. That being said, in Q1, we continued to see slower growth of consumption as customers optimized GCP costs reflecting the macro backdrop, which remains uncertain. In terms of operating performance, we remain focused on driving long-term profitable growth in Cloud, while continuing to invest given the substantial opportunity.”we continued to see slower growth of consumption as customers optimized GCP costs reflecting the macro backdrop, which remains uncertain. In terms of operating performance, we remain focused on driving long-term profitable growth in Cloud, while continuing to invest given the substantial opportunity.”

More on Best-of-Breed Cloud Stocks

To help illustrate how the deceleration has continued for some best-of-breed names, we took a sample of the top-ranking cloud stocks on revenue growth, free cash flow, adjusted operating margin and/or valuations.

Among the best-of-breed cloud stocks, only MongoDB’s guide shows sequential growth. The company’s QoQ growth was 6% last year and is expected to be 7% this year. The largest deceleration was in HashiCorp, which grew 13% last year and is expected to have flat 0% sequential growth this year.

In the previous quarter, we stated the following:

“Among the best-of-breed cloud stocks, only ServiceNow’s guide shows sequential growth. The company’s QoQ growth was 7% last year and is expected to be 8% this year. The largest deceleration was in GitLab, with revenue that grew 12% QoQ last year, is expected to decline (4%) sequentially this year.

Overall, the category is slowing down sequentially (a rather drastic) 83% for Q1 guides compared to the previous year — from an average of 12% QoQ last year to 2% QoQ growth this year.

For example, best-of-breed cloud reported a 71% slowdown in QoQ/YoY growth for Q4 guides and is now guiding for 83% slowdown in QoQ/YoY growth for Q1 guides.”

We now see an improvement in the recent quarter, as the best-of-breed cloud stocks are guiding for a 72% slowdown in QoQ/YoY growth for Q2 guides – from an average 15% QoQ last year to 4% this year.

Source: YCharts/Seeking Alpha

In our writeups following last earnings season, we were wary of flat guides on YoY basis given cloud has decelerated ever since these companies went public. Due to the slowing revenue growth, companies must report perfect earnings reports. Otherwise, the stock is sold off after hours.

We had seen in the recent earnings season that companies like HashiCorp (lost 25% of its value), SentinelOne (lost about 35% of its value), Cloudflare (lost 25% of its value), and Snowflake (lost 10% of its value) as their guidance missed the Wall Street expectations. This is why we prefer to wait until the Cloud sector reports flat to accelerating growth on a QoQ basis. Due to the strength of the products, we believe this could be early 2024 (see below).

Our Snowflake premium article in January 2022 explained the downside of the consumption-based pricing model, especially during increased macro uncertainty. “Consumption-based pricing has a few drawbacks. For example, its less predictable than subscription revenue and there isn’t a ‘floor’ on revenue, because if consumption declines then so will sales.”

We further highlighted this point in the risks. “Another risk is the company’s consumption billing model, which is inherently unpredictable. This can make growth lumpy and some quarters may disappoint the Street. Investors should expect increased volatility in growth from Snowflake in the near term as new customers ramp consumption.”

In the quarter following this premium note, Snowflake guided for slower growth during the announcement of the Q4 results in March 2022, which led to the stock being down 30% in after-hours. Similarly, the company missed the Q1 earnings, and Wall Street analysts grew concerned, mainly due to the company’s consumption-based model.

Price Action

There has been an improvement in the price action of cloud stocks in Q2 till date, particularly after May, as seen in the chart below. MongoDB is leading among the best-of-breed cloud stocks after announcing the strongest results in the group pictured above. HashiCorp and SentinelOne rank at the bottom, and are reporting steeper deceleration QoQ – 25% for SentinelOne and then a thin 0% QoQ growth for HashiCorp.

Source: YCharts

The I/O Fund’s Cloud Plan:

Generally speaking, the cloud category has weaker bottom lines and is unprofitable. Therefore, it’s our view that the cloud category will need to return to top line acceleration QoQ before it becomes an obvious buy. This is not true for all tech categories as some can lean on operational efficiencies to drive bottom line growth, and this is rewarded by the market.

Certainly, there are outliers each earnings season, yet the outliers last quarter failed this quarter – and vice versa. As discussed, Cloudflare and Snowflake did quite well last quarter yet missed their guidance this quarter. This is not due to the strength of their product rather how unpredictable budgets are in the current environment.

Per Cloudflare’s CEO: “In the first quarter, we continue to witness a challenging business environment, which deteriorated significantly in March when negative headlines emerged related to SVB, the broadening banking crisis and the worsening macroeconomic outlook. With intensifying business uncertainty, companies became increasingly cautious in more deeply scrutinized field, which impacted numerous areas of our business, including a material lengthening of sales cycles, delays in collections and the significant back-end weighting in the linearity for the quarter.”

Snowflake’s CFO said the following: “In Q1, consumption varied from month to month. We benefited from strong consumption in February and March. Starting in April, consumption slowed after the Easter holidays through today.”

For the most part, many cloud stocks are underperforming the Nasdaq YTD, whereas in the past, this category greatly outperformed the Nasdaq.

Source: YCharts

Conclusion:

In order for cloud companies to outperform the Nasdaq again, we will want to see a return to top line growth QoQ and YoY. The reason we track QoQ is because this shows deceleration quickly compared to YoY. The QoQ data above predicts MongoDB would be the strongest stock, and HashiCorp and SentinelOne would be the weakest stocks, and this matches the market’s reaction.

Below are the forward estimates for MongoDB. Assuming consensus is correct for this stock, the rebound would happen around October 2024 with an entry best timed in January 2024 when the company reaches a low point of 10.95%. One area of concern is the 29% in the current quarter won’t return until nearly two years later.

H2 2024 and 2025 look optimal. Should anything change before then on the fundamentals, we will keep you updated.

The I/O Fund Analyst Team contributed to this article