Jabil’s Strong AI Growth Overshadowed by a Myriad of Weak Segments

Posted on May 16, 2025June 30, 2026 by io-fund

Jabil has surfaced as an oft-overlooked cloud and data center beneficiary, as the company’s strong growth in AI-related segments is mired behind multiple low-growth segments.

Simply put, Jabil’s 37% guided growth in Cloud & Data Center Infrastructure — to account for nearly 23% of fiscal 2025 revenue — would be impossible to see by looking at just top-line growth as revenue is expected to decline (3.4%) YoY in FY25.

However, it is this exact reason that Jabil likely faces growing headwinds throughout the rest of 2025, as a myriad of weak segments such as Auto and high consumer exposure via Apple present it to tariff-related demand and supply chain risks. These weak segments are more than offsetting AI growth, while thin margins mean tariff costs must be passed on to preserve the bottom line, which is already far below management’s FY23-stated target for this year.

Below, we discuss Jabil’s positioning in the AI supply chain, data center-driven growth and a penchant for M&A, consumer-exposed tariff risks, and lingering weakness in key segments.

Jabil’s Unique Positioning in the AI Supply Chain

Jabil is uniquely positioned in the AI supply chain, as it provides custom-designed, turnkey HPC/AI server platforms, rack enclosures, and optical networking components. Jabil is also increasingly vertically integrated across its AI portfolio with recent acquisitions, now offering complete GPU-agnostic servers featuring custom power and cooling solutions and in-house optical components.

Jabil offers both 1U and 2U (single, double rack unit) servers based on AMD’s latest 5th-gen EPYC processors and Intel’s 5th and 6th-gen Xeon processors. The 2U servers are optimized for low-latency, AI GPU accelerated workloads, while its 1U servers can be optimized for compute-storage or memory density. Jabil’s 2U ‘Eagle Stream’ server is Nvidia-certified for its L4 GPUs, which focus on video processing, deep learning and graphics use cases.

Jabil takes its full-system integration capabilities one step further with its Design-to-Dust lifecycle management support. This spans complete server rack development, tailored to customers’ exact needs, moving to volume manufacturing and then customer delivery, and circling back to decommissioning for end-of-life products. Thus, hyperscaler customers can come to Jabil for fully-designed, custom-manufactured servers from the ground up, minimizing supply chain diversification with Jabil’s vertical integration capabilities, further expanded with recent acquisitions.

However, the main risks with this strategy serving primarily in a ‘contract manufacturing’ model is that Jabil’s margins may remain thinner than other AI server manufacturers (at ~5% versus high single/low double-digits for Super Micro or HPE), hyperscale customers could shift spending, switch to other suppliers that can better meet needs with leading-edge GPUs, such as Blackwell or soon Rubin, or decide to internalize builds.

M&A Aiding Vertical Integration Capabilities

Jabil has taken steps over the past few years to strengthen its AI data center stack and enhance its vertical integration capabilities with two primary acquisitions, first with Intel’s silicon photonics-based pluggable optics transceivers unit in late 2023, and with liquid cooling manufacturer Mikros Technologies in late 2024.

Jabil is also said to be an interested party in acquiring ZT Systems’ US-based AI server manufacturing plants, with AMD reportedly looking to offload the assets in the second quarter to avoid competing with its customers Dell and HPE. Per Bloomberg, AMD is looking for a deal valued between $3 to $4 billion for the plants, with Taiwanese firms Wiwynn and Compal Electronics other interested parties.

Deal for Intel’s Silicon Photonics Unit

Financial terms for the silicon photonics deal with Intel were not disclosed, though Jabil acquired Intel’s silicon photonics IP, current and future product designs, R&D and technical teams. The deal brought Intel’s existing 400G optical transceiver module products, 800G products in development, and future 1.6T designs to Jabil’s data center portfolio. Neither Intel nor Jabil commented on the revenue of the unit, with Jabil’s management simply stating that it had “baked some of the revenues into our guide through 2024 into 2025.”

Interestingly, Jabil’s management said the idea of the deal arose from discussions from cloud customers who wanted to “disaggregate supply chains” and for Jabil to be more vertical in its server offerings. This raises a somewhat concerning point in that Jabil may have undertaken the deal due to pressure from customers who wanted to minimize extensive supply chain exposure, highlighting that these cloud customers likely have low switching costs and were willing (and able) to switch to new rack suppliers easily if such demands were not met.

Jabil’s management stated in late 2024 that within the first 12 months of the deal, the company had landed two new hyperscale accounts, with shipments already commencing. The hyperscale customers were not named, though Jabil has had a long-standing relationship with Amazon as one of its largest customers at 11% of revenue back in 2020, in both Cloud and Connected Devices segments, along with a pre-existing relationship with Meta in Connected Devices (now Connected Living).

As of fiscal Q2, Jabil is currently engaged in the 100G, 200G and 400G PAM4 optical transceiver module lines, while quoting 800G PAM4 modules in the first half of 2025 and moving towards 1.6T PAM4 modules by the end of the year. Jabil recently showcased its 1.6T pluggable transceiver module at the start of April, supporting dual 800G Ethernet or Infiniband connections, or single 1.6T connections while offering “among the lowest power consumption in the market.”

Jabil’s positioning in the 800G and 1.6T transceiver lines opens to door to growth over the next few years as these ultra-high speed products emerge at the forefront of the optical transceiver market. According to leading manufacturer Mitsubishi Electric, the optical transceiver market is expected to nearly triple from $4 billion in 2023 to almost $12 billion by 2029, with 800G and 1.6T solutions accounting for more than 80% of the market by then. This would correspond to ~$10 billion share, up 10x from ~$1 billion in 2023.

Source: Mitsubishi Electric

However, given that Mitsubishi commands ~50% global market share, the absolute opportunity in terms of revenue for Jabil may be quite low given that the market is quite saturated and competitive. Based on management’s current guidance for FY25, Networking and Communications revenue is expected to remain flat YoY at $2.3 billion when backing out the $0.7 billion associated with the exit of its legacy networking unit in FY24. Thus, it’s likely that related transceiver driven growth will be minimal even as Jabil begins to quote 800G and 1.6T products this year. Even if the new products generate ramp quickly to a few hundred million in revenue, that will only account for 1% of Jabil’s total revenue, which could easily be overshadowed by lingering auto or consumer weakness.

Jabil also expects the photonics deal will position them well for the upcoming push to co-packaged optics, believing their capabilities align better with networking switches, which is where CPO is first expected to be utilized after Nvidia unveiled two CPO networking switches at GTC. However, the growth story for CPO is much more long-term, arising more in 2027 and 2028, and as result CPO is unlikely to be a material driver over the next few years for Jabil.

Acquiring Low-Revenue DLC Firm Mikros Technologies

To enhance its thermal management solutions, Jabil acquired little-known liquid cooling manufacturer Mikros Technologies for $63 million, with the company’s revenue being estimated between $4 million and $7 million in 2023, non-accretive to Jabil’s $28.8 billion last year. The deal had $40 million in intangible assets, including $31 million assigned to contractual agreements and customer relationships.

Mikros specializes in custom microchannel cold plate and liquid cooling designs with ultra-low thermal resistance and high cooling capabilities of 1kW per square centimeter. These solutions are primarily direct-to-chip liquid cooling methods. The primary benefit of this is that these solutions can feature in a wide range of server racks, but are not as efficient as immersion-cooled servers, which are more tailored to >50kW racks, such as those featuring Blackwell GPUs, according to Super Micro.

Mikros has designed multiple different cold plate designs, with its AX-NV1 being designed primarily for Nvidia’s H100 GPU, and its AX-NV2 designed specifically for Blackwell series GPUs. Mikros says the NV2 fits easily in 1U rack designs, a primary rack size that Jabil offers.

The acquisition is helping Jabil begin to ramp its ability to help customers retrofit existing facilities from air cooling to liquid and soon liquid to liquid, through Mikros’ cold plate tech that easily will integrate into Jabil’s rack solutions. This acquisition further expanded Jabil’s full-system capabilities to now span server racks, cooling and optical networking tech.

Financials: AI Growth Overshadowed by Many Weak Segments

Jabil is by no means a hypergrowth stock, with revenue expected to decline this year and rebound to low-single digits in the next two. Despite the slow growth and thinner margins, the company has a strong bottom line, with EPS currently forecast to be nearly $9 this year.

AI-related revenue growth is strong at a guided +40% YoY as Jabil captures rising data center infrastructure demand. However, forward revenue growth rates through 2027 are multiple points lower than pre-pandemic growth and lagging management’s long-term growth targets, signaling risk ahead as multiple segments remain weak.

Revenue: Q2 Rebounds, FY25 Revenue Guidance Raised

In Q2, Jabil reported revenue of $6.73 billion, down (0.6%) YoY, with a growth rate rebounding from a (16.6%) decline in Q1.

For Q3, Jabil guided for a return to topline growth at 3.4% YoY at midpoint, offering a wide revenue range of $6.7 billion to $7.3 billion. To note, comps after fiscal Q1 2024 are slightly impacted by the $2.2 billion divestment of its Mobility business in FY24 — Mobility contributed $1.7 billion in revenue in FY24 before divestment, down from $4.2 billion in 2023.

On the back of AI-related strength, Jabil raised its FY25 forecast in Q2, now seeing revenue of $27.9 billion, a $600 million increase from the $27.3 billion guided in fiscal Q1. This has brought its guidance up $900 million from its initial $27 billion guide from Q4 2024. The primary driver for FY25 is Intelligent Infrastructure (discussed below in Segment Breakdown), riding AI tailwinds to a forecast of 17% YoY growth for the full year to $10.8 billion in revenue. This was increased from Q1’s forecast for 9% growth to $10 billion in revenue.

Jabil’s updated outlook would correspond to a YoY decline of (3.4%) for revenue, as it works through weakness outside of Intelligent Infrastructure. This builds on top of a (16.8%) YoY decline in FY24, as swift pullbacks in customer demand and excess inventory buildup in multiple key markets including auto, 5G and renewables dented revenue growth significantly. Jabil had initially guided for a (2%) to (5%) YoY decline including the Mobility divestiture, but ended the year at nearly (17%). This overshadowed strong momentum in AI, with Jabil noting that “AI GPU volume in the first half of 2024 [was] 200 times that of the level of 2023.”

Looking forward through FY27, Jabil’s growth is expected to return to positive territory in the mid to high-4% range, estimated to rise 4.6% YoY in FY26 to $29.3 billion and 4.9% YoY in FY27 to $30.7 billion.

Accelerating AI-driven growth is not appearing in higher revenue growth over the next few years, and more importantly, current estimates show Jabil operating through FY27 below its long-term growth targets – management previously outlined expectations to grow revenue at 5% to 7% YoY in the long-term.

Segment Breakdown

Jabil recently reorganized its reportable segments at the end of fiscal 2024, shifting from two segments, Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS), to three: Intelligent Infrastructure, Regulated Industries, and Connected Living & Digital Commerce. Regulated Industries accounted for 41% of revenue, followed by Intelligent Infrastructure at 39% and Connected Living & Digital Commerce at 20% of revenue in Q2.

Intelligent Infrastructure is arising as a core driver of revenue growth in fiscal 2025, with the segment focused on high-value data center and cloud computing needs for hyperscalers. Regulated Industries segment focuses primarily on auto and transportation, healthcare, renewable energy infrastructure and packaging end markets, while Connected Living & Digital Commerce segment focuses on retail digitization, smart home, warehouse automation and robotics.

Here's how each segment fared in Q2:

Intelligent Infrastructure revenue rose 18% YoY to $2.6 billion, accelerating from 5% YoY growth in Q1. This was driven by strong AI-related demand in cloud, data center and capital equipment. Growth was 37% YoY when backing out the ~$300M in revenue in Q2 ‘24 from the legacy networking business it exited.
Regulated Industries revenue declined (8%) YoY to $2.7 billion in Q2, decelerating slightly from (7%) YoY growth in Q1, on expected EV and renewable energy weakness.
Connected Living & Digital Commerce revenue declined (13%) YoY to $1.3 billion; excluding the Mobility divestiture, growth was 4% YoY. This was driven by strong warehouse automation and digital commerce growth, offset by weakness in consumer-oriented connected devices.

For Q3:

Intelligent Infrastructure revenue was guided to accelerate to 22% YoY to $2.8 billion, driven by “broad-based growth across our capital equipment, advanced networking, cloud, and data center infrastructure markets,” slightly offset by 5G weakness.
Regulated Industries revenue guided to rebound to a (1%) YoY decline to $3.0 billion, on continuing caution in the EV market.
Connected Living & Digital Commerce revenue guided to decline (16%) YoY to $1.2 billion, due to weaker growth in connected living, offset by some growth in digital commerce.

Q3’s guide would point to a 17 point acceleration in growth for Intelligent Infrastructure in just 2 quarters. QoQ growth is also accelerating from 4% QoQ in Q2 to 7.7% QoQ in Q3, assuming Jabil meets it guide at $2.8 billion.

Jabil laid the groundwork for this forthcoming acceleration in Q1, noting that it deepened its relationship with its largest hyperscaler customer (presumed to be Amazon but not named), seeing continued strength in custom AI-driven GPU rack integrations, and winning new programs with a new hyperscaler customer in silicon photonics. The ramp of Jabil’s 800G optical transceivers in the first part of calendar 2025 is also another likely factor behind this acceleration.

Intra-Segment View for FY25

Jabil also provides an intra-segment view into each of three reportable segments, breaking down growth by end market. This provides further clarity into the separate growth drivers for Jabil and what segments are struggling to grow.

Within Intelligent Infrastructure, Jabil is projecting 37% YoY growth in Cloud and Data Center revenue to $6.3 billion, or nearly 23% of total revenue, a significant acceleration from Q1’s outlook for 20% YoY growth to $5.5 billion in revenue (an $800 million sequential increase). This would be primarily driven by server racks and related data center products, as photonics revenue appears in Networking.

Capital Equipment growth is forecast at 38% YoY to $2.2 billion, while Networking and Communications revenue is expected to decline (23%) YoY to $2.3 billion, in part due to the exit of legacy networking which contributed $700 million in revenue last year. Stripping that out, Networking growth would be flat YoY.

For Regulated Industries, FY25 revenue growth was revised down from (2%) in Q1 to (5%) in Q2, on prolonged weakness in Auto & Transportation revenue, with growth expected to slow further to (11%) YoY. Renewables & Energy remain flat, while Healthcare growth was revised from 2% to flat as well.

Connected Living & Digital Commerce was maintained around (27%) YoY, impacted in part by the Mobility divestiture, but also more broadly by weak demand in Connected Living.

Most importantly, this segment breakdown reveals one key risk ahead for Jabil — the fact that Data Center growing at 38% YoY at nearly one-quarter of total revenue is not appearing in top-line growth suggests this strong AI momentum will remain overshadowed by weak growth and demand issues in other consumer-exposed and rate sensitive segments.

AI-Related Revenue Forecast Increased to $7.5 Billion, up 40%+ YoY

Based on its strengths within Intelligent Infrastructure and more specifically within Cloud and Data Center Infrastructure, Jabil boosted its AI-related revenue outlook for FY25 to $7.5 billion.

This represented a $1 billion increase in its AI-related revenue forecast and points to YoY growth of 40%+. Jabil said that last year’s AI-related revenue “was in the region of $5 billion,” and they had then increased it to $6 billion, then $6.5 billion and now to $7.5 billion. Management said the increase comes “as demand for servers, racks, photonics, advanced networking gear, storage, and testing equipment all continued to climb higher during the quarter.”

Barclays’ George Wang questioned Interim CEO Mike Dastoor about what was driving the raised AI guidance and $800 million increase in Cloud & DCI guidance:

Q, Wang: “Just kind of glad to see you guys raised the guidance by $800 million around the server rack. Was it likely driven by your biggest hyperscale customer? Just curious about timing for the ramp. Earlier, you guys talked about it will be more FY '26 in terms of the ramp with the sort of custom rack with your biggest customer in the DCI side. Just curious if there's any pull in into the back half of FY 25 kind of evidenced by the strong growth in the segment and the kind of guidance you raised. Just curious if you have any refreshed thoughts in terms of nuance just on the cadence for the ramp.”

A, Dastoor: “So I think the increase is driven mainly in 2 parts. I think if you look at our market share, we are growing our market share. So there's definitely some level of consolidation going on there, and we're winning more than our fair share of the market. And then the end market growth, again, we're not seeing any slowdown there in the end market. That continues to move upward.”

Dastoor’s answer beat around the bush, as he did not provide any clues or clarity as to whether this growth was driven by its largest hyperscaler. Comments around the custom rack ramp being more towards FY26 implies that Jabil’s AI-related revenue growth next fiscal year could remain strong if there is no pull in into this fiscal year.

Margins

Though Jabil has thin margins, it is seeing some slight margin expansion arise with its Intelligent Infrastructure operating at a higher margin and higher growth rate than its other segments. This can provide longer-term margin tailwinds should AI continue to drive more favorable margins in the segment over the next few years.

Gross margin in Q2 was 8.6%, down from 8.7% in Q1 and 9.3% in the year ago quarter.
GAAP operating margin was 3.6% in Q2, up from 3.8% in Q1 (not comparable to Q2 24’s 16.7% due to divestiture gains). Adjusted operating margin was 5.0%, flat QoQ and YoY. For Q3, adjusted operating margin is implied to be ~5.4% at the midpoint of management’s guidance for $348 million to $408 million in operating income.
GAAP net margin was 1.7%, up from 1.4% in Q1. Adjusted net margin was 3.2%, down slightly from 3.3% in Q1 but up slightly from 3.1% in the year ago quarter.

Breaking down adjusted operating margin by segment in Q2 shows Intelligent Infrastructure becoming the quiet margin and visible growth driver:

Intelligent Infrastructure adjusted operating margin was 5.3% in Q2, expanded half a point from 4.8% in Q1.
Regulated Industries adjusted operating margin was 4.8% in Q2, up slightly from 4.7% in Q1.
Connected Living & Digital Commerce adjusted operating margin was 4.5% in Q2, down 1.3 points from 5.8% in Q1.

EPS

Jabil reported strong 15.5% growth in adjusted EPS to $1.94, while it guided for a wide range of $2.08 to $2.48 for Q3. At midpoint of $2.28, this implies adjusted EPS growth will accelerate to 20.6% YoY. Jabil had noted at the time of its Mobility divestiture that it expects EPS seasonality similar to its old EMS business, with 40% in the first half and the remaining 60% coming in the second half.

The wide revenue and EPS range likely stems in part from uncertainties around tariffs, given that the guidance was given in March before specifics were announced. Yet it’s notable that management is forecasting sequential improvement in margins and accelerating EPS (aided by seasonality), as it suggests that they are quite confident in their ability to navigate tariffs and benefit from accelerating AI demand.

In Q2, Jabil also boosted its FY25 EPS forecast, seeing earnings of $8.95, up 5.4% YoY. This was a $0.20 increase from its original $8.75 forecast. To see EPS growth while revenue is declining, albeit at single digits, suggests Jabil is managing costs well and recognizing some slight operating leverage benefits.

Over the medium-term, EPS growth is expected to accelerate to the mid-teens in FY26 and FY27, with growth currently estimated at 15% and 14% to $10.30 and $11.75, respectively.

However, the broad slowdown in demand across multiple end markets and ensuing revenue weakness in FY24 has put Jabil behind its FY25 EPS target given at the end of FY23. At the time, management forecast EPS of at least $10.65 in FY25, but is now nearly (16%) below that target for this year, and still below it next year.

Cash and Balance Sheet

Cash flows remain solid, with Jabil reporting a sequential improvement in cash flows in Q2.

Operating cash flow was $334 million in Q2, up more than 53% YoY and 7% QoQ. Operating cash flow margin was 5.0%, expanding from 4.5% in Q1 and 3.2% in the year ago quarter.

Adjusted free cash flow was $261 million, up more than 443% YoY and 15% QoQ. Adjusted free cash flow margin was 3.9%, up from 3.2% in Q1 and 0.7% in the year ago quarter. Jabil forecast for adjusted free cash flow generation of more than $1.2 billion for FY25, implying a slight expansion in adjusted FCF margin from 3.7% in FY24 to 4.3% in FY25. While these are thin margins, it’s likely sufficient to cover upcoming debt maturities.

Core EBITDA was $488 million in Q2, down (3.4%) YoY. For the first half of 2025, core EBITDA was $987 million, down (15.9%) YoY due to Q1’s YoY decrease in operating income.

Net inventories rose 2.7% QoQ to $4.44 billion. Net inventory days increased 5 days QoQ to 61, above management’s targeted range of 55 to 60 days, which Jabil attributed to timing in the Intelligent Infrastructure segment.

Cash and equivalents totaled $1.59 billion, while debt remained steady at $2.88 billion. While Jabil is upside-down on debt, having nearly 2x debt as cash and debt-to-equity at 2.12x, available revolver capacity and evenly spaced maturities suggest that Jabil’s indebtedness should not elevate risk.

Jabil has approximately $500 million in senior debt due in 2026, 2027, 2028 and 2030, with $300 million due in 2029 and its largest tranche of $600 million due in 2031. While Jabil is currently focused on maximizing shareholder returns via share buybacks, its cash flow generation annually would be sufficient to cover its upcoming maturities. Jabil also has $4 billion in revolving credit facilities available as a backup to its Commercial Paper program, which also has $3.2 billion in available borrowing capacity.

However, a larger acquisition such as for AMD’s ZT Systems’ manufacturing plants where Jabil is a rumored bidder, would likely place more significant strain on its balance sheet given its expected price tag of $3-4 billion.

Jabil Believes it is Well Insulated from Tariffs, but Supply Chain Risks Remain

We recently discussed The Impact of Tariffs on the Stock Market as Q1 earnings kicks off, highlighting that early commentary from executive teams and analysts point to growing uncertainty on customer behavior and demand, amidst broader supply chain challenges. We explained that analysts are revising estimates under the hood with cautious notes that these issues will not disappear overnight.

For Jabil’s case, management believes it is well insulated from direct tariff impacts due to its global manufacturing footprint and majority of localized sales, though indirect, trickle-down impacts present a larger risk as numerous end markets remain weak.

Tariffs were a central part of Q2’s earnings call at the beginning of March, well in advance of April’s tariff announcements and subsequent market selloff, given uncertainties around scope, duration and impact of tariffs. Jabil’s management fielded several questions from analysts about this and the impacts they expect given their global manufacturing and sales footprint.

CEO Mike Dastoor said the majority of Jabil’s China business is “local to regional” in nature with only a small portion being US-bound, while he thinks the company’s global footprint and ability to manufacture locally to domestic customers worldwide means tariffs would be a “net positive.” However, this could potentially be an incorrect assumption as tariffs could possibly impact industry-wide growth in key markets such as automotive and smartphones.

To note, Jabil’s foreign revenue exposure is elevated at 77% in Q2, down from 82.5% a year ago, with the decrease primarily due to the Mobility divestiture. Jabil does not break down individual geographic exposure beyond that, but this high foreign revenue concentration increases geopolitical risk due to the sweeping implementation of tariffs worldwide, as well as broader macroeconomic risk should tariffs weigh on global growth and numerous foreign economies where Jabil operates in.

Jabil said that tariffs will be a “pass-through cost”, which makes sense to protect its bottom line given that its thin margin profile would be unlikely to safely absorb rising tariff-related expenses without severely impacting EPS. Yet, this does not truly insulate Jabil from tariffs, and neither does its global footprint — as we have seen with multiple other major tech firms from semis to autos, there is the growing uncertainty that tariffs “could lead to some level of demand reduction by the end customer” in the upcoming quarters. Jabil would likely feel tariff-related impacts if core customers such as Apple, Tesla and other auto and renewable customers face demand weakening through the end of 2025.

As we explained in our free newsletter, tariffs could quickly complicate the global supply chain and have trickle-down effects to consumers, as it’s impossible to onshore complex supply chains to the US overnight, or in short order, without facing major increases in costs. Tariffs are also expected to weigh on consumer demand, and for Jabil, analysts are cutting price targets and estimates. JPMorgan is now embedding “broader macro slowdown and associated demand moderation across most customer verticals into its estimates,” while Goldman cut its view on the auto market and sees softening consumer demand.

Consumer Exposure, Apple Concentration

Tariff impacts are already appearing in the consumer electronics industry, where both PC and smartphone industry growth forecasts are being revised lower, with industry tracking groups noting that growth rates in Q1 were driven by vendor stockpiling rather than healthy demand.

For the smartphone market, IDC said vendor stockpiling “effectively inflated Q1 shipment figures beyond levels anticipated based on underlying consumer demand trends alone.” IDC added that heightened US-China tensions and growing tariff uncertainties were a “strong reason for concern” for 2025 growth. TrendForce estimated that the “best case scenario will see the smartphone market flat at best” in 2025, while the “worst case scenario is a production decline by as much as 5% YoY.”

Jabil’s top customer Apple is expected to face quite significant tariff impacts, either culminating in much higher prices for consumers, with analysts forecasting 7% up to 43% price hikes, or higher costs, up to $9 to $10 billion to COGS. Apple also rushed to ship in 600 tons, or ~1.5 million iPhones worth $2 billion, in March in an effort to avoid tariffs.

While Jabil may not be affected by directly supplying Apple, if its sales occur locally in India for example, demand shocks from higher prices theoretically would impact Jabil’s revenue if Apple cuts shipments to manage inventories as a result. Jabil’s management is well aware of the fact that overall volumes are likely to be negatively impacted by tariffs in the future, expecting “some level of pullback towards the holiday season, especially from the consumer's perspective.”

In FY24, Apple’s share of Jabil’s revenue was 11%, or ~$3.2 billion, abating from the 19% to 22% revenue share from FY19 to FY22 (in part due to the Mobility divesture). During those years, Apple had driven revenue of at least $5.4 billion to Jabil. In 2023, Jabil also took steps to limit its Apple-China exposure, shifting its AirPod production to India.

EVs, Renewables Also Present Risks

Jabil has already seen persisting weakness in Automotive weigh on revenue growth, especially in FY24, and tariffs could further exacerbate demand issues in this and other markets such as renewable energy.

The solar and renewable energy industries have been plagued by high rates affecting solar rollouts throughout 2023 and 2024, and high rates combined with tariffs will likely remain a dark cloud over global demand. Enphase last week stated that while tariff impacts would be felt more on batteries as opposed to solar, it expects the US solar market to remain pressured by high interest rates while Europe remains challenging from regulatory changes and seasonal demand softness.

When it comes to automotive, the current consensus is that the industry will be hit quite hard by tariffs. A CNBC report from early April noted that analysts and executives are “expecting to see a drop in vehicle sales in the millions, higher new and used vehicle prices, and increased costs of more than $100 billion for the industry.”

When it comes to EVs, Tesla is typically seen as the bellwether for the industry given its presence and market share. Now, Tesla sits at the crossroads of consumer demand and China tensions, and is witnessing large cuts to growth expectations on top of weak demand. Q1 deliveries slumped (13%) YoY to the lowest level in two years, while revenue estimates for the full year have been slashed by $20 billion since the start of 2025.

Jabil is definitely not immune to demand headwinds in auto and solar — Auto and Transportation weakness was a core factor in FY24’s revenue decline, while Renewable Energy Infrastructure remains nearly (20%) below 2023’s revenue level, at $2.4 billion guided for FY25 versus $3.1 billion in FY23.

At the end of FY23, Jabil had projected 20% YoY growth in FY24 for Auto and Transportation revenue, forecasting a rise from $4.4 billion to $5.3 billion. Jabil then cut the segment’s guidance each quarter, with actual FY24 revenue for the segment coming in flat at $4.4 billion.

For FY25, Jabil had initially guided for $4.2 billion in revenue, down just (5%) YoY, but now has cut this guide each quarter to project just $3.9 billion in revenue for the segment, down (11%) YoY. This is before the full effect of tariffs has hit the auto industry, and a rather substantial erosion of revenue growth for Jabil, considering that at $5.3 billion, Auto & Transportation would’ve accounted for more than 15% of revenue in FY24 and nearly 19% in FY25.

Due to this weakness in Automotive as well as lingering headwinds in other segments including Renewable Energy and Healthcare, Jabil faces a murky outlook and weak top-line growth until these segments begin to meaningfully recover, which at the moment seems to be much more prolonged as tariffs weigh.

Valuation

Jabil has not been left out of tech’s rout in 2025, with shares at one point falling more than 30% from January’s highs at nearly $175. This has brought valuation multiples down to more reasonable levels, though tariffs could still result in a negative impact to the bottom line over the coming quarters due to thin margins.

Currently, Jabil is trading at 16.2x forward PE, a fair bit below its 18-19.5x peak multiples in January 2025 and early 2024, though well above its April low at 13x. This has brought it back above its 5-year average forward PE multiple of 12.8x, presenting more room to the downside should earnings estimates get revised lower through the rest of the year should tariffs impact customer demand and revenue growth.

Source: YCharts

On a top-line basis, Jabil is trading at 0.56x FY25’s estimated revenue of $27.9 billion at its current $13.3 billion valuation. This is above its 5-year historical forward PS average of 0.45x, as Jabil is likely seeing a slight re-rating higher due to optimism around its strong data center and AI related revenue growth forecasts.

Source: YCharts

If you strip it down to look at just the AI-related revenue, Jabil is trading at just above 2x its $7.5 billion AI revenue forecast, which is growing 40%+ YoY. It’s also trading at 2.5x its Cloud and Data Center Infrastructure segment with 37% YoY growth, approaching AI hardware pure-plays such as Super Micro which have been valued at 3-4x revenue at peak.

Conclusion

Jabil is intriguing as its strong growth in Cloud and Data Center Infrastructure is shrouded by a myriad of weaker segments, and it has substantially raised the segment’s forecast by $800M QoQ in Q2. This would represent a substantial acceleration from its prior 20% growth guide to 37% growth.

Despite this strong growth, Jabil’s top-line growth is rather subpar, with revenue forecast to decline YoY in FY25 as Jabil continues to digest end market weakness in a handful of consumer-exposed segments. This exposure to Apple, automotive clients and other industries such as healthcare has the potential to weigh on revenue and earnings growth through the rest of 2025, and risks completely overshadowing AI growth.

The I/O Fund has a high allocation to other prominent data center infrastructure beneficiaries, sharing its research and real-time trade alerts with our Pro and Advanced subscribers, while discussing potential setups and trading plans in our weekly webinars with Portfolio Manager Knox Ridley. Our cumulative returns of 210% and annualized returns of 27.6% place us as one of the top performing tech portfolios, beating Wall Street’s very best. Take advantage of a limited-time offer for $275 off our Advanced tier here. To upgrade, email us at premium@io-fund.compremium@io-fund.com.

Damien Robbins, Equity Analyst for the I/O Fund, 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:

Tesla Stock Faces Recalibration of Growth Expectations

Posted on April 17, 2025June 30, 2026 by io-fund

It was no surprise that Tesla’s Q1 deliveries came in below estimates, given the multitude of data points across Europe and China that pointed to significant YoY declines in demand. We pointed out in the first week of March when we last covered Tesla’s stock that given this weakness in core regions and transitory production impacts from the refreshed Model Y, there was a risk that Q1 deliveries would fall to well below 400,000 vehicles, whereas consensus estimates at the time were calling for more than 410,000.

Tesla’s stock is now facing a recalibration of expectations after Q1’s delivery report missed by a wide margin, with revenue and EPS growth estimates falling sharply into its earnings report next week. Below, I dig into the risks Tesla’s revenue faces in Q1, growth expectations for the year, and the bigger picture ahead.

Tesla’s Q1 Deliveries Miss Mark

Tesla reported 336,681 deliveries in the first quarter, more than 40,000 shy of the 377,592 estimate, representing the worst performance in two years. This represented a (13%) YoY decline in deliveries, while production fell (16%) YoY to 362,615 vehicles, the lowest quarterly production since Q2 2022. Tesla said that the transition to the refreshed Model Y led to “several weeks” of lost production.

Q1 saw a sharp decline in Tesla’s production and deliveries to the lowest levels since 2022. Source: I/O Fund

These delivery and production figures provide a few clues for the upcoming earnings report and for Q2 as well:

1) Outsized revenue impact due to ASP deterioration and delivery decline

2) Margin headwinds, not just from idle capacity and the refreshed Model Y ramp, but also incentives

3) Possible inventory build-up with production outpacing deliveries by ~26K vehicles, which may force more aggressive financing activity to sell down excess inventory in Q2

4) Recalibration of expectations for 2025 growth

Recalibration of Growth Expectations

The delivery weakness looks to be snowballing into something much larger – a recalibration of growth expectations for Tesla for the full year. Even in the six weeks from our previous update, revenue and EPS estimates for Q1 and for 2025 have continued to drop considerably, marking a rapid shift in expectations impacted by the weak delivery print.

At the start of 2025, Tesla was expected to report $25.98 billion in revenue in Q1, up 22% YoY, with EPS of $0.71, for YoY growth of 58%. These estimates had been little changed since July 2024.

Now, less than a week from Tesla’s report, Q1 revenue is pegged at $21.54 billion, for growth of just 1.1% YoY. Q1’s EPS estimate is $0.43 for a (4%) decline.

Tesla’s Q1 revenue and EPS estimates saw sharp changes heading into the end of the quarter, with revenue estimates coming down more than $2 billion in March. Source: YChartsYCharts

Essentially, in just four months, Tesla has shaved off 20 points of revenue growth and more than 60 points of EPS growth, assuming it meets estimates for Q1. This is a sudden, sharp recalibration of growth expectations for the quarter that has carry-over effects for full-year growth.

Now to the full year: at the start of 2025, Tesla was estimated to generate $116.7 billion in revenue, up nearly 19.5% YoY, with EPS of $3.15, up 30% YoY.

Now, 2025 revenue is expected to be $106.7 billion, $9 billion below where it entered the year and representing growth of just 9.4% YoY, while EPS is estimated to be $2.55, (19%) lower than at the start of the year and representing growth of just 4.6% YoY.

Tesla’s revenue and EPS estimates have fallen sharply since the beginning of the year, with EPS estimates now 19% lower and revenue now nearly 8% lower. Source: YChartsYCharts

In just four months, Tesla’s full year revenue growth estimate has fallen 10 points to the high-single digit range, while its EPS growth estimate has declined more than 25 points to the mid-single digit range. This is not solely due to Q1, as Q2 and Q3 estimates have been revised (2%) to (4%) lower as well after Q1’s weak report.

ASP Weakness Exacerbating Tesla’s Delivery Decline

Q1’s revenue is likely to be pressured as weak pricing weighs on Q1’s weak deliveries, providing additional challenges for automotive revenue, its primary revenue segment at 77% of revenue in Q4.

Tesla’s automotive revenue faces amplifying headwinds in Q1, with weaker ASPs weighing on an already large (13%) YoY decline in deliveries. This presents broader growth challenges given that Energy Storage revenue has decoupled from deployment growth, and as a result, Tesla may run the risk of revenue coming in below $20 billion in Q1.

Here’s why:

Tesla has not increased its ASPs on a QoQ basis since Q2 2022. Compared to last year, ASP was ~$3,700 lower YoY in Q4. This alone presents a 9-point additional headwind to automotive revenue growth (excl. leasing and reg credits) simply due to the swift pace of price declines.

In Q1, ASPs faced a complex environment, from continuing promotional efforts (0% APR loans, referral discounts, etc), combined with price hikes for the Model X, slight increases in average transaction prices in the US near the end of the quarter, and the launch of the Model Y Juniper, which may actually provide a drag to ASP this quarter.

Impact of Tesla’s New Model Y

Model Y Juniper’s popularity in China may dent ASP in Q1, as the new variant is priced lower than its US counterpart: the RWD variant is priced at 263,500 yuan, or ~$36,000, while the Long Range AWD is priced at 303,500 yuan, or $41,500, versus $48,990 for the LR AWD in the US before federal tax credits.

The new model reportedly saw nearly 60,000 orders in the first 5 days in China, becoming the country’s top-selling model in March with 43,370 deliveries. The RWD variant is priced nearly 10% below Tesla’s Q4 global ASP in US$ figures, while the AWD variant is just over 3% higher, suggesting that if a majority of sales volumes were for the cheaper RWD variant, global ASPs will face some pressure.

While Juniper carries a higher price tag than the previous Model Y variant, it was only available in the US in mid-March, leaving little time for deliveries to commence in volume. Tesla also has reportedly discontinued the Launch Series, meaning the new model no longer has its $11,000 more expensive option available for sale, limiting its ability to positively impact ASPs.

Tesla Could See Q1 Revenue Below $20 Billion

Assuming ASPs remain approximately flat QoQ due to the aforementioned factors – slight price hikes, base Juniper variant priced below global ASPs in China with strong deliveries, and financing/incentive offers – automotive revenue could decline nearly (22%) to $12.9 billion. Including approximately $1.2 billion in leasing and regulatory credits, total auto revenue could be just under $14.1 billion, or down (19%) YoY.

Energy Storage decoupled from deployment growth in Q4, as revenue grew less than 2% from Q2’s peak despite 17% higher deployments. On a YoY basis in Q4, deployments rose 244%, yet revenue rose just 113% YoY, a staggering 131 point difference pointing to pricing pressures. This suggests that growth is likely to remain pressured in Q1, as Energy deployments declined more than (5%) QoQ in Q1 to 10.4 GWh.

Should Energy Storage revenue follow that pattern of revenue growth weaker than deployment growth, at something such as a (8%) QoQ decline, or up 73% YoY, while Services revenue increases 4% QoQ, this would project total Q1 revenue out to $19.85 billion.

Even assuming 10% QoQ growth in Energy Storage revenue, or up 106% YoY, a 2% increase in ASP (this would be the first time in 11 quarters), $1.2 billion in leasing and regulatory credit revenue, and the 4% QoQ Services growth, revenue would project out to $20.6 billion.

To hit the current consensus of $21.54 billion, which has declined from $22.46 billion since deliveries were reported, Tesla would need a massive 7.5% QoQ increase in ASP, or up $3,000 sequentially, plus 10% QoQ revenue growth in both Energy Storage and Services, with $1.2 billion in reg. credit and leasing revenue, an unlikely scenario.

The I/O Fund specializes in covering lesser-known AI stocks on our research site with trade alerts and weekly webinars. Learn more here.The I/O Fund specializes in covering lesser-known AI stocks on our research site with trade alerts and weekly webinars. Learn more here.

Lingering Margin Pressures – New Lows Likely Ahead

Tesla is facing a slew of headwinds to margins, as production and delivery numbers are suggesting inventory buildups, alongside known impacts from ramp-related costs. The combination of weaker deliveries and weaker automotive revenue growth is also likely to weigh on already thin margins.

Q4 already saw increased margin pressures from aggressive financing efforts to clear out excess inventory, and average gross profit per vehicle was on the brink of falling below $5,000 as a result. In Q1, Tesla now must contend with much weaker automotive revenue on top of additional ramp related costs for the refreshed Model Y. Ramping Megapack and Powerwall output in Shanghai also is likely to weigh on operating margin in the quarter.

For Q2, margins are likely to face additional pressure from tariff impacts. Tesla acknowledged that tariffs “will have an impact on our business and profitability,” and while the administration has floated “possible temporary exemptions” on imported auto parts and vehicles, nothing is set in stone. Reports from Anderson Economic Group estimate that for US-assembled small crossovers, sedans, and mid-sized SUVs, tariffs costs could be $2,500 to $4,500.

According to NHTSA, for the 2025 model year, Tesla’s vehicles source 20% to 25% of its part content outside the US, primarily from Mexico, opening it up to some tariff risks. Additionally, Tesla was said to have suspended plans to source some components for the Cybercab and Semi following increasing China tariffs, disrupting production timelines for the two vehicles, which were originally expected to start trial production in October.

1.48M More Deliveries Needed to Return to Growth in 2025

We said in our March 6 analysis, Tesla Has a Demand Problem; The Stock is Dropping, that if Q1 did come in weak due to global sales weakness and transitory production impacts, Tesla would have to “make up substantial ground in the back half of the year” to reach optimistic delivery targets.

As you may recall, Tesla quietly shifted its tone on 2025 deliveries growth, with Musk originally stating that 20% to 30% growth was achievable in 2025 in Q3 2024’s earnings call, while Q4’s earnings call shifted the outlook to just a ‘return to growth’.

Now that Q1 deliveries have been officially announced, we can see where Tesla stands on its path to growth. 2024 deliveries totaled 1.81 million, meaning Tesla would need to deliver 1.48 million more vehicles from Q2 to Q4 to return to growth this year.

Q2 is unlikely to ease growth fears, as expectations similarly have been lowered quickly as uncertainty around tariffs and vehicle demand looms. Initial estimates currently point to deliveries between 350,000 to 375,000 for Q2, versus nearly 444,000 in the year ago quarter, though it is still quite early in the quarter and subject to change.

Tesla reportedly halted shipments of Model X and S vehicles to China due to high tariffs, though this is expected to have a minimal impact on deliveries considering the X/S accounted for <5% of global deliveries last year, with China a portion of that. As a whole, China is a major market for Tesla accounting for approximately 37% of deliveries last year, and rising geopolitical tensions could put some of that at risk.

Returning to growth in deliveries this year would require Tesla to deliver over 491,000 vehicles on average each quarter for the rest of the year, based on how Q1 started. This would require Tesla to increase deliveries at ~20% QoQ each quarter, which would culminate in 580,000 in Q4, or a fresh record and pointing to 17% YoY growth, a figure that Tesla has not hit in any of the past nine quarters. Put another way, given Tesla’s annual capacity of >2.35 million vehicles, or 587,000 quarterly, Tesla would need to be producing and delivering at almost maximum capacity come Q4.

The Bigger Picture Ahead for Tesla

As we said in our March analysis, price often bottoms before fundamentals, and it’s clear that Q1 and even Q2 are expected to be the weakest point of the year before the fundamentals improve heading into 2026.

As it stands currently, Tesla is expected to see revenue growth significantly reaccelerate beginning in the back half of the year, with EPS following in 2026. Estimates point to growth bottoming at 0.3% in Q2, before accelerating to 14.3% YoY to end 2025 and 25.7% in Q1 2026, representing a quick 25 point growth acceleration in four quarters.

Tesla’s revenue growth is currently forecast to bottom in Q2 before accelerating to nearly 26% in Q1 2026. Source: I/O Fund

EPS growth is expected to be choppy this year, with only Q2 expected to see growth against a much weaker comp. However, Q1 2026 is expected to see the sharpest YoY growth in EPS in more than three years at 54.2% — again against a soft comp.

We have continuously reminded our readers that margins have been the #1 metric to focus on for nearly two years as margin compression led to 2024’s large YoY declines in EPS. Tesla has had to continue cutting ASPs to promote vehicle affordability, not relieving any of this margin pressure.

In Tesla’s case, however, sentiment often takes precedence above all, in part due to a massive advantage it has in physical AI and (speculative) trillion-dollar opportunities in robotaxis and humanoid robotics with Optimus.

Tesla is witnessing exponential growth in FSD-driven miles, nearly tripling from ~1 billion in March 2024 to almost 3 billion by December 2024. It is also still planning to launch a driverless robotaxi service this year and begin scaling Optimus production. While neither of the two are expected to be meaningful contributors to growth for this year, the materialization of either AVs or humanoid robotics could open tremendous growth potential for the company in the future.

Timing has always been tricky for Tesla, especially when it comes to autonomous vehicles. However, timing investments is one of the I/O Fund’s strengths, actively managing positions with real-time trade alerts for every buy and sell we make in our leading portfolio with 210% returns since inception and 27.6% annualized returns. We also offer frequent deep dive research, weekly webinars and an automated portfolio hedge. Learn more here.

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

Recommended Reading:

The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025The Fed Can’t Save This One: Why Bonds May Break the Stock Market in 2025
I/O Fund Reports 210% Cumulative Return — Ranking Above Wall Street's BestI/O Fund Reports 210% Cumulative Return — Ranking Above Wall Street's Best
The Harsh Truth: Retail Investors Take the Brunt of Market LossesThe Harsh Truth: Retail Investors Take the Brunt of Market Losses
Nvidia CEO Predicts AI Spending Will Increase 300%+ in 3 YearsNvidia CEO Predicts AI Spending Will Increase 300%+ in 3 Years

Tesla Has a Demand Problem; The Stock is Dropping

Posted on March 7, 2025June 30, 2026 by io-fund

After posting its first annual decline in deliveries in 2024, Tesla continues to face major hurdles to growth in 2025. There are shockingly large declines in Europe and China so far this year, coupled with automotive margins that hit a low in Q4 with more margin pressure likely in Q1. Management has also quietly shifted its tone on 20% to 30% delivery growth, with other segments offering no reprieve as Tesla continues to eat into its gross profit to push deliveries higher.

While optimism has risen for robotaxi services and Optimus robots, neither of the two look to be major drivers of growth in 2025, with initial use cases likely to be internal or small-scale in nature. Tesla continues to hype up a more affordable model, though questions remain about its ability to do so profitably as Tesla has made more progress cutting selling prices than it has cutting production costs.

Stay on the leading edge of AI with I/O Fund’s high-performing tech portfolio, which had 10 positions outperform the Nasdaq-100 in 2024, many held at high allocations, and we are prepping for a strong 2025. Take advantage of our limited-time monthly promotion for up to 20% off our Pro service here to access the I/O Fund’s portfolio, library of research, webinars, and more. here to access the I/O Fund’s portfolio, library of research, webinars, and more.

Tesla’s Automotive Growth Stagnates in 2024

Automotive growth stalled in 2024, with Tesla recording a (1%) YoY decline in deliveries for the year to 1.79 million vehicles. Q4 capped off the end to a rather tumultuous year for Tesla, as Tesla sold down a significant amount of inventory after Q1 2024 saw its first YoY decline in quarterly deliveries in four years.

Tesla stock sees its first annual decline in deliveries as growth stagnated in 2024.

China was a strong area of growth for Tesla in 2024 and in Q4, with Tesla’s deliveries in China reaching a record high of 82,927 vehicles in December and 196,902 vehicles in Q4, up nearly 16% YoY and also marking a fresh record. For 2024, China deliveries exceeded 657,000, rising 8.8% YoY. As a result, China accounted for 39.7% of global deliveries in Q4 and 36.7% in 2024, up more than 3 points from 33.4% in 2023.

For 2025, Musk had estimated vehicle deliveries could grow 20% to 30% YoY in Q3, which would correlate to deliveries between approximately 2.15 million and 2.33 million, or an average of at least 550,000 deliveries per quarter. Interestingly, this target was not repeated in Q4, with Tesla saying now that it only expects to “return to growth” in 2025. This subtle shift in tone is easy to miss, but it suggests that Tesla may be on track for 1.85 to 2.0 million vehicles this year, technically returning to growth but at a much lower rate than prior commentary.

This year looks to be off to a challenging start, with early data from across Europe showing plunging sales, while China sales accelerated their decline in February to notch a (29%) YoY drop for the first two months of the year.

ACEA data showed that Tesla registrations fell 45% YoY in January 2025 in the EU, Iceland, Liechtenstein, Norway, Switzerland and the UK, reaching a two-year low, despite broader EV sales rising 37%. In February 2025, registration data showed declines of (42%) to (48%) YoY in Scandinavia and France, while Germany saw sales decline a whopping (76%) YoY after falling (60%) in January.

Tesla stock is facing a tough road ahead in China as sales have slumped to start 2025, with February plunging -49% YoY.

China sales dropped (12%) YoY in January, but accelerated this decline in February, with preliminary data from the CPCA showing sales down (49%) YoY to 30,688 vehicles, the lowest monthly volumes in the country since August 2022. This also marks a (51%) MoM plunge from January’s 63,238 vehicles, and a more than (67%) plunge from December 2024. For comparison, rival BYD’s February sales surged 161% YoY for BEV and PHEVs, with global sales up 56% YoY in the first two months. CPCA data also showed the NEV market rose 82% YoY in February, with Tesla lagging the market by a 131 point difference. Tesla is now offering an 8,000 yuan (~$1,100) insurance subsidy on Model 3 vehicles in China in an effort to revive demand.

Given this weakness already in Q1 in core regions, there are whispers that deliveries could fall to significantly below 400,000. There are mounting indications that Tesla is facing a demand problem, not only within plunging sales across multiple markets worldwide, but also in more aggressive financing perks. Tesla recently launched new financing and free lifetime supercharging perks this week to boost demand, offering 0% APR or zero due at signing for Model 3s and discounts on older Model Ys.

If Q1 does come in weak due to global sales weakness and transitionary impacts to production from the refreshed Model Y, Tesla will have to make up substantial ground in the back half of the year to reach its optimistic targets, as Musk’s prior 20% to 30% volume growth target would already be pushing the upper limits of Tesla’s installed manufacturing capacity.

Tesla’s Margins Have Faced Significant Pressure

Tesla has prioritized affordability to drive growth in delivery volumes and prevent inventory build-ups through 2024, with this coming at the expense of margins. In Q4, CFO Vaibhav Taneja reaffirmed these priorities, saying Tesla is still committed to reducing inventory and vehicle production costs – as expected, this came at quite a cost to margins. Management has also discussed for multiple quarters the plan to launch more affordable models in the first half of 2025, but there’s limited evidence that Tesla can do so in a margin-accretive way that quickly.

Taneja explained in Q4’s earnings call that Tesla was “able to get our overall cost per car down below $35,000, primarily by material costs,” despite increased depreciation as Tesla transitions to its refreshed Model Y. Calculations show that COGS per vehicle declined just (1.1%) sequentially in Q4 to ~$34,716, or a reduction of $390 from Q3.

Tesla’s actions to aggressively sell down inventories, which declined nearly $2.5 billion sequentially in Q4 to $12 billion, were possibly due to “attractive financing options but also other discounts and programs which impacted ASPs.” As a result, ASPs fell (5.2%) sequentially to $39,818 in Q4, a decline of approximately ($2,174) from Q3. This was the largest QoQ decline in ASPs since Q1 2023. Essentially, Tesla reduced production costs at less than 1/5th the rate of ASPs in the quarter.

Tesla’s average selling prices declined more than 5% QoQ in Q4 2024, while production costs declined just 1.1% QoQ.

Over the last three years, ASPs have been declining at a faster rate than COGS, pressuring margins quite substantially in the process. Tesla said that it saw a new record for deliveries in the highly competitive Chinese market, which (as we have discussed in our analyses Tesla Sells 33% Of Vehicles Below Average Cost, BYD Pulls Ahead in November 2023 and Tesla’s China Market Share Continues To Slide in December 2023) are detrimental to ASPs and likely a factor in the larger QoQ decline.

Putting this all together, automotive gross margin dropped more than 3.5 points sequentially to 13.59% in Q4, more than a full point below Q2’s 14.65% margin. This was visible within Tesla’s growth rates – automotive revenues declined (8%) YoY and (1%) QoQ despite a 2% YoY and 7% QoQ increase in deliveries. This was also mostly expected given management had stated that sustaining margins in Q4 would be challenging.

Tesla stock witnessed automotive gross margin (excl. regulatory credits) fall to a fresh low at 13.59% in Q4 2024.

On a per-vehicle basis, Tesla’s average gross profit was ~$5,102 in Q4, down more than (29%) YoY and (26%) QoQ due to the sharper decline in ASP. This is a far cry from the $14,000+ gross profit per vehicle Tesla was recording in late 2021 and early 2022.

As it stands, Tesla risks its per-vehicle gross profit falling below $5,000 in 2025 unless it can quickly drive production costs below $34,000 per vehicle or reverse its decline in ASPs. The aforementioned 0% APR financing perks and other promotional discounts are likely to weigh on ASPs, as was the case in Q4.

Margin Issues to Persist in Q1

Tesla has outlined more headwinds in the first half of 2025, and energy storage has been unable to offset automotive weakness recently, facing similar growth headwinds in Q4 – revenue and gross profit increased just 1.5% and 0.7% from Q2 despite deployments being more than 17% higher.

For Q1, there’s not likely to be much relief on the margin front, as management said that production of the refreshed Model Y kicking off in February will “result in several weeks of lost production” in Q1, and that “margins will be impacted due to idle capacity and other ramp related costs” that will ease once production is ramped. Energy storage is also likely to see margin pressure in Q1, with Shanghai production set to ramp with both Powerwall and Megapack remaining supply constrained.

Sign up for I/O Fund's free newsletter with gains of up to 2,250% because of Nvidia's epic run – Click hereSign up for I/O Fund's free newsletter with gains of up to 2,250% because of Nvidia's epic run – Click hereClick here

Questions also remain about Tesla’s ability to launch and ramp a more affordable model as promised this year. Tesla has stated for multiple quarters now that it remains on track to launch this vehicle in the first half of 2025, with it being a cornerstone to the previous 20-30% delivery growth forecast given management’s intense focus on improving affordability for customers to drive delivery growth in 2024. Tesla can tout Q4’s production costs as the lowest on record, but the bigger picture shows that Tesla has made very little progress in actually reducing production costs over the past three years. In fact, production costs have declined just (5%), or ~$1,830, since the end of 2021, or a little more than a $150 reduction per quarter on average.

If Tesla’s goal is to make an affordable model at a $25,000 price point and make it profitable at scale, production costs would need to be more than 30% lower than current levels. A 30% reduction in production costs from Q4’s level would equal ~$24,300, or a gross margin of under 3%. To produce a $25,000 vehicle at a ~15% margin, production costs would need to come down to ~$21,750, or nearly 40% below its average cost. Simply reshuffling logistics scheduling to reduce quarter-end weighting of deliveries or relying on materials costs coming down in the face of tariffs is not enough.

And if this is truly something that is feasible to do within the year, it begs the question, why hasn’t Tesla done this yet? There is little evidence that Tesla can flip a switch and bring to market a sub-$30,000 or $25,000 vehicle in the first half of the year without significant damage to margins.

The Bigger Picture at Play for Tesla Stock is Eroding Earnings

While I have heard numerous times that discussions on margins are short-sighted and that the bigger picture for Tesla is the long-awaited autonomous driving and robotics growth curve, I want to make clear that margins have led to a significant erosion in Tesla’s earnings power over the past few years.

At the beginning of 2023, Tesla was expected to earn $8.50 in earnings per share in 2025. At that time, automotive gross margin had actually contracted 5 points YoY, down from 29.2% in Q4 2021 to 24.3% in Q4 2023. To put it another way, Tesla was generating more in automotive gross profit at half the scale.

In Q3 2021, Tesla generated $3.67 billion in automotive gross profit, or $3.24 billion excluding leasing and regulatory credits, with deliveries of 241,391. In Q4 2024, Tesla generated $3.29 billion in automotive gross profit, or $2.39 billion excluding leasing and regulatory credits. This gross profit and margin erosion is why adjusted EPS peaked at $4.07 in 2022 and has since dropped to $2.42 in 2024.

Now, 2025’s EPS forecast stands at just $2.85 at the beginning of March, more than (66%) lower than the estimate from two years ago. It’s also a rather sharp decline this year, down more than (12%) from $3.25 in mid-January.

Tesla stock’s EPS estimates have fallen -12% so far in 2025. Source: YCharts

This has been primarily caused by margin contraction and lower automotive gross profit, which have dragged operating margin much lower. Operating margin peaked at 16.8% in 2022, before contracting to 9.2% in 2023 and now to 7.2% in 2024, with Q4’s operating margin at 6.2%.

Robotaxis, Optimus Inconsequential to Tesla’s Growth in 2025

Robotaxis and Tesla’s Optimus humanoid robots are two core anchors for a majority of the multi-trillion-dollar valuation thesis, with Musk throwing out in Q4’s call that Optimus has “the potential to be north of $10 trillion in revenue.” However, for 2025, even if both are achieved, they’re likely to be only for internal use and not ready for commercialization in a way that will contribute to growth.

Tesla says that it is planning to launch unsupervised FSD as a paid service in Austin, Texas in June, with Tesla’s fleet testing the service out at its factory, from the end of the production line to the destination pick-up parking spot. Musk explained that Tesla is aiming to have unsupervised services with its internal fleet in multiple cities by the end of 2025. Tesla is also seeking the first permit to pave the way for an approval for robotaxi services in California.

However, given that FSD is still Supervised for consumers, analysts had questions about the progress Tesla is making on reaching full autonomy (ie. hands-off, eyes-off), with management explaining that it is close but not there yet:

“We need to be very confident that the probability of injury is low before we allow people to check with their email and text messages. … We're in this perverse situation where people will turn the car off autopilot so the computer doesn't yell at them, check the text messages while steering the car with their knee and not looking out the window. … If you have any problems with the system and when people are not looking, that is a dangerous thing. And that's what we're trying to avoid. The capability is getting there, but it's not fully there.”

Though Tesla laid forth that goal to have a robotaxi service running as soon as this summer, and discussed its ramp profile in Q3, the company provided no major update in Q4 on the Cybercab, its purpose-built robotaxi. Tesla said that it would be aiming for volume production in 2026 with a ramp to at least 2 million vehicles per year, potentially as high as 4 million in the future.

For Optimus, Musk threw out a rather sensational $10 trillion revenue figure, though he shared more details about the robot and Tesla’s production projections. Musk explained that the current production line Tesla is “designing is for roughly 1,000 units a month of Optimus robots. The next line would be for 10,000 units a month. The line after that would be for 100,000 units a month.” He added that Tesla will “probably not” succeed in manufacturing 10,000 in 2025, which is what its internal plan targets, but will aim to ramp production significantly faster than its automotive side.

Musk also predicted that it would not “take very many years before we're making 100 million of these things a year,” though initial use cases for Optimus will be inside Tesla factories, with commercial sales not expected until at least the second half of 2026. If anything, scaling production of either robotaxis or Optimus this year will likely add to costs and impact the bottom line.

Note on Tesla’s Capex

What’s interesting is that even with the $10 trillion revenue potential (and 100 million production numbers) for Optimus and 2 million for Cybercab, Tesla’s capex is not expected to meaningfully increase from 2024’s levels over the next three years. For 2025, 2026 and 2027, Tesla said that it expects capex to be at least $11 billion, compared with $11.34 billion in 2024. Musk had said in Q4 that Optimus’ AI training needs are “probably at least ultimately 10x of what's needed for the car,” suggesting significant amounts of compute would be needed.

In 2024, Tesla’s AI infrastructure assets rose $3.6 billion YoY to $5.15 billion, and it is still working on developing FSD. If you have to scale the compute factor by 10x, while ensuring plants can handle manufacturing millions of Optimus robots, millions of Cybercabs, existing models and a new affordable model, maintaining capex at or above $11 billion annually does not seem sufficient given that Tesla is just now approaching a 2 million vehicle scale annually after having spent close to $50 billion over the past decade.

Conclusion

Musk has been quite vocal about 2025 being Tesla’s “most pivotal year” and possibly the “most important” in its history. Despite strumming up optimism for Optimus and autonomous driving advancements this year, the growth story looks challenged with data for January and February showing substantial YoY declines across Europe and China.

Management’s commentary saw a subtle change from 20% to 30% growth in Q3 for deliveries to now only a return to growth mentioned in Q4, suggesting Tesla is also tempering expectations for deliveries in 2025.

2025’s EPS estimates are already dropping, falling more than 12% since the beginning of the year to $2.85, while revenue estimates have already been revised $4.3 billion lower to $112 billion. New products such as robotaxis and Optimus are unlikely to be growth drivers in 2025, with initial use cases likely limited to small scale and internal operations.

Margins came under more intense pressure in Q4, and are facing even more headwinds from idle capacity in Q1 as Tesla paused production in order to ramp up the refreshed Model Y, while Energy storage provided no relief despite a jump to record deployments in Q4. As Tesla is aggressively pushing for better affordability, it’s putting automotive gross margin at risk of falling into the single-digit range.

Price often bottoms before fundamentals, which means Tesla may be in a buy zone soon. Find out what potential entries the I/O Fund is watching for Tesla and other AI stocks in our upcoming webinar with Portfolio Manager Knox Ridley on Thursday, March 13 at 4:30pm EST. Learn more here.

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

Recommended Reading:

Monolithic Power Systems: A Back-Half 2025 Hyperscaler Story

Posted on February 12, 2025June 30, 2026 by io-fund

Monolithic Power Systems posted top and bottom-line beats in its Q4 2024 results, closing 2024 with record revenues and issuing upside Q1 2025 guidance.
The Enterprise Data segment grew 121.7% in 2024, driven by AI servers, data centers and application power solutions. The Company expects a slow start to 2025, accelerating in the second half of 2025 as hyperscalers ramp up and Monolithic Power is “… engaged across all the hyperscalers.”
Communications and Automotive segments will drive the growth in 1H 2025, as Enterprise Data gains traction again towards the year’s end.

Monolithic Power Systems designs, develops and produces power management integrated circuits (ICs), creating highly integrated power solutions that combine multiple functions into a single chip. It is widely believed that they supply power management solutions ICs and modules to the majority of NVIDIA GPUs, including Blackwell, and also supply them for AMD GPUs and Google’s TPUs. The company expects a slow start to 2025, supported by growth in its automotive segment and then acceleration into the second half of the year as Enterprise Data revenues rise with hyperscaler ramp-ups. The conference call felt like management was trying to downplay the ramp and brace analysts for a flattish year as Enterprise Data is expected to accelerate closer to years end.

Solid Q4 2024 Results Driven by EVs and AI

Monolithic Power reported Q4 2024 EPS of $4.09 versus $3.98 consensus estimates, beating by $0.11. Q4 2024 generated record revenues up 36.9% YoY and 0.2% QoQ to $621.7 million versus $608.09 million estimates, a $13.61 million beat. The company guided Q1 2025 revenues above consensus from $610 million to $630 million, mid-point of $620 million compared to $584.38 million consensus.

Revenue: Record Q4 2024 Revenues

Monolithic Power reported record Q4 revenues of $621.7 million, up 0.2% QoQ and 36.9% YoY. Strength was attributed to the Automotive and Enterprise Data segments. The company guided Q1 revenue of $610 million to $630 million, mid-point at $620 million, representing 35.4% YoY growth, beating estimates by 6.1%. Notably, this is flat growth QoQ even though Nvidia’s Blackwell is expected to be ramping – this would indicate either MPS is not a key supplier for the B200s and rack-level systems or Blackwell is delayed, impacting the supply chain.

The company’s quarterly growth of 37% is higher than the 21% growth reported for the fiscal year, which is typically a good sign. However, despite the Q1 guide beating expectations, analysts are estimating a sharp deceleration to 9% growth for the September quarter.

Monolithic Power generates revenues through six segments:

Enterprise Data focuses on providing power solutions to data centers, servers and networking equipment used in enterprise computing ecosystems. AI is a major driver in this segment. However, thriving data center revenue is lumped in with the legacy enterprise segment, which can provide lumpiness. Q4 revenue was up 51.2% YoY to $194.9 million. This is the strongest segment, generating full-year 2024 revenues of $716.2 million, up 121.7% YoY, driven by power management solutions for AI and server applications. It represents 32.5% of total 2024 revenue, up from 17.7% of total revenue in 2023.

CFO Bernie Blegan specifically pointed out in the Q&A call, “On industrial consumer, we have a lot of new product ramps, but those are likely to start to contribute at the end of 2025 and the enterprise data will be down.”

Blegan also added that Enterprise Data would accelerate, “Yes. Just to add a little bit of color to how we see the year rolling out, we believe that, we will be off to a slower start in the first half of the year. But as the year develops, the customer base is expected to broaden as hyperscalers launch their new products. We have multiple product ramps with both existing customers as well as with these new hyperscalers. So as Michael just said, we believe, it's likely to be a flattish year, but we believe that from a quality and supply availability perspective, we're in very good shape.”

Communications provides power management solutions for infrastructure and communications systems including power integrated circuits (ICs) for optical modules, fiber optic communications, wireless communication base stations, routers and switches. Soft networking solutions partially offset the strong sales of optical modules and routers. Q4 revenues were down (11.2%) YoY to $63.8 million. Full year 2024 revenue rose 10.2% YoY to $225.9 million, representing 10.2% of total revenue, down from 11.3% in 2023.

Automotive focuses on automotive applications like advanced driver assistance systems (ADAS), ICs for battery management systems, infotainment systems, motor controls and various automotive applications.

This is one of the strongest segments generating strong sales of its highly integrated applications supporting ADAS. Monolithic Power’s silicon carbide inverters have higher efficiency, higher power density and can operate at higher temperatures than regular silicon. They were introduced for high-powered clean energy applications like electric vehicles (EVs), helping to reduce power losses in the motor drive system. EVs were around 75% of its Automotive revenues.

CFO Blegan pointed out, “Initial revenue is expected to ramp in late 2025. Other silicon carbide-based applications are expected to be introduced in multiple geographies during both 2025 and 2026.” Q4 revenues grew 43% YoY to $128.4 million. The full-year 2024 revenues rose 4.9% YoY to $14 million, representing 18.8% of total 2024 revenues, down from 21.7% in 2023.

Storage and Computing provides power management for computing and storage devices like power ICs for solid-state drives (SSDs), hard disk drives (HDDs), and notebook and desktop computers. Q4 revenue was up 16.4% YoY to $136.5 million. The full-year 2024 revenues rose 2.1% YoY to $501.6 million, driven by increased sales of products for notebooks. This segment represents 22.7% of total revenue, down from 27% in 2023.

Consumer focuses on power management for consumer electronic devices, including power management ICs for smartphones, tablets, laptops and wearables. This segment has been weak due to the broad market weakness and lower sales of smart TVs, home appliances and gaming solutions. Q4 revenues rose 31% YoY to $57.3 million. Full-year 2024 revenue fell (13.9%) YoY to $202 million, representing 9.1% of total revenues, down from 12.9% in 2023.

Industrial focuses on industrial applications like ICs for robotics, motor control, industrial automation, machinery and equipment. This division is weak due to market weakness across all industrial segments. Q4 revenue rose 22.3% YoY to $40.8 million. The full-year 2024 revenues fell 14.6% YoY and represent 6.7% of total 2024 revenues, down from 9.4% in 2023.

EPS: A Slow Start in 1H 2025 That Gains Traction in 2H 2025

Monolithic Power posted Q4 2024 non-GAAP EPS of $4.09, beating $3.98 consensus estimates by $0.11 or 2.9%. Management guided Q1 2025 non-GAAP EPS of $3.94, up 40.29% YoY. Margins are gradually improving.

Margins have been steady with gradual improvement. In Q4:

Non-GAAP gross margin was 55.80%, up from 55.7% in the year-ago period.
The non-GAAP operating margin was 35.5%, up from 34.4% in the year-ago period.
Non-GAAP net margin was 31.9%, up from 31% in the year ago period.
Cash was $862.9 million, down from $1.1 billion in the year-ago period.
The Company completed repurchases in Q4 under a 2023 $640 million authorization.
The Company has returned 86% of its free cash to shareholders through share repurchases and dividends paid for the past three years ending December 2024.
The Company had no debt in 2023 and 2024.

Risks/Concerns: Three Customers Comprise Over 20% of Sales and Blackwell

Customer concentration is a concern as Q1, Q2 and Q3 and full-year had two direct customers, which were distributors, with more than 10% of sales and one indirect customer with more than 10% of sales. This means that three customers comprise over 20% of 2024 revenues.

Edgewater Research Says NVDA Cancelling 50% of Monolithic’s Backlog in November

There was speculation from Edgewater Research on November 11, 2024, that the company may have lost some market share in NVIDIA's Blackwell GPU line to Renesas and Infineon Technologies, as there may be performance problems with its voltage regulator modules and power management integrated circuits.

Edgewater analysts said, "We hear NVDA will go through their confirmed orders to MPWR for the next few quarters, but we hear NVDA has canceled half of MPWR’s backlog, cutting all of their unconfirmed orders," the analysts explained. "It appears that Renesas may see its Hopper allocation grow to 50% in 1Q or 2Q25, vs ~15% in 4Q24. We are not aware of plans for IFX to be qualified for Hopper. It sounds like NVDA Engineering has lost confidence in MPWR, and they have decided to focus on Renesas and IFX as their two primary suppliers." The analysts also noted that Monolithic's solution to the hopper issue was seen as a "stopgap measure" by several supply chain partners, as opposed to a true resolution to the root cause.

Monolithic Indicates No Changes from Nvidia

Monolithic Power filed an 8-K stating, “In calls with analysts on November 11, 2024, representatives of Monolithic Power Systems, Inc. (the “Company”) confirmed the Company has no performance issues and remains in NVIDIA Corporation’s bill of materials for its next generation systems. The Company’s Q4-2024 guidance remains unchanged.” It’s worth noting that they made a special effort to avoid mentioning any specific names during their Q4 2024 conference call, in accordance with their clients' requests. Customers have made it very clear they don’t want to be disclosed. Keybanc’s note indicates that MPWR has lost market share on the B200/GB200s but will “regain share on Blackwell Ultra in the second half of 2025 as well as the ramp of other AI platforms, including the Google TPU.”

Conference Call Q&A: H1 will be Flat Ahead of Hyperscalers Ramping in H2

The theme of the conference call was about the ramp-up occurring in the second half of 2025. Management really downplayed Enterprise Data in the first half of 2025.

They pointed out the slower start at the beginning of the year was expected as their hyperscaler clients start to ramp with their new offerings later in the year. While the exact timing of the ramp is hard to call they are engaged across all the hyperscalers. Management can't tell which ones will ramp or how much their ramp will be. They have to be ready to receive orders and have the supply chain intact.

Here's what CFO Blegan said in the call.

“Yes. Just to add a little bit of color to how we see the year rolling out, we believe that, we will be off to a slower start in the first half of the year. But as the year develops, the customer base is expected to broaden as hyperscalers launch their new products. We have multiple product ramps with both existing customers as well as with these new hyperscalers. So as Michael just said, we believe, it's likely to be a flattish year, but we believe that from a quality and supply availability perspective, we're in very good shape.”

Monolithic Power will be ramping up inventory for the second half of 2025. CEO Hsing admitted their inventory and the channel inventory is low, “Our inventory is low, and the channel inventory is low. We're going to be ramping up. And the rest of our stuff, okay, Bernie.”

Enterprise data is expected to be flattish for the year for the whole segment not just AI. Hyperscalers are expected to ramp up in 2H of 2025. Ramps for Silicon Carbide (SOC) and Tensor processors are going to launch in the 2nd half. Existing customers have multiple new product launches in the 2nd half of the year. The trickle-down effect in memory, optical and networking is expected to ramp up in the second half.

CFO Blegen said this during the Q&A.

“As we look at the ramps for both the SOCs and some of the sensor processor products that are expected to come out, we've been prototyping those, but the revenue ramps are really weighted to the second half. In addition, some of our existing customers in the AI business in particular have multiple new products that they're ramping, and those will have different demand profiles as well.”

Management can't tell if it will move revenue needles in Q4 of 2025 or next year. Staying away from quarter-by-quarter but half-by-half for ramps and timing. No telling when the ramps will happen. While large customers are pushing out, others are pulling. Cautiously optimistic that the momentum is moving in the right direction.

CEO Hsing said this during the Q&A when asked about lumpiness of opportunities and trajectory.

“It's very difficult to say. Surely, you go by year-by-year, we don't go by year-by-year, but although we have to report a year-by-year. And I'll give you examples. Our large customers start to push out some product, pulling a lot of other ones. So we can't really tell. And other customers, other hyperscalers start to ramp. They start telling us we're going to keep a ramp, whether the ramp have effective move our revenue needles in Q4 over this year or Q1 over next year, we can't tell.”

Automotive Will Drive Growth Until Enterprise Data Ramps Up in H2

Automotive and Communications are long design cycles; automotive is 2-3 years and 4-5 years ahead of time for design wins, which makes it the easiest to predict. However, the timing of the ramps is hard to tell. They can predict within 6 to 9 mos. EVs in China are growing, supplemented by a European OEM in second half of 2025.

CFO Blegen said this when asked about a broader view into demand for 2025.

“When you look at the end markets, most of the ones that we have are long design cycles. And automotive probably lends itself to being the most predictive because we secure design win two to three years for an EV in advance of when it gets launched, or as many as four to five years for a traditional internal combustion. Now having said that, the timing of those ramps, when we get the design win comes to market, still remains a question mark. But within the context of six to nine months, we can be reasonably predictive. So in automotive, we see a continuation of what's been driving our last two quarters of growth as far as EVs in China. And those will be supplemented in the second half of the year more likely by a European OEM that is going to be bringing up an autonomous driving ADAS solution, as well as additional content opportunities in North American EV Company.”

The Communications segment finally started to grow last year and is in the very early stages of being able to ramp opportunities, particularly with fiber optics, and expects to grow from originally starting with two customers. Areas of strength are in optical, data center opportunity, versus legacy business.

“If you look at comps going forward, their area of strength that we've really been calling out is in optical, and we'd expect that to continue as part of the overall data center opportunity that you heard Michael talk about. So I think that's probably the biggest inflection point that you've seen over the past couple of quarters versus the legacy business.”

CFO Blegen also added.

“And then, when you look at the communications side, I think that is, we're very early stages of being able to ramp the revenue opportunities, particularly in fiber optics. We started out with two primary customers, but we expect that customer base to diversify over the year.”

What the Analyst Said After Q4 2024 Release

Analysts were positive on the results and conference call, with five analysts raising their price targets or ratings and one analyst lowering their price target:

Loop Capital raised the firm's price target on Monolithic Power to $760 from $660 and keeps a Buy rating on the shares. The company's Q4 results and Q1 guidance indicate that Monolithic Power continues to take market share in the PMIC (power management integrated circuit) and general analog market, just as the company has done year in and year out for nearly a decade, the analyst tells investors in a research note, “Monolithic Power's strong growth and the better-than-seasonal Q1 guide also reflects continued strong data center-specific revenue as well as cyclical strength in broader market.”
TD Cowen raised the firm's price target on Monolithic Power to $750 from $720 and keeps a Buy rating on the shares. The firm said its clean beat/raise was overshadowed by a weak 1H outlook and aggressive 2H ramp in MPS' key Enterprise Data segment.
Citi raised the firm's price target on Monolithic Power to $800 from $700 and kept a Buy rating on the shares. “The company reported strong Q4 results and guided Q1 sales better than feared as strength from the Auto, Computing and Storage businesses offset share loss in the Enterprise Data business.” the analyst tells investors in a research note. The firm views the results as reinforcing its thesis that Monolithic is a "long-term diversified quality compounder" that consistently delivers 10%-15% outperformance versus peers. It sees the investor day on March 20 as the next potential catalyst for the stock.
KeyBanc analyst John Vinh raised the firm's price target on Monolithic Power (MPWR) to $850 from $700 and keeps an Overweight rating on the shares. “Upside in the quarter was mostly driven by Auto, while guidance reflects strength in Auto, Memory, PCs, and Comms. Enterprise Data is expected to be down quarter-over-quarter in Q1 and flat for 2025 with growth expected to be the second half of the year weighted,” KeyBanc adds. The firm believes this reflects the loss of share on Nvidia's (NVDA) B200/GB200 platform and the regain of share on Blackwell Ultra in the second half of 2025, as well as the ramp of other AI platforms, including the Google (GOOGL) TPU.
Wells Fargo analyst Joe Quatrochi raised the firm's price target on Monolithic Power to $710 from $610 and keeps an Equal Weight rating on the shares. The firm notes the company delivered a better-than-expected Q1 guide as Ent Data's weakness will be offset by accelerating other end markets. While the 2025 Ent Data reset is now confirmed, Wells thinks investors could struggle with the first half vs the second half of 2025 end market revenue dynamics.
Deutsche Bank lowered the firm's price target on Monolithic Power to $815 from $900 and kept a Buy rating on the shares.

Valuation: Monolithic Systems Stock is Priced at a Premium

Monolithic Power stock trades at a premium. Its stock trades at a P/E of 76.84 and forward P/E of 41.32 vs the industry average of 38.82. The 5-year medium P/E is 79.92. Its price/sales ratio is 16.35, and forward P/S is 12.93. Its price to free cash flow (FCF) is 49.12 vs 62.56 industry average. May 20, 2025, is the next Investor Day.

Conclusion:

Monolithic Power had a strong 2024, with Enterprise Data achieving 51.2% YoY growth in Q4. However, growth is expected to slow in the first half of 2025 and remain flat for the year as hyperscaler clients ramp up in the second half. Management is preparing by building inventories and strengthening supply chains, positioning the company well heading into 2026, despite uncertainty about the ramp-up's timing.

In the meantime, their automotive revenues continue to accelerate having closed Q4 with 43% YoY growth. Automotive tends to be more predictable and the growth in EVs especially in China is continuing the momentum. A European OEM will be ramping up autonomous driving ADAS solutions in the second half to keep the momentum thriving. After closing Q4 with 55.9% YoY growth, its Communications business is in the very early stages of a revenue ramp powered driven by fiber optics. Automobile and Communications will carry the growth in H1 through H2, while Enterprise Data will ramp up in H2 heading into 2026.

Automotive revenues accelerated with 43% YoY growth in Q4, driven by strong EV momentum in China and expected to continue with upcoming ramp of autonomous ADAS solutions from a European OEM in H2. The Communications business also posted robust growth, rising 55.9% YoY in Q4 as it initiates a fiber optics-driven revenue ramp. Together, these segments are expected to drive growth through H1 and H2, while Enterprise Data will ramp up in H2 heading into 2026.

It may be premature to invest in Monolithic Power at this time, but its sustained growth in the Automotive and Communications segments along with the Enterprise Data ramp up in H2 suggests that it could become a strong candidate for the portfolio as we exit 2025.

Jea Yu, Equity Analyst at the I/O Fund, contributed to this article.

Recommended Reading:

Five Top Tech Stocks Of 2024: Year In Review

Posted on January 6, 2025June 30, 2026 by io-fund

This article was originally published on Forbes on Jan 1, 2025,06:21pm ESTForbes Forbes on Jan 1, 2025,06:21pm EST

The Nasdaq 100 is capping off 2024 with a return of 27.0%, building upon 2023’s 53.8% return (its best year since 1999). Since the start of 2023, the Nasdaq 100 has nearly doubled with stellar returns of 95.3%, its second highest two year performance since 1998 and 1999’s 274.2% rise.

This year, the Nasdaq had countless winners and strong repeat performances from AI leaders like Nvidia, but 5 stocks took the market by surprise with significant outperformance relative to the broader indices. I think it’s important to pause and draw some parallels around the stocks that performed well in 2024 to form an opinion on what might perform well in 2025, as many of the year’s top performers shared similar fundamental improvements or had similar thematic tailwinds such as AI, nuclear and quantum computing.

Below, I review five of the top stocks of 2024, selected based on their price action, fundamentals and presence withing leading tech themes. Choosing a top 5 means many great stocks were left off this list, yet this sample helps to form conclusions around how 2024 shaped up versus years past, centered around leading, core thematic opportunities.

Read about our Top 5 Stocks from 2023 here and our Top 5 Stocks from 2022 here – many of which went on to lead the following years.here and our Top 5 Stocks from 2022 here – many of which went on to lead the following years.

AppLovin (APP)

AppLovin was one of the Nasdaq’s best performers, up 735%and joining the Nasdaq 100 on a special rebalance in November. From the start of 2024, AppLovin rose from a mere $13 billion valuation to $111 billion, peaking above $135 billion in early December – the stock has done the unthinkable this year, awakening a low-growth mobile gaming ads industry with an AI engine that is showing demonstrable results.

This meteoric rise stems from APP’s AXON 2.0 AI advertising engine, which has driven significant revenue acceleration and massive fundamental improvements to margins and cash flow. AppLovin has reported four consecutive quarters with revenue growth above 30% YoY, a major acceleration from late 2022 and late 2023 where three of four quarters saw declining revenues. Management expressed confidence in maintaining 20% to 30% YoY growth for the foreseeable future due to the efficiencies of AXON’s self-learning and catalysts from web-based e-commerce expansion.

AppLovin has reported four consecutive quarters with revenue growth above 30% YoY, a major acceleration from late 2022 and late 2023. Source: I/O Fund

Not only has revenue accelerated substantially, but AppLovin’s margins have more than doubled further down the income statement. GAAP gross margin expanded more than 8 points to 77.5% in Q3, while operating margin rose more than 13 points to 44.6%. Taking a look annually, AppLovin is on track to potentially double its operating margin to ~38% from 19.7% in FY23. Additionally, net margin nearly tripled to 36% in Q3 on a GAAP basis, up from 13% a year ago. EPS rose 317% YoY to $1.25, with YTD EPS reaching $2.81, up 462% YoY.

AppLovin is on track to potentially double its operating margin to ~38% from 19.7% in FY23. Source: I/O Fund

AppLovin’s near-flawless execution has also translated to strong cash flow generation, with operating cash flow margin doubling, rising from 23% a year ago to 46% in Q3. Free cash flow margin followed, reaching 45.5%, up from 22% a year ago.

This kind of operating leverage while maintaining revenue growth rates in the 30% range is quite rare indeed, separating AppLovin from a majority of its ad-tech and software peers. Analysts are excited to see what the company’s expansion to e-commerce can contribute to growth and a path to $6+ in EPS next year from AppLovin’s very strong margin profile.

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick hereClick here

Palantir (PLTR)

Palantir joins this Top 5 list for a second-year running, with shares rising 356%. My firm’s free stock newsletter previously pointed out that Palantir was “one of the rare few that sees AI drive both real returns for its business and real value for its customers,” as it continues to crush its software competitors in AI-related growth. Palantir’s Artificial Intelligence Platform (AIP) has driven a significant revenue re-acceleration following its launch, with profitability also expanding – a rare combination for growth software stocks.

Palantir has capitalized on the AI software opportunity at hand via AIP’s unique value proposition, its scalability and versatility. November and December’s partnership announcements alone help demonstrate the versatility of Palantir’s platform, spanning numerous different industries from autonomous drone navigation to AI models for defense tech to more government program wins. Palantir benefits from the best of both worlds in both government contracts and AI exposure, as enterprise adoption of AI builds.

For a deeper look at AIP and how it has been transforming Palantir and driving revenue growth higher, read This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue.

Palantir’s 2024 was characterized by strong underlying AI momentum, with Q3 seeing revenue growth reach 30%, more than 10 points faster than when it entered the year and nearly 5 points above guidance for 25.2% growth. AIP has aided this revenue acceleration story by driving significant growth in Palantir’s US commercial segment, with the past two quarters seeing growth there above 50% YoY.

Palantir’s 2024 was characterized by strong underlying AI momentum, with Q3 seeing revenue growth reach 30%, more than 10 points faster than when it entered the year. Source: I/O Fund

Similar to AppLovin, these AI growth tailwinds are not just driving revenue, but also aiding operating margin expansion and EPS growth. GAAP operating margin was 16% for the second quarter in a row, up 9 points from last year, while adjusted operating margin is approaching 40% and has been >30% for four quarters in a row. Cash flow margins have been strong — operating cash flow was nearly $420 million, or a 58% margin, while adjusted free cash flow was $435 million, a 60% margin in Q3, up from the low-20% range in the first half of 2024. Palantir is targeting adjusted FCF of $1 billion-plus this year, or ~36% of revenue.

Fundamentally, to have revenue growth around 30%, free cash flow margin of 30%, and adjusted operating margin nearing 40% is impressive, to say the least. Palantir’s returns this year reflect that fundamental strength from AI-driven growth as well as optimism about its AI growth prospects for next year.

IonQ (IONQ)

Quantum computing stocks have been on a tear to end the year, with a handful of names seeing returns of more than 2,000% over the past three months. IonQ has risen 244% on surging enthusiasm for the quantum computing sector and revenue reaccelerating 40 percentage points over the past three quarters.

IonQ reported $12.4 million in revenue in Q3, with revenue growth of 102% YoY, following on 106% YoY growth in Q2. This has accelerated 42 points from 60% YoY growth in Q4, as IonQ is starting to quickly scale revenues as it has been consistently delivering on its technical roadmap ahead of schedule. IonQ also slightly raised its full year revenue guidance to $40.5 million at midpoint, for growth of 84% YoY.

As it is still in its scaling phase, IonQ is by no means profitable or close to profitability, with analysts not expecting the quantum computing firm to break into profitability until well after 2027. However, revenue is currently expected to grow at a ~95% CAGR through 2027, from $22 million last year to an estimated $315 million.

IonQ's revenue is currently expected to grow at a ~95% CAGR through 2027, from $22 million last year to an estimated $315 million. Source: I/O Fund

This positioning in a leading theme among investors in the second half of 2024, as well as consistent execution ahead of schedule with revenue growth forecast to rise at a nearly triple digit CAGR through 2027 has landed IonQ a spot on this list.

Reddit (RDDT)

Despite not even trading for the entire year with its IPO in March, Reddit has returned a remarkable 224% from its first day close of $50.44. The social media and online community platform reported a blowout beat and raise in Q3, with investors eyeing some AI training data opportunities ($60M/year deal with Google) on top of strong advertising growth.

Q3 revenue rose 68% YoY to $348 million, a 14 point acceleration from 54% YoY growth in Q2 and up 20 points from 48% YoY growth in Q1. Advertising revenue growth accelerated 15 points sequentially, rising 56% YoY to $315 million. Q4’s guide for $385 million to $400 million in revenue came in well above the $361 million consensus estimate, pointing to growth of 57% YoY. The market is expecting another blowout in Q4, with analysts already projecting $403 million in revenue, above the high end of management’s guided range.

Reddit's Q3 revenue rose 68% YoY to $348 million, a 14 point acceleration from 54% YoY growth in Q2 and up 20 points from 48% YoY growth in Q1. Source: I/O Fund

Reddit is demonstrating significant operating leverage, as it surprised the Street by reporting GAAP net income in the high single-digit percents in the quarter. GAAP operating expenses rose 53% YoY, less than that 68% YoY revenue growth, pushing GAAP operating margin to 8.6%, up from (3.4%) a year ago and (3.7%) in Q2.

Cash flow generation has improved, with Reddit generating $71.6 million in operating cash flow and $70.3 million in free cash flow in Q3, or margins of ~20%. This doubled from ~10% cash flow margins in Q2. Adjusted EBITDA has increased more than 9x from the start of the year, at $94.4 million in Q3, a 27% margin, up from just $10.0 million in Q1.

Reddit excites the market due to its fundamentals — a 90% gross margin business quickly shifting to GAAP profitability on rapid quarterly revenue growth. This combination hints at potentially strong EPS growth, should it scale from the single-digit net margin range of 8.6% in Q3, to the double-digit range in short time.

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

Astera Labs (ALAB)

Though Nvidia arguably deserves a spot on this Top 5 list with a 114% gain following Hopper’s breakout 2023, with data center revenue continuing to beat estimates by $1 billion each quarter, I think it’s time to highlight an Nvidia supplier and ASICs beneficiary – Astera Labs. Astera returned 179% in Q4 for a total YTD gain of 128%, with the company showing multiple growth opportunities and a push for profitability despite still solidly being in its hypergrowth phase.

Astera is a major supplier to Nvidia’s PCIe-enabled GPUs with PCIe5 retimers and components, and its upcoming Scorpio fabric switches built on its lead in PCIe5. Management expects the new product to “exceed 10% of revenues in 2025” with “good momentum going into 2026” as it unlocks a $12 billion TAM by 2028.

Astera reported record revenue of $113.1 million in Q3, up 47% QoQ and 206% YoY, beating estimates by 16.1%. Management guided for $126 million to $130 million in revenue in Q4, well ahead of the $108 million consensus estimate and representing YoY growth of 153%, its fifth consecutive triple-digit growth rate.

Astera Labs reported 206% YoY revenue growth in Q3 and guided for 153% YoY growth in Q4, its fifth consecutive quarter of triple-digit growth. Source: I/O Fund

Even with revenue growth expected to be triple-digits for at least the next two quarters, management forecast for GAAP net income in Q4, though at a razor thin margin. GAAP operating margin is moving towards positive territory, from (7.9%) in Q3 to (4.3%) at midpoint of Q4’s guide. Adjusted operating margin expanded significantly to above 32% in Q3, up from 2% a year ago, while adjusted net margin improved 35.6% compared to (-1.1%) last year.

Astera was one of a handful of AI-exposed semiconductors to see dazzling returns this year, as AI semiconductors remained investor favorites throughout the year. Astera also shared key similarities to the rest of this list: adjusted margins showing strong expansion, high cash flow margins (56% operating cash flow margin in Q3), and AI-related rapid revenue growth.

For a more detailed look at Astera’s product lines, Blackwell and ASICs opportunities and its AI-driven TAM growth, read more here.here.

Conclusion

If there’s one major takeaway from this selection of 2024’s top tech stocks, it’s that being at the top comes with quite the price tag and premium. All five of these stocks trade at quite high multiples, headlined by IonQ at 230x forward revenue and Palantir at a 2021-esque 63x forward revenue and 32x 2027 revenue. Astera Labs trades at 53x forward revenue, while AppLovin and Reddit are not quite as high, at 24x and 22x respectively. However, these revenue multiples are all 130% to 500% higher than they were six months ago, highlighting just how quickly these five have gotten more expensive as they’ve rallied.

All five of these stocks trade at quite high multiples, headlined by IonQ at 230x forward revenue and Palantir at a 2021-esque 63x forward revenue and 32x 2027 revenue. Source: YChartsYCharts

Looking back at 2024 can be important as it often provides clues for tech investors as the new year begins. Winners have kept winning, from Nvidia to the five discussed here, and that is one reason I like to reflect on the clear winners from the previous year. These five stocks above highlighted similarities among winning tech stocks in 2024 – presence and prevalence in leading themes such as AI and quantum computing, strong revenue acceleration (and rapid growth), and operating leverage driving margin expansion.

For 2025, the I/O Fund has worked to identify key Nvidia suppliers with Blackwell on deck to ramp significantly, sharing this research and buy zones with premium members. Stay tuned for our upcoming 2025 and Q1 webinars to hear more about what the I/O Fund expects for the new year. Learn more here.

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

Recommended Reading:

This Is Not Broadcom’s ‘Nvidia Moment’ YetThis Is Not Broadcom’s ‘Nvidia Moment’ Yet

Semiconductor Stocks Exposed To China With Tariffs IncomingSemiconductor Stocks Exposed To China With Tariffs Incoming

Shopify Stock Is A Black Friday Beneficiary That Faces Key Test In Q4Shopify Stock Is A Black Friday Beneficiary That Faces Key Test In Q4

Where I Plan To Buy Nvidia Stock NextWhere I Plan To Buy Nvidia Stock Next

Tesla Stock: Margins Bounce Back For AI-Leader

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

This article was originally published on Forbes on Updated Oct 24, 2024, 09:01pm EDTForbesForbes on Updated Oct 24, 2024, 09:01pm EDT

Tesla is arguably one of the most advanced AI companies in the world, yet its stock is dictated by margins. Over the past three years, Tesla’s average gross profit per vehicle has declined by 60%, falling from more than $14,400 in Q3 2021 to less than $6,000 in Q2 2024, highlighting the difficulty Tesla has faced in a high-interest rate environment.

Higher interest rates have forced Tesla to place more emphasis on affordability, either via price cuts or promotional financing rates, pushing average selling prices lower and thus impacting margins. Q3’s report showed that margins may have bottomed, despite weakness in vehicle selling prices due to that focus on affordability.

Perhaps the long-term story is recurring software revenue from robotaxis and humanoid robotics, however, margins are driving the stock price for now.

Below, I look at the puts and takes of an AI front runner that is battling economic headwinds.

Deliveries Recover, But Revenue Doesn’t

Q3 saw Tesla report sequential growth for both production and deliveries after a weak Q1, where deliveries dropped below 400,000 for the first time since late 2022. Tesla reported deliveries of 462,890 EVs in the third quarter, a 6.4% increase from last year and a 4.3% increase from the second quarter.

Tesla reported deliveries of 462,890 EVs in the third quarter, a 6.4% increase from last year and a 4.3% increase from the second quarter.

Source: Tech Insider Network

For the third quarter, Tesla reported automotive revenue of $18.83 billion, up just 1.3% YoY and 1.6% QoQ, and short of the consensus estimate for $19.50 billion. As a result, Tesla’s overall revenue fell short of estimates, with Tesla reporting $25.18 billion in revenue, nearly half a billion below the consensus for $25.67 billion.

A quick look at the growth rates shows that automotive revenue growth lagged delivery growth by just over 5 percentage points, at 1.3% versus 6.4%. This tells investors that automotive selling prices declined once again, and to a large degree – Q3’s ASP fell below $42,000, down ~(1.7%) from Q2 and falling (5.6%) from nearly $44,500 last year.

Notably, there is risk the ASPs fall lower in Q4 as Tesla continues to cut some prices, with the Cybertruck seeing up to 20% cuts on different model variants in October. Musk mentioned that Tesla would be aiming for YoY growth, and with just Q4 left, that means Tesla would have to deliver more than 515,000 vehicles, a record high. This would also imply an acceleration to 11% QoQ growth, leaving the door open for more aggressive price cuts to spur demand, something management hinted at in the earnings call.

Tesla is aiming high for 2025, with Musk stating that the automaker is shooting for “20% to 30% vehicle growth next year,” or roughly at least 2.1 million vehicles assuming Tesla ends 2024 at around 1.75 million. Taneja added that Tesla’s “focus remains on growing unit volume, while avoiding a build-up of inventory. To support this strategy, we're continuing to offer extremely compelling vehicle financing options in every market.”

The Fed has forced Tesla to focus on financing and affordability, which in turn, has been a major driver of margin issues. I noted in July 2023 that the “comment on interest rates is the most important comment from the call as high interest rates mean Tesla must lower prices,” and that Tesla was “one of many tech stocks whose revenue growth and profitability is on borrowed time until the Fed instills a more dovish policy.”

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick hereClick here

Tesla’s Profitability Improved on Cost Optimizations

Despite ASPs declining again sequentially, profitability improved and automotive margins recovered as Tesla captured some tailwinds from “lower raw material costs, freight and duties” and drove vehicle production costs to a record low.

Tesla headed into Q3’s report facing a tough test, as average selling prices were flat and vehicle production costs were rising. From Q4 2023 to Q2 2024, ASPs were relatively unchanged while production costs rose 3.7%, denting both automotive margins and impacting profitability. This had been hindering Tesla’s ability to revitalize automotive gross margins — as a result of those two changes, automotive gross margins took quite a large hit, falling from 17.2% to 14.6% in that two-quarter span.

Q3 saw a sharp improvement in automotive gross margin, expanding ~240 bp QoQ and ~72 bp YoY, as Tesla drove production costs to a record low of ~$35,106.

Source: I/O Fund

Q3 saw a sharp improvement in automotive gross margin, expanding ~240 bp QoQ and ~72 bp YoY, as Tesla drove production costs to a record low of ~$35,106, dropping ~(4.6%) from $36,802 just last quarter.

Because of the large improvements in production costs, average gross profit per vehicle bounced back, increasing ~16.3% QoQ to reach ~$6,886, up from $5,921 last quarter. Essentially, Tesla manufactured and sold 14,000 more vehicles this quarter for ~$220 million cheaper than last quarter.

Average gross profit per vehicle bounced back, increasing ~16.3% QoQ to reach ~$6,886, up from $5,921 last quarter.

Source: I/O Fund

Operating margin also rebounded significantly, expanding to 10.8% in Q3, up from 6.3% in Q2 and 5.5% in Q1. This newfound operating margin growth adds more confidence in the margin recovery story, which has been paramount for investors as share price declines have correlated quite closely with operating margin contraction.

Tesla's share price declines since late 2021 have correlated quite closely with operating margin contraction.

Source: YCharts

Energy Storage was a bright spot in Q3 as even with a sequential decline in deployments and (21%) sequential decline in revenue, gross margin expanded from 24.5% to 30.5%. This aided company-wide gross margin expansion, with Tesla reporting a 19.8% gross margin in Q3, up from 18.0% in Q2.

Q4 Margins Will Be “Challenging” to Sustain

Q3’s profitability is a welcome sign, yet CFO Vaibhav Taneja cautioned that “sustaining these margins in Q4, however, will be challenging given the current economic environment,” due to vehicle affordability issues.

Investors may need to get comfortable with thinner margins moving forward on the automotive side. When the stock was at all-time highs in 2021 and early 2022, Tesla was reporting more than $14,000 in gross profit per vehicle, or automotive gross margins in the high-20% range, topping 30% once. Now, average gross profit per vehicle has fallen more than (52%) to $6,886 in Q3, with automotive gross margins back to 17%, though it has remained below 20% since the start of 2023.

This decline in gross profit per vehicle stems from weaker average selling prices, which have fallen quite dramatically since the start of 2023, and continue to fall. The reason margins were able to expand in Q3 was from reducing production costs, not vehicle pricing.

Tesla's average selling prices, which have fallen quite dramatically since the start of 2023, continue to fall.

Source: I/O Fund

As long as Tesla continues to cut prices, margin gains will be primarily realized on the cost side. The path to higher margins will arise when Tesla can push production costs towards $30,000 and lower, and once the pressure on ASPs have resolved.

Musk said in Q3’s call that Tesla is “still on-track to deliver more affordable models starting in the first half of 2025,” which would require similar cost reductions to preserve margins. Musk also implied thin margins may be the norm for investors, as Tesla noted that affordable model production in the first half of 2025 “will result in achieving less cost reduction than previously expected.”

Robotaxis Still Not Here, Despite Numerous Timelines

While the robotaxi opportunity is promising for Tesla, it’s yet to provide tangible AI revenue. Tesla’s robotaxi reveal event earlier in the month was met with a lackluster response, sending shares down more than (8%) the day after, as the production timeline for its ‘robotaxi’ was pushed back once more, a familiar storyline for Tesla investors over the past few years.

At the unveiling of Tesla’s pedal and wheel-free purpose-built robotaxi, dubbed the Cybercab, CEO Elon Musk said that production may begin in 2026 or as late as 2027, saying that he “tend[s] to be optimistic about timeframes.” This is another years-long delay for Tesla’s most anticipated product, where in 2022, Musk had promised to reveal the robotaxi in 2023 and start production in 2024. This follows an initial promise from 2019 to have one million Tesla vehicles equipped with Level-5 autonomy in 2020. Years later, and Tesla has still not deployed the robotaxi, which places additional emphasis on the margins.

Musk reiterated Tesla’s goal to launch production of the Cybercab in 2026, adding that Tesla is “aiming for at least 2 million units a year of Cybercab.”

Following Q1’s earnings report in April 2024, I joined Bloomberg China to discuss the most pressing items for Tesla, saying that “as AI approaches, that’s the piece that Tesla has to execute on. So what we’re seeing is a moment where it’s a little too early for AI software…. we’re not in that cycle right now, and that’s what Tesla really truly needs for its stock to resume where it was before as a Wall Street darling [in 2021]. And that AI software cycle, if I were to give you my best estimate, it would be more of a 2026 discussion.”

Conclusion

Despite a mixed Q3 earnings report featuring a revenue miss and an EPS beat, Tesla’s report exceeded expectations in the one area that mattered most – margins. Automotive gross margin rebounded due to production cost improvements, even as selling prices fell, boosting operating margins back to the double-digit range.

While the AI story is one to watch, margins have been the behind-the-scenes driver for shares, and remain the data point to track until a credible, tangible revenue stream from robotaxis arises. I/O Fund Portfolio Manager Knox Ridley wrote in August 2023 as the I/O Fund cut our Tesla position for a 60% gain that the I/O Fund was “avoiding ‘Crocodile Jaw’ situations where the stock price is going up but fundamentals are decelerating.”

By closely following Tesla’s margins and fundamentals, the I/O Fund nailed Tesla's move off of 2022's lows and exited at a top in early 2023. The I/O Fund continues to track Tesla, but recently shared research with premium members on two AI beneficiaries in a lesser-known semiconductor space with standout EPS numbers. Learn more here.

Recommended Reading:

This Stock Is Crushing Salesforce, MongoDB And Snowflake In AI RevenueThis Stock Is Crushing Salesforce, MongoDB And Snowflake In AI Revenue
Nvidia, Mag 7 Flash Warning Signs For StocksNvidia, Mag 7 Flash Warning Signs For Stocks
Cybersecurity Stocks Seeing Early AI GainsCybersecurity Stocks Seeing Early AI Gains
4 Things Investors Must Know About AI4 Things Investors Must Know About AI

Hewlett-Packard Enterprise: Sleeper Stock with AI Potential

Posted on July 29, 2024June 30, 2026 by io-fund

Hewlett Packard Enterprise (HPE) has quietly undergone a business transformation over the last few years to position itself as a beneficiary in AI servers, networking, hybrid cloud and AI software. Last quarter, HPE’s AI systems revenue doubled sequentially to $900 million with a backlog of $3.1 billion. Compare this to Dell with AI server order revenue of $2.6 billion and AI server shipments of $1.7 billion. Super Micro has total revenue of $3.85 billion with “more than 50%” of this from AI or about $2 billion.

As a percentage of revenue, SMCI is certainly in the lead as a pure play. However, HPE is ahead of Dell in terms of percentage of revenue at 12.5% for HPE and 7% for Dell.

We’ve identified liquid cooling as a leading trend for the back half of 2024. Of those at the cross-section of servers and liquid cooling, HPE has the lowest valuation to the tune of being priced up to 67% lower.

HPE Overview:

HPE has over 13,000 patents, with 300 of these in particular in liquid cooling systems for data centers, and is the owner of four of the world’s top 10 fastest supercomputers. It has also made a number of partnerships, such as with Microsoft Azure, Google Cloud, SAP, and Nvidia to offer seamless cloud experiences or more powerful compute capabilities. HPE operates globally with over 700 channel partners giving it a unique edge in go-to-market capabilities.

HPE has five business segments:

1. Server (53% of revenue in Q2’24): HPE sells servers for general-purpose use through their ProLiant line and more compute-intensive applications such as their Cray line, which is used in supercomputers.

2. Hybrid Cloud (17% of revenue): HPE offers cloud-native and hybrid solutions for customers that would prefer not to host their own servers on-premise. This includes data storage and management, hybrid and cloud-native services through HPE GreenLake, and AI infrastructure as a service.

3. Intelligent Edge (15% of revenue): HPE provides solutions that enable faster data transfer and improved data analytics through edge computing. AI workloads will eventually move to the edge. Intelligent Edge also offers security features like Zero Trust. This segment includes HPE Aruba which is a subsidiary focused on networking capabilities supported by HPE’s planned $14B merger with Juniper Networks, announced in January 2024.

4. Financial Services (12% of revenue): HPE provides investment solutions to allow businesses to deploy technology models and acquire IT solutions.

5. Corporate Investments and Other (3% of revenue): HPE provides consulting and implementation services.

HPE Cray’s supercomputers are high performance computing servers for AI workloads. They are available with both Nvidia and AMD GPUs, and currently rank as the world’s fastest and largest supercomputers. Cray was a supercomputer manufacturer founded in 1972 before it was acquired by HPE in 2019. Cray is roughly 80% government and agency contracts and 20% commercial, with the bulk of the line being used such for supercomputers for research labs within the Department of Energy, among others.

The ProLiant servers accelerate workloads from the data center to the edge, and are used by corporations for hybrid AI. The AI rack servers offer memory intensive AI inferencing and scalable GPU acceleration for enterprise AI. There are SKUs for virtualized workloads for edge applications that offer balanced bandwidth and memory, data intensive workloads for apps that require large storage capacity and high bandwidth, and compute and data storage demanding workloads that require a maximum core count, among others.

GreenLake cloud is a hybrid architecture that allows enterprises to maintain control of sensitive data, while leveraging the benefits of public and private clouds. HPE calls this an edge-to-cloud platform, which offers software-as-a-service for storage, a data control plane to have a complete view of data assets, data analytics, and the ability to scale AI pilots and large language models. The software platform offers the ability to create a private cloud alongside on-premise servers, which may become quite popular as it allows enterprises to balance the security and data sovereignty that on-premise offers with the agility and scalability of the cloud. Among other things, HPE GreenLake lets customer privately train and tune large language models.

HPE Edgeline offers edge computing and processing power in a compact server that is located close to where data is generated. Edgeline servers are important for edge computing where data is quickly turned into intelligence with AI, and to manage AI/ML applications while protecting and governing data.

Aruba ensures reliable and secure connectivity from the edge back to the servers at the datacenter. The most recent Juniper Networks acquisition expands HPE into ethernet networking and switches. HPE’s $14B merger with Juniper Networks is expected to close in late 2024 or early 2025 and will strengthen HPE’s portfolio in AI networking.

Financials:

Hewlett Packard Enterprise (HPE) surprised in its latest earnings report, posting revenue and non-GAAP EPS that both exceeded outlook in Q2 as AI systems revenue more than doubled sequentially. Management also raised full year revenue and non-GAAP EPS guidance, signaling confidence in their ability to convert the current backlog orders to revenue.

Revenue and EPS:

HPE is a low growth company that has promising, initial signs of AI demand.

The company reported $7.2B in revenue, representing 3.3% YoY growth (5.45% beat), which was the biggest revenue surprise in the last 6 quarters. The company guided for $7.6B in revenue at the midpoint for this upcoming quarter, representing 8.5% YoY growth (2.1% beat).

The company reported ARR of $1.5 billion, up 37% from the prior-year period and 39% in constant currency. Last quarter, ARR grew 41% year-over-year to more than $1.4 billion in Q1, with the company stating to expect ARR growth of 35% to 45%.

GAAP EPS of $0.24 was down 25% YoY and down 17% QoQ.

Adjusted EPS of $0.42 vs $0.52 last year (8.2% beat) is down 19% YoY and was down 13% QoQ. The company guided for adjusted EPS in the range of $0.43 to $0.48 vs $0.49 last year.

HPE’s FY24 revenue guidance represents 1.5% YoY growth at the midpoint, a slight rise from Q1’24 where they guided for 1% YoY growth at the midpoint in constant currency. Adjusted EPS guidance for FY’24 was in the range of $1.85 and $1.95, higher than the guidance given during Q1 results of $1.82 and $1.92.

Key Segments:

The revenue beat was driven by strong performance in AI-related revenues. AI system sales more than doubled sequentially to over $900M for 12.5% of revenue, and the number of enterprise AI customers tripled YoY. AI systems accounted for all of the QoQ growth given the QoQ declines in Hybrid Cloud and Intelligent Edge.

Server Revenue of $3.9 billion dollars in Q2 represents a 16% increase sequentially and up 18% year-over-year, driven by AI servers and HPE Greenlake revenue.

HPE continues to expect sequential growth in both their traditional and AI server business. Operating margins were 11% in this segment, down 340 bps YoY due to pricing headwinds on AI systems, but it is in-line with their long-term operating margin guidance range of 11% to 13%.

HPE has reduced lead times for delivering Nvidia H100 solutions to six to 12 weeks, from over 20 weeks in Q1’24, which it expects will further boost revenues in H2’24, along with more large enterprise orders.

The backlog remained stable at $3.1B, down from $3.4B last quarter but up from $1.4B in the prior year quarter. This acceleration in AI systems revenue comes alongside a recovery in traditional and cloud infrastructure markets, creating a strong set-up for further acceleration into H2. This was also discussed in the Q&A with excerpts below.

Management also pointed to a growing enterprise customer base as evidence of its products’ value proposition.

“Our differentiation – with liquid cooling, software, HPE GreenLake, and increasingly services – is resonating in the market. We have seen a threefold increase in our enterprise AI customer base in the past year.” We have seen a threefold increase in our enterprise AI customer base in the past year.”

Hybrid Cloud revenue was $1.3 billion, down 8% from the prior-year period in actual dollars and 9% in constant currency, with 0.8% operating profit margin, compared to 1.9% from the prior year period.

This decline is being driven by two ongoing transitions. First is from hardware storage to HPE’s cloud-native Alletra storage solution, which reduces current revenues but leads to more predictable recurring revenues with storage ARR up 50% YoY.

Second is the transition from block storage to file storage driven by AI and is seeing strong progress with the pipeline of file storage deals tripling sequentially. Operating margins were down 110 bps YoY to 0.8% due to the decline in revenue as well as a larger mix of lower margin third-party products and traditional storage.

Management provided helpful insights around operational transitions the Company is working through:

“The business is managing two long-term transitions at once. We’ve talked about our migration to the more software intensive Alletra platform. This is reducing current period revenue growth though locking in future recurring revenue. Storage ARR growth of over 50 percent year-over-year offers early confidence in the migration. The second transition is from block storage to file storage driven by AI. While early, this is also on the right trajectory. Our new file offerings plus the sales force investment Antonio mentioned tripled our pipeline of file storage deals sequentially in Q2.”

The GreenLake as a service offering is expected to grow ARR at a 35-45% CAGR through FY’26.

HPE GreenLake, a leader in hybrid cloud infrastructure, is also attracting new customers to HPE’s portfolio with the number of customer organizations using GreenLake increasing 9% QoQ to 34,000 and ARR growing 39% YoY to over $1.5B. This increase is being driven by growth in AI systems and they expect high growth to continue to persist with a target 35-45% ARR CAGR from FY’22 to FY’26.

“We have strong momentum in HPE GreenLake. The number of customers that have adopted HPE GreenLake rose 9 percent sequentially. ARR grew 39 percent year-over-year to above $1.5 billion dollars in Q2. Storage and networking are typically the fastest growth elements of ARR and both retain robust growth rates. This quarter, AI was the fastest growth component of ARR. Our software and services mix rose approximately 200 basis points year-over-year to 67 percent. ARR is the best indicator of our model transformation to our as-a-service offerings. This growth validates what our customers are telling us – HPE GreenLake is a key differentiator. We expect HPE GreenLake’s value proposition to key customer, including enterprises and sovereigns, to sharpen with the advent of AI.”This quarter, AI was the fastest growth component of ARR. Our software and services mix rose approximately 200 basis points year-over-year to 67 percent. ARR is the best indicator of our model transformation to our as-a-service offerings. This growth validates what our customers are telling us – HPE GreenLake is a key differentiator. We expect HPE GreenLake’s value proposition to key customer, including enterprises and sovereigns, to sharpen with the advent of AI.”

Intelligent Edge revenue was $1.1 billion, down 19% from the prior-year period with 21.8% operating profit margin, compared to 24.7% in the prior-year period.

This was driven by difficult comps in both periods as HPE went through its backlog and also by soft macro conditions. However, HPE believes that the segment will return to modest sequential growth moving forward. The segment reported a 21.8% operating margin which was down 290 bps YoY due to lower revenues and the high margin switching business forming a lower percentage of revenue. Moving forward, HPE has already lowered its opex for the segment and they expect operating margins to return to the mid-20s by Q4’24.

Financial Services revenue was $867 million, up 1% from the prior-year period with 9.3% operating profit margin, compared to 8.9% from the prior-year period. Net portfolio assets of $13.2 billion, down 1.1% from the prior-year period.

Margins:

Margins contracted across the board with gross margin in Q2’24 the lowest since 2022. Gross margins were 33%, compared to 36% last quarter and in the prior year quarter. A shift from networking revenue to AI systems revenue is a headwind as AI servers are lower in margin (compared to the higher margin offerings i.e., Intelligent Edge). Management did revise forward guidance on adjusted gross margins downward based on the mix shift and expect to be below full year expectations of 35%.

GAAP gross margin of 33.0%, down 300 basis points year-over-year.
Q2 non-GAAP gross margin was 33.1%, down 310 basis points year-over-year.
GAAP operating margin of 5.9%, down 160 basis year-over-year and down 190 basis points sequentially. This is driven by gross margin compression as operating expenses decreased YoY.
Net Margin of 4.4%, down 160 basis year over year and down 130 basis points sequentially. The decreased net income margin is driven by gross margin compression and slightly offset by improvements in total operating expense year over year.

Cash:

HPE reported operating cash flow of $1.1 billion for an OCF Margin of 15.2%, up $204 million YoY.

Free cash flow of $610 million represents an 8.5% margin and an increase from a FCF margin of 4.1% last year due to prepayments for AI systems and the timing of working capital payments. HPE maintained guidance for at least $1.9B in FCF for FY’24, representing 6.4% FCF margins and noting that FCF is seasonally higher in the second half.

Management continues to target returning 65% to 75% of FCF to shareholders through repurchases and dividends. They repurchased $45M worth of shares in Q2’24 and noted that they expect a similar pace of repurchases going forward with an outstanding buyback authorization of ~$0.9B. The dividend yield as of July 10th, 2024 is 2.44%. The dividend yield has come down from >3% in 2019 as the amount of dividends paid has remained consistent at ~$619M since then despite an increase in stock price.

The cash conversion cycle was negative 4 days, which is a reduction of 28 days from Q2 2023. Inventory increased to $7.3 billion vs $4.6 billion in prior quarter. Management noted that “our days of inventory and days payable were both higher to support our expected growth in AI system revenue in the second half”.

Balance Sheet Discussion

HPE has a strong balance sheet despite having a seemingly high net debt balance of $8.6B as of Q2’24 relative to its current market cap of $27.8B as of July 10, 2024. This is because the Financial Services division is managed separately with Net Portfolio Assets of $13.2B which is the total amount of Financing Receivables and Operating Lease Assets, net of reserves against those assets. This is balanced against Gross Debt of $11.5B and Cash of $0.3B for the Financing Division. The actual Operating Company (i.e., HPE excluding Financial Services) has $2.5B of cash with no debt.

Overall, the debt balance has remained manageable with $11.3B of total debt as of Q2’24, down from $13.4B in Q2’23 and a peak of $19.5B in Q3’20. $7.5B of total debt is long-term, with the remainder being comprised of $3B of debt being current, $646M of commercial paper, and $121M of notes payable and lines of credit.

Earnings Q&A:

HPE’s IP Portfolio and Liquid Cooling:

On the call, an analyst asked how HPE separates itself given the large IP portfolio the company has with over 300 patents related to liquid cooling. Given we are Dell and Super Micro investors, this question was of importance to us. If we look at the sales we see today, these three companies are neck-and-neck in terms of total AI server $ revenue. However, HPE took the time to discuss how the company is differentiated, although we have yet to see that differentiation (or competitive edge) show up in revenue.

Question

Aaron Rakers – Wells Fargo:

Yes. Thanks for taking my question. I guess sticking on the AI topic, if I could first ask, when you referenced the AI enterprise customers starting to show up, and I think the comment on the conference call was…it's now north of 15% of your AI orders. Can you give a little bit more context of that? What has that been over the last couple of quarters? I'm just trying to think about the trajectory of that.

And then Antonio, on the liquid cooling side, as we and investors think about Blackwell product cycle from NVIDIA. I'm curious of…can you be a little bit more specific of exactly where, from a technology perspective, you differentiate at liquid cooling? Is there something unique that HPE does within the 300 patents that you would want to highlight for us, as sustainably differentiated. Thank you.

Answer:

Antonio Neri – CEO

As for the differentiation, HPE has three different ways to cool systems. So, one is the traditional way, which is called the liquid-to-air cooler, think about that, basically running water supply in chilled locations where basically cools the air around the systems. Everybody has done that for a long time. The second is what most of the industry is doing today, which is what I call 70% direct liquid cooling or hybrid liquid cooling. Those companies still use fans to cool aspects of the systems. Some of our competitors talk about direct liquid cooling, but that's exactly what they're doing, and they are doing only a hybrid direct liquid cooling. And HPE has…and by the way, in that environment, we have 10 systems already in market today that we are shipping and configuring for customers.

And then we have what I call 100% direct liquid cooling. And this is a unique differentiation HPE has because we have been doing 100% direct liquid cooling for a long time. And today, there are six systems in deployment, and three of them are for generative AI. And as we go to the next generation of the silicon and you talk about Blackwell, when you go to the B200, that will require 100% direct liquid cooling.

–End Quote

Here was another moment the CEO discussed the top 4 ways HPE is differentiated for AI:

“So Amit, on the differentiation, I will summarize this on four key elements. One is our ability to deliver and run systems at scale, so AI system scale, that's a unique expertise and we have decades of experience. Number two is our infrastructure cooling intellectual property. We actually have all the IP necessary to cool systems in three different ways for them other. Our manufacturing footprint, which is very unique. We have one of the largest water-cooled manufacturing footprints in the world with two very important locations in the US and in Europe, which are close to customers.

And then last but not least is services. What I think people are coming to realize that running the system of scale requires unique services capabilities. And that's why with Marie, we started showing you what the services pull-through is, which is also over time, a lever to improve the gross margin in this business. And we cover all aspects from day zero which consulting, to day one, which is advisory and professional services design and then — and build, and then day 2, which is a running part with our — in our operational services side and deep expertise when it comes down to this system of scale, including direct liquid cooling.”

Guidance Looks to Be Conservative:

An analyst called out that the guidance looks conservative. HPE could be setting up for a beat/raise in the second half of the year, which would be key to market enthusiasm and stock performance. Primarily, the key metrics including backlog support higher growth than management’s current guide. FY’24 revenue guide seems to assume no additional growth in the backlog, to traditional servers, or to intelligent edge, despite management noting their expectation for all three to experience sequential growth through year-end.

Management toned down expectations by noting that it takes longer than 6-12 weeks to install and that a decent percentage of AI system deals are in generative AI which are all GreenLake and therefore the services portion is deferred over the life of the contract. While this latter point may mean that the current backlog will take longer than 2 quarters to realize, expectations are still low enough to set for further large beat and raises.

Toni Sacconaghi:

[…] You talked about enthusiasm for the second half, but you beat revenues this quarter relative to your expectations by $400 million and by guiding up an additional percent, you're actually only guiding up the full year by $300 million. So, I'm wondering, are you just being conservative, given the commentary around enthusiasm and forces at work in the second half or how do we reconcile that discrepancy? And then also just on AI servers for the second half, I think you talked about six-week to 12-week lead times. So if you have $3 billion in backlog and lead times for six weeks to 12 weeks, why can't you deliver $3 billion in AI systems like next quarter or certainly in the second half? Thank you.

Marie Myers

[…] What I did point to though, Toni, is I pointed to the higher end of the range, so that's really what's giving us confidence based on the increase that we made on revenue. So you're seeing that higher top-line and then also the confidence I got around just the cost discipline […] So overall, Toni, keeping the guide at $1.85 to $1.95, but really pointing to the higher end of the guide in terms of just the confidence that you articulated. So I'll turn it over to Antonio to cover the second question.

Antonio Neri

Yes. Toni, I think there is an opportunity to potentially exceed that. I think the limiting factor is not the supply, to be honest with you, is the availability of data center space. I made this comment in Q1, if you recall, data center space and power and cooling. And so some — we are working with the customers to time everything correctly, 6 to 12 weeks, think about it, maybe less than a quarter, but then you have to go and install it.

And there is a nice percentage of our deals in generative AI, which are all actually GreenLake. And so while we can recognize the revenue upfront, we are deferring all the services piece of it. So it really is going to come down to the timing of the data center and the power and cooling. And if that all aligns correctly, then we may have an opportunity to do better. But we felt prudent at this point in time to keep it the way it is and raising by 1%.

–End Quote

With an AI backlog of $3.1B and lead times being reduced to 6-12 weeks, HPE can conservatively recognize their backlog over the next 1-2 quarters, resulting in at least $1.55B of AI systems revenue per quarter. This alone would meet consensus estimates for H2’24, and with management expecting sequential growth in traditional servers and intelligent edge as well as a backlog that is growing almost as fast as revenues, HPE is well-positioned to deliver a surprise or two over the next few quarters.

Valuation:

Despite top-line growth being positioned to accelerate from the low-single-digits over the last three years to the mid-single-digits and potentially higher going forward, HPE still trades in-line with its historical range on a NTM EV/EBITDA basis. With a NTM EV/EBITDA of just 6.6x, it trades below peers like DELL at 10.8x despite comparable growth (Dell is projected to grow in the high-single-digits going forward).

However, as previously mentioned, HPE’s enterprise value is overstated since it accounts for all of the liabilities of the Finance division and none of its assets. Backing out the book value of the finance division yields an EV of $23.3B as of July 11th, 2024, compared to EBIT of $297M in the division in the TTM. Backing out Financial Services EBIT yields non-GAAP operating profit of $2.6B for an EV/EBIT of 9x.

Comp Table

Assuming HPE meets consensus revenue expectations of $31.8B of revenue in FY’26 (3.5% CAGR) and maintains adjusted EBIT margins of 11%, it would generate $3.5B of EBIT. Assuming Financial Services forms the same percentage of EBIT as it does today and backing that out from total EBIT yields Operating Company EBIT of $3.1B. Assuming a similar pace of buybacks, HPE can reduce its share count by 0.8% annually, along with a 2.3% dividend yield. Assuming no multiple expansion, this would yield a high-single-digit IRR.

If we assume that HPE re-rates to 13.3x EV/EBIT by 2026, a valuation in-line with CSCO which is projected to see flat growth through 2026 and is the second cheapest in the group, then HPE would generate a low-20s IRR. This scenario could become more likely as AI systems revenue continues to accelerate and the market starts to recognize HPE as a direct liquid cooled server company. This scenario is still conservative as it doesn’t take into account the likely possibility that HPE will beat consensus estimates.

Conclusion:

HPE will test mental flexibility as it’s a sleeper stock; viewed as an outdated tech company from the dot-com era. Yet, 1990s hardware players are auspiciously positioned to capture AI server revenue, and to also offer software platforms for hybrid AI architectures.

There will be many investors too set in their ways to consider the possibility that we are in a new era. Those who see HPE or Dell doing well will cry “dot-com bust.” AI servers will drive the revenue for these companies in the near-term, yet keep an eye on the AI software segments (GreenLake, etc.) for dot-com-defying longevity.

Our portfolio’s motto is the best AI hardware players will make the best AI software players, which gives a strong nod to how we plan to secure future gains as opposed to resting on our laurels with the current hardware-driven AI cycle. HPE is certainly a candidate that fits this motto, yet it’s too early to tell if HPE has what it takes to compete in what is shaping up to be a highly competitive space.

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

Richard Chu, Equity Analyst for the I/O Fund, contributed to this analysis.

Recommended Reading:

Tesla’s Q2 Deliveries Strong, But What’s To Come?

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

This article was originally published on Forbes on Jul 11, 2024,09:48pm EDTForbes Forbes on Jul 11, 2024,09:48pm EDT

After months of being the lowest performing Mag 7 stocks, Tesla saw rapid gains — up 42% in a one month rally, with 37% of those gains in eight sessions — after it reported Q2 deliveries ahead of expectations and a surge in energy storage deployments.

Optimism had also been building for its much-anticipated robotaxi reveal on August 8, but that now has reportedly been pushed back until October. Despite the surge in share price and renewed deliveries growth in Q2 relative to Q1, Tesla still is facing an EV demand problem with production and deliveries set to decline in 2024. Investors are hoping Tesla is at a meaningful bottom, yet that will require significant growth in the back half of the year.

Production & Deliveries Decline

Tesla delivered 443,956 EVs in Q2, about 1% more than consensus for 439,302 deliveries. Despite rebounding to a 57,000 QoQ increase from Q1, Q2 notched a second straight YoY decline, at (4.8%), though this was an improvement from Q1’s (8.5%) YoY drop.

Production fell to the lowest level in seven quarters, falling to 410,831 vehicles – this represented a (5.2%) QoQ and (14.4%) YoY decline in production. This follows production issues the EV maker faced in Q1, primarily impacts to ramping up the refreshed Model 3 in Fremont, and more recent issues with lowered Model Y production in China and five days of production pauses in Germany in June.

Source: I/O Fund

While the QoQ increase in deliveries was a positive sign to see after Q1’s sharp sequential decline, production and deliveries are both peaking in the short term on a TTM basis. Both have pulled back below the 1.8 million mark in Q2 – production totaled 1.769 million vehicles, with deliveries at 1.75 million vehicles. This comes after Tesla warned in Q1 that 2024’s “vehicle volume growth rate may be notably lower than the growth rate achieved in 2023.” At the moment, we’re tracking for a (3%) to (4%) decline.

Production and deliveries both declined below 1.8 million on a TTM basis.

Source: I/O Fund

Q2’s deliveries point to inventory reduction/channel clearing efforts. Q1 had excess inventory of more than 46,000 vehicles, and thus Tesla had lowered production for this excess to be absorbed in Q2.

In Q1, Tesla noted that it began lowering vehicle and subscription prices, and offering leasing and financing deals to help boost demand, and its TTM trend seems to confirm that weaker demand from Q1 is persisting through to Q2. The industry backdrop in the US remains challenged, as EV demand “has grown more slowly than expected due to high borrowing costs, economic uncertainty and consumer preference for gasoline-electric hybrids.”

To ease these fears, Tesla would need to report strong sequential growth in Q3 and Q4, for both production and deliveries. Assuming 5% QoQ growth in production in Q3 and 7% QoQ growth in Q4, for volumes of ~431,370 and 461,570 respectively, and 2% residual inventory in each quarter, Tesla would end the year at 1.737 million vehicles produced and 1.705 million delivered. This would mark a nearly (6%) YoY decline.

China Deliveries, Market Share Slip

Tesla continues to face major headwinds in China, with China-made deliveries declining on a YoY basis for a third consecutive month in June. We noted to our free readers in November and December 2023 that primary rival BYD’s strong growth presented a tangible and challenging headwind for Tesla in that nation.

Now, we’re seeing more evidence that Tesla’s growth challenges are unique for China. Tesla’s China-made deliveries totaled 71,007 vehicles in June, a 2.2% MoM decline and a 24.2% YoY decline. Stripping out exported vehicles, local deliveries were 59,261, down nearly (20%) YoY but up 7.3% from 55,215 deliveries in May.

BYD outsold Tesla more than 2-to-1 in June, delivering 145,179 BEVs in the month, up 13.2% YoY. Smaller EV rivals Nio and Zeekr also saw strong deliveries, posting record high tallies for June. Industry-wide growth was strong, with NEV sales projected to rise 8% MoM and 28% YoY to 970,000 vehicles. Tesla’s market share dropped below 7% in June, down from more than 11% a year ago as industry growth remains strong and as BYD continues to outsell Tesla significantly in China.

Tesla has an easy comp for July, where China-made deliveries were 64,285 vehicles, including exports. It’s imperative that Tesla break this string of declines in one of its core automotive markets as it heads into Q3. China-made sales were 205,747 vehicles in Q2, or more than 46% of total deliveries.

Energy Storage a Bright Spot, But EPS Impact Likely to be Minimal

Energy storage was a bright spot in Q2, with Tesla reporting a record 9.4 GWh in deployments, up more than 129% QoQ and 154% YoY. Q2’s deployments exceeded historical levels at 4 GWh per quarter, at a maximum.

Source: I/O Fund

This strong growth in deployments should help the segment contribute more to both revenue and gross profit, as its contribution to gross profit has increased significantly through 2023 and 2024. Energy storage contributed less than 8% of revenue in Q1, but could contribute 14% or more of total revenue assuming revenue more than doubles sequentially.

In terms of gross profit contribution, energy storage contributed 10.9% of Tesla’s $3.69 billion in gross profit last quarter, compared to 3.7% in Q1 2023. Energy storage has a superior margin profile versus Tesla’s automotive segment, at above a 24% gross margin in Q1. However, EPS impacts will be minimal in Q2 despite the likely triple digit QoQ revenue growth, as automotive margin has stabilized in the 18% range.

Assuming energy storage gross margin expands at the same pace in Q1 at 3 percentage points, to a 28% gross margin, the segment could generate $1.05 billion in gross profit, up from $403 million in Q1. This $600 million sequential growth would be a primary driver of sequential growth in gross profit company-wide, likely to $4.7 billion to $4.8 billion in Q2, up from $3.7 billion in Q1.

However, this boost to gross profit, driven by energy storage, won’t translate into a meaningful bottom-line impact. Assuming a 10% QoQ increase in operating expenses, net income would project to $1.85 billion, or ~$0.62 per share, just $0.01 ahead of the current consensus estimate for $0.61.

Sign up for I/O Fund's free newsletter with gains of up to 2600% because of Nvidia's epic run – Click hereClick here

Revenue, EPS Growth Muted

Q2 is currently expected to be the last quarter in which Tesla registers negative growth on both the top and bottom line, with analyst estimates pointing to (2.8%) revenue growth to $24.24 billion and (33.5%) adjusted EPS growth to $0.61.

Source: I/O Fund

Analysts expect Tesla to return to YoY growth in Q3, with revenue growth of 9.2% and adjusted EPS growth of just 2%, suggesting margin headwinds are expected to persist as this comes against a weak comp. It also highlights that despite this recent rapid growth in energy storage, automotive sales and margins will be a primary driver of bottom-line strength or weakness. Should energy storage continue to grow off of Q2’s level of deployments, it may shape up to be a more significant driver in 2025.

Margins Yet To Rebound

We have tracked Tesla’s margins for nearly a year now, assessing how low Tesla’s margins could go in an analysis in August 2023. We had estimated that Tesla’s operating margin would decline to 7.8% in our base case, or to 6.2% in a more bearish case. We also reiterated after Q3 earnings that this continual decline in margins highlights a broader concern for investors in that Tesla has provided no concrete guidance on how far margins will decline.

Tesla's operating margin continues to slide on a quarterly and TTM basis

Source: YCharts

Q1 2024’s actual operating margin was 5.5%, down from 11.4% in Q1 2023. On a TTM basis, operating margin fell to 7.8%, back to 2021 levels, and down from a peak of 17% at the end of 2022. Automotive margin has yet to rebound, and energy storage’s contribution is still not large enough to drive a meaningful inflection in operating margin.

Tesla's automotive operating margin dropped back below 16.4% in Q1, just a fraction above Q3 2023’s low.

Source: I/O Fund

Automotive operating margin dropped back below 16.4% in Q1, just a fraction above Q3 2023’s low. If this is a sign of stabilization in the 16% to 17% range, Tesla is facing a rocky road ahead, as operating margin has weakened consistently with automotive gross margin below 20%.

Conclusion

Tesla’s monster 42% one-month rally follows its Q2 delivery beat and budding optimism for its robotaxi reveal event, but under the surface, Q2’s delivery numbers do not seem quite as strong. TTM production and deliveries both peaked and have begun to decline, and it would take strong double-digit sequential growth through the remainder of the year to break this trend and return to positive YoY growth.

Demand issues look to be persisting as Tesla has lowered production to sell off a large chunk of existing vehicle inventory, with Q2’s production volume the lowest in seven quarters and more than 5% below delivery volume. Energy storage was a bright spot with triple-digit sequential growth, but its contribution down the line is not yet meaningful enough to drive a significant EPS beat.

While many will argue that Tesla is one of the most advanced AI companies in the world, my response is “sure,” but Tesla is also heavily exposed to consumer spending — and this is entirely out of their control. It’s been our contention for some time that Tesla is a Fed-related stock as vehicle financing and EV demand hinges on interest rates.

Interest rates are truly the most important data to track for Tesla in the current environment as high interest rates mean Tesla must lower prices (or vice versa). Therefore, it’s not surprising that Tesla has rallied during a period of increased optimism that a rate cut may be on the horizon.

Some will talk about recurring software revenue from robotaxis as the most important catalyst, but the harsh reality is that the Fed lowering rates is the most important catalyst for Tesla today. That may not be as exciting as AI, but Tesla is one of many tech stocks whose revenue growth and profitability is depends on the Fed instilling a more dovish policy.

Recommended Reading:

How to Participate in Tech: The Million Dollar Question (Video Highlights)How to Participate in Tech: The Million Dollar Question (Video Highlights)
This AI Stock Could Outpace Nvidia’s Returns by 2030This AI Stock Could Outpace Nvidia’s Returns by 2030
AI PC Stocks: Emerging 2024 And 2025 StoryAI PC Stocks: Emerging 2024 And 2025 Story
AI Power Consumption: Rapidly Becoming Mission-CriticalAI Power Consumption: Rapidly Becoming Mission-Critical

The Magnificent 7 Are Falling Like Dominos; Only 3 Remain

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

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

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

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

Source: TwitterSource: Twitter

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

Source: TradingView

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

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

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

Sign up for I/O Fund's free newsletter with gains of up to 221% – Click hereClick hereClick here

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

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

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

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

Concentration Risk Elevated

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

Source: CME

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

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

Source: TradingView

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

Source: YCharts

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

Valuations Relatively Intact

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

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

Source: YCharts

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

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

Conclusion

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

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

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

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

Recommended Reading:

Big Tech Q4 Earnings: Capex Increases

Posted on February 7, 2024June 30, 2026 by io-fund

Below, we look at key Big Tech earnings reports and the major takeaways from Alphabet, Meta and Apple.

Alphabet Q4 results: Cloud accelerates while ad revenue falls short

Alphabet beat top-line and bottom-line estimates. The company’s revenue growth of 13% was the highest growth since Q2 2022. Google Cloud revenue accelerated four points from 22% in the previous quarter to 26% in Q4. However, the company’s ad revenue fell short of estimates as it grew by 11% YoY to $65.5 billion and missed consensus estimates of $65.8 billion. The rise of Capex also led to the stock selling off post-results.

However, the rise of Capex is a notable positive for AI accelerators, which our portfolio is loaded with as the increase in capex will funnel through to GPUs and other AI beneficiaries. Per Alphabet’s earnings call: “In 2024, we expect investment in CapEx will be notably larger than in 2023.”In 2024, we expect investment in CapEx will be notably larger than in 2023.”

Revenue and EPS:

Revenue grew by 13% YoY to $86.31 billion, beating estimates by 1.2%. Analysts expect revenue to grow 13% YoY to $78.58 billion in the March quarter and 11% in the next two quarters.

GAAP EPS came at $1.64 and beat consensus estimates by 2.8%. This is up from $1.05 in the same period last year.

Margins

Gross margin improved 300 bps YoY to 56.5% yet was 20 bps lower than the Sept quarter.
Operating margin improved 360 bps YoY to 27.5% yet was 30 bps lower than the Sept quarter.
Net margin improved 610 bps YoY to 24% yet was 170 bps lower than the Sept quarter.

This year’s December quarter expenses included $1.2 billion in exit charges related to office space optimization, and last year's Dec quarter included $1.2 billion in inventory-related charges.

The CFO reiterated the company’s efforts to reduce costs in the earnings call and this should further help the company to improve its margins. “Turning to margins and expenses. As we have repeatedly stressed, we remain committed to our framework to durably reengineer our cost base as we invest to support our growth priorities. Key contributors to moderating our expense growth include: first, product and process prioritization to ensure we have the right resources behind our most important opportunities and to reallocate resources where we can; second, organizational efficiency and structure. We're focused on removing layers to simplify execution and drive velocity.”

Cash Flows and Balance Sheet

Operating cash flow margin was 21.9% compared to 31.1% in the same period last year and 40% in the Sept quarter.
Free cash flow margin was 9.2% compared to 21.1% in the same period last year and 29.5% in the Sept quarter.
Cash flows were lower mainly due to the deferral of tax payments to the fourth quarter. The CFO said in the earnings call, “We delivered free cash flow of $7.9 billion, which was affected by the timing of the $10.5 billion tax payment we made on October 16 that we called out previously related to the deferral of certain tax payments to the fourth quarter.”
Capex also increased 45% YoY to $11 billion in the Dec quarter, which also led to the lower free cash flow.

The CFO said in the earnings call. “With respect to CapEx, our reported CapEx in the fourth quarter was $11 billion, driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”driven overwhelmingly by investment in our technical infrastructure with the largest component for servers followed by data centers. The step-up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers and governments globally and the long-term growth opportunities that offers. In 2024, we expect investment in CapEx will be notably larger than in 2023.”

As stated, comments on capex are good for our semiconductor portfolio mix.

The company has cash and marketable securities of $110.9 billion compared to $119.94 billion in the Sept quarter. Meanwhile, debt was $13.25 billion compared to $13.78 billion in the Sept quarter. The company repurchased $62 billion worth of shares in 2023.

Key Metrics:

Google Cloud Revenue

Google Cloud revenue grew by 26% YoY to $9.2 billion, helped by the increasing contribution from AI. Even though the growth is slower than the 32% growth in the same period last year, it has accelerated from 22% in the previous quarter.

The operating margin for Google Cloud came in at 9% compared to 3% in the previous quarter and negative (0.2%) in the same period last year. The strong growth in the quarter also helped the company to narrow the gap to 4 percentage points with Microsoft Azure’s leading growth of 30% compared to 7 percentage points in the previous quarter.

The CFO said, “The Cloud team is intensely focused on bringing the benefits of Gemini, our industry-leading AI technology, to enterprises and governments globally, and we are gratified with the level of engagement. The strong demand we are seeing for our vertically integrated AI portfolio is creating new opportunities for Google Cloud across every product area.”

Google Advertising Revenue

Google Advertising revenue grew by 11% YoY to $65.5 billion, compared to 9% growth in the previous quarter and a (-4%) decline in the same period last year. However, they fell short of the consensus estimates of $65.8 billion.

Google Search and other advertising revenues grew by 13% YoY to $48 billion. It was up from 11% growth in the previous quarter and a decline of (-2%) in the same period last year.
YouTube ads revenues grew by 16% YoY to $9.2 billion. It is up from the 12% growth in the previous quarter and a decline of (-8%) in the same period last year.
Network advertising revenues declined by (2%) YoY to $8.3 billion.

Earnings Call

The company’s CEO Sundar Pichai was positive on the launch of Gemini and said in the earnings call, “We closed the year by launching the Gemini era, a new industry-leading series of models that will fuel the next generation of advances. Gemini is the first realization of the vision we had when we formed Google DeepMind, bringing together our two world-class research teams. It's engineered to understand and combine text, images, audio, video and code in a natively multimodal way and it can run on everything from mobile devices to data centers.

Gemini gives us a great foundation. It's already demonstrating state-of-the-art capabilities and it's only going to get better. Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”Gemini Ultra is coming soon. The team is already working on the next versions and bringing it to our products. That starts with Search.”

He also mentioned that subscriptions revenue reached $15 billion in annual revenue, up 5x since 2019, helped by strong demand for YouTube Premium and Music, YouTube TV, and Google One. The CFO said, “Subscriptions, Platforms and Devices revenues, which we previously referred to as other revenues, were $10.8 billion, up 23%, primarily reflecting growth in YouTube subscription revenues.”

Conclusion:

While the overall report was good, it is clear that the market expects perfection in key metrics. The slight miss in the advertisement revenues and the rise of capex overshadowed the acceleration in Google Cloud. With that said, for our purposes, the increase in capex commentary is critical to hear for our current portfolio mix, which is overweight AI semis.

Meta Q4: Back to Juggernaut Status

Meta’s Q4 report beat on the top and bottom lines and initiated a $0.50 dividend in a surprise move, The strength of the report is cementing the Facebook parent’s status as a juggernaut of tech once more. Key metrics were very strong across the board, and Q1’s guide pointed to 25% revenue growth at the midpoint, suggesting that 2023’s momentum is continuing into next quarter.

Revenue and EPS:

Meta reported revenue of $40.11 billion for Q4, above the higher end of its guide of $36.5-$40.0 billion range and beating estimates for $39.17 billion. Revenue grew 24.7% YoY.
For the full year, Meta reported revenue of $134.9 billion, representing YoY growth of 15.7%.
Meta guided for $34.5-$37 billion in revenue for Q1, representing YoY growth of 24.8%
EPS of $5.33 beat estimates by 7.9%, and represented YoY growth of 203%.
For the full year, Meta reported EPS of $14.87, representing YoY growth of 73.1%.

Margins:

Gross margin was 80.8% in Q4, a 100 bp QoQ decline but a 670 bp YoY improvement.
Operating margin was 40.8% in Q4, a 50bp QoQ and 2090 bp YoY improvement.
Net margin was 34.9%, a 100 bp QoQ and 2060 bp YoY improvement.
For the full year, gross margin was 80.8%, a 240 bp YoY improvement.
For the full year, operating margin was 34.7%, a 990 bp YoY improvement.
For the full year, net margin was 29.0%, a 910 bp YoY improvement.

Accelerating ARPU

Although Q1’s guide is for 24.8% growth, triple-digit EPS growth and strong YoY expansion in margins, the highlight of the report lies within acceleration in ARPUs to record levels – ahead of what is expected to be a strong ad market backdrop this year.

Growth in ad impressions cooled, but remained above 20% (versus a fairly tough comp at 23% in the year ago quarter). Ad pricing returned to growth, increasing 2% YoY after seven quarters of declines. We highlighted in mid-January while discussing Meta’s clear leadership in the social media space that “what investors should watch for is if improved ad targeting from AI features can help drive ad pricing back to growth, supported by a favorable spending backdrop and continuing strength in ad impressions globally.” Meta delivered exactly that, though impressions growth decelerated a bit more rapidly QoQ than in Q3.

This recovery and inflection in ad pricing helped drive an acceleration in advertising revenue growth. Overall advertising revenue increased 23.8% YoY to $38.7 billion, a rapid acceleration from the 4.1% growth posted in Q1 when Meta inflected back to growth. US & Canada ad revenue grew 18.5% YoY, while Europe ad revenue growth was the strongest, increasing 32.7% YoY.

Accelerating ARPUs in Facebook’s two core geographies drove this growth – we said two weeks ago that Meta was “on track to potentially reach a record level” for ARPU in Q4, and it did exactly that.

ARPU in US & Canada accelerated to 16% YoY to $68.44, compared to 14% YoY growth in Q3 and a (3%) YoY decline in the year ago quarter. Europe ARPU growth remained steady compared to Q3 at 34% YoY to $23.14, up from 14% YoY in Q2 and a (12%) YoY decline in the year ago quarter. Meta has displayed unbelievable strength in improving monetization in US & Canada, with ARPU rising nearly $20, or 40%, since Q1.

Q1 will be the next true test for Meta, as it needs to show that it can maintain this strength in ARPU, though it faces a very easy comp with 1% growth in ARPU in the three regions highlighted above. If Meta can report US & Canada ARPU above $60 and Europe ARPU above $20, it will be well on track to proving that it can successfully and meaningfully increase monetization via AI. Q1’s strong guide at nearly $1.9 billion above consensus estimates at midpoint suggests that this is possible.

What also cannot be written off is Meta’s ability to deliver strong operating margin expansion and generate substantial cash flow, while continuing to invest heavily in AI and AR.

In Q4, operating margin expanded over twenty percentage points YoY to 40.8%, the second straight quarter with operating margin above 40% since Q1 and Q2 2021. As a result, FY23 operating margin improved 990 bp YoY to 34.7%. This is helping drive a strong improvement in the bottom line, with Meta reporting a net margin of 34.9%, a second straight quarter above 33% and a strong 2040 bp YoY expansion.

This operating margin expansion comes as Meta continues to pour substantial amounts of cash into Reality Labs. Operating losses for Reality Labs totaled ($16.1) billion for FY23, generating a ~1195 bp headwind to operating margin.

Not only has Meta driven a visible increase in operating margin while meaningfully accelerating revenue over the last four quarters, but it has also driven a massive increase in cash flow.

For FY23, Meta delivered 40.9% YoY growth in operating cash flow to $71.1 billion, as it saw OCF margin expand 940 bp YoY to 52.7%. This is the highest margin among the Magnificent 7. Free cash flow also increased 134% YoY to $43.01 billion, with FCF margin increasing 1610 bp YoY to 31.9%.

Commentary:

Meta guided for a strong Q1, calling for 24.8% YoY growth though it comes against a weak 2.6% YoY comp; however, the ad market backdrop is looking increasingly favorable and supportive of a high-teens growth rate, with current expectations pointing to 16.7% revenue growth for Meta in 2024 to $157.6 billion.

Social media ad spend is expected to remain robust in 2024, with one of the fastest projected growth rates in the ad industry at +13.8% to reach $227.2 billion globally, less than 1% shy of search ad spend.

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

CEO Mark Zuckerberg said Meta’s year of efficiency in 2023 paid off, with the company returning to strong revenue growth with strong engagement across its apps, while it also “established a world-class AI effort that's going to be the foundation for many of our future products.” By the end of 2024, Meta will have approximately 350,000 H100 GPUs and 250,000 H100 equivalents (perhaps a mix of AMD’s MI300X and/or Meta’s in-house ASICs?), to power its AI ambitions, which span LLMs, in its Llama, Llama 2 and Llama 3, Reels, and other AI features and new products.

Meta is also starting to see more positive contributions from products outside of Facebook, primarily Reels, Meta’s answer to TikTok. Management said Reels “and our discovery engine remain a priority and major driver of engagement,” and “Reels is now contributing to our net revenue across our apps.” Management added that it is seeing “sustained growth in Reels and Video overall as daily watch time across all video types grew over 25% year-over-year in Q4.” Reels can continue to aid growth for Meta in 2024, and while its engagement rate of ~6-9% is slightly below TikTok’s average engagement of 9-11%, Reels is estimated to have higher reach and interactions, which can benefit ad pricing despite the lower engagement rate.

While 2023 was Meta’s year of efficiency, 2024 may shape up to be Meta’s year of leverage. Key metrics support a return to >40% operating margin for the full year and a possible >33% net margin, driven by increasing ad pricing after inflecting back to growth, strong engagement and impressions growth, aided by the release of numerous AI features. Reaching those margins for the full year would imply EPS growth of nearly 38% to $20.50 on $160B in revenue.

AI can help provide increased operating leverage, similar to what we have seen with Microsoft as it boosts growth and creates additional engagement opportunities. Meta is investing heavily in both AI and non-AI hardware and data centers, with its capex guided for $30 to $37 billion in 2024.

Meta said that for “generative AI, we fully rolled out our Meta AI assistant and other AI chat experiences in the U.S. at the end of the year and began testing more than 20 GenAI features across our Family of Apps.” Increasing user engagement via AI features can drive higher ad loads, and thus higher pricing by increased optimization: Meta said that its “approach to optimizing ad levels in our apps has become increasingly sophisticated” as it continues to deliver performance gains for advertiser campaigns.

Note on Meta’s Capex:

The management has guided $30 billion to $37 billion in 2024, an increase of $2 billion at the high range of the prior guide. The guide represents 19.2% YoY growth in capex at the mid-point compared to an actual $28.1 billion in 2023. Since 2023 was a ‘Year of Efficiency,’ the company’s capex was down (12.3%) YoY compared to a growth of 66.5% in 2022.

Apple: Strong Q1 FY24 results overshadowed by weak guidance

Apple beat on the top line and bottom line. The profit margins and cash flow margins improved in the Dec quarter. The gross margin guide for the March quarter was also strong. However, management’s revenue outlook for the next quarter implies revenue will decline (5%) YoY and miss consensus estimates by 6%. China revenue of $20.8 billion also missed analyst estimates of $23.8 billion.

Revenue and EPS

Revenue grew by 2.1% YoY to $119.58 billion, beating estimates by 1.1%.

iPhone sales accelerated to 6% YoY growth to $69.7 billion, up from 3% in the Sept quarter, partly due to strong demand for the iPhone 15 line-up.
Mac Sales rebounded to 1% YoY growth to $7.8 billion from a (34%) decline in the September quarter. We want to watch this line item for a rebound in the broader PC market.
iPad sales disappointed as they declined by (25%) YoY to $7 billion. The slide was steeper than the Sept quarter decline of (10%).
Wearables, home, and accessories revenue declined by (11%) YoY to $12 billion, from a (3%) decline in the Sept quarter.
Services revenue grew by 11% YoY to $23.1 billion. Services remain a long-term opportunity for the company to monetize its installed base of over 2.2 billion active devices. Services revenue grew 16% in the Sept quarter.

GAAP EPS grew by 16% YoY to $2.18, beating estimates by 3.6%.

Margins

Gross margin improved 70 bps sequentially and 290 bps YoY to 45.9%. The management guide for the next quarter is in the range of 46% to 47%.

Operating margin improved 370 bps sequentially and 310 bps YoY to 33.8%.

Net margin improved 270 bps sequentially and 280 bps YoY to 28.4%.

Cash flow and balance sheet

Operating cash flow margin improved 930 bps sequentially and 440 bps YoY to 33.4%. Free cash flow margin improved 970 bps sequentially and 560 bps YoY to 31.4%. Free cash flow also benefitted from lower capex when compared to the same period last year.

The company has cash and marketable securities of $172.6 billion and debt of $108 billion. They repaid $4.0 billion of commercial paper and had net cash of $65 billion compared to net cash of $51 billion in the Sept quarter. Management reiterated its plan to be net cash-neutral over time. The company returned about $27 billion to the shareholders in the recent quarter in the form of dividends and share repurchases.

What to watch in the coming quarters

While providing the outlook for the next quarter, the CFO said they expect foreign exchange to be a 2-percentage headwind. The outlook suggests that revenue will decline by (5%) YoY in the March quarter and this missed consensus estimates by 6%. iPhone sales are expected to decline by about (10%) YoY in the March quarter.

The CFO said, “As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.” We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago.”

The company is facing competition from other smartphone companies in China due to foldable designs and advanced AI features. The company’s total revenue from China in the recent quarter was $20.8 billion, which missed estimates of $23.8 billion.

The performance of the services segment will also be crucial as the company has an installed base of over 2.2 billion active devices and over 1 billion paid subscriptions. The management expects a similar double-digit revenue growth rate in the next quarter to what the company reported in the December quarter: 11% YoY growth.

Management is expected to share more details later this year on how the company plans to capitalize on Artificial Intelligence. Tim Cook said in the earnings call. “That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year.”

Vision Pro launched and has sold an estimated 200,000 units.

Lastly, the recent changes to the app store to comply with the EU’s Digital Markets Act are to be watched. The impact is limited at the moment since the change is only to Europe. The company will have lower commissions on the app store in Europe, which will now range between 10% to 17% instead of the typical 30%.

The CFO answered an analyst’s question on the call on the impact of the changes. “As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue.”

Conclusion

The company's strengths are strong margins, cash flows, a stable balance sheet, and a loyal customer base. Tackling the revenue slowdown in China and capitalizing on its vast installed base is crucial for the company. Keep an eye on the app store commissions as Europe’s move to reduce these commissions will likely serve as inspiration to developers globally to push for the same.

Equity Analysts Damien Robbins and Royston Roche contributed to this article.

Recommended Reading: