2024-11-22 21:01:45
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NVIDIA reported its October quarter earlier this week, with the world holding its breath and dissecting every move in the stock price.
While Wall Street often fixates on the latest quarter, today, let’s take a step back to examine the broader trend shaping NVIDIA’s historic rise. The stock is up 10X since we first covered it in this newsletter two years ago. Already more profitable than Alphabet and Amazon, NVIDIA is on track to leapfrog Microsoft and Apple in net income in the coming quarters—a dazzling ascent for the history books.
The turning point? November 2022, when OpenAI introduced ChatGPT to the world. NVIDIA CEO Jensen Huang has called this the “iPhone moment of AI.”
Fast forward two years, and NVIDIA’s latest GPU architecture, Blackwell, is shipping at scale. As Huang put it:
“The age of AI is in full steam, propelling a global shift to NVIDIA computing. Demand for Hopper and anticipation for Blackwell — in full production — are incredible as foundation model makers scale pretraining, post-training and inference.”
Huang highlighted two trends fueling this cycle:
Platform shift from coding to machine learning (IT modernization).
Rise of AI factories (new industries emerging from gen AI apps).
AI-native startups are flourishing, and successful inference services are multiplying. If AI follows the trajectory of the mobile economy, it’s 2009 all over again—Instagram didn’t even exist yet—and we’re just getting started.
Today at a glance:
NVIDIA’s Q3 FY25.
Scaling limits of AI.
Key quotes from the call.
What to watch looking forward.
NVIDIA’s fiscal year ends in January, meaning the recently reported October quarter marks Q3 FY25. I’m focusing on sequential growth (quarter-over-quarter), a better representation of the momentum.
Income statement:
Revenue jumped +17% Q/Q to $35.1 billion ($2.0 billion beat).
⚙️ Data Center grew +17% Q/Q to $30.8 billion.
🎮 Gaming grew +14% Q/Q to $3.3 billion.
👁️ Professional Visualization grew +7% Q/Q to $0.5 billion.
🚘 Automotive grew +30% Q/Q to $0.4 billion.
🏭 OEM & Other grew +10% Q/Q to $0.1 billion.
Gross margin was 75% (-1pp Q/Q), in line with guidance.
Operating margin was 62% (flat Q/Q), in line with guidance.
Non-GAAP operating margin was 66% (flat Q/Q).
Non-GAAP EPS $0.81 ($0.06 beat).
Cash flow:
Operating cash flow was $17.6 billion (50% margin).
Free cash flow was $16.8 billion (48% margin).
Balance sheet:
Cash and cash equivalents: $38.5 billion.
Debt: $8.5 billion.
Q4 FY25 Guidance:
Revenue +7% Q/Q to $37.5 billion ($0.5 billion beat).
Gross margin 73 % (-2pp Q/Q).
So what to make of all this?
NVIDIA delivered a revenue beat of 6%, slightly ahead of last quarter’s 5% beat but below the high double-digit beats earlier this year. This reflects the market's elevated expectations and the inevitable "law of large numbers." While NVIDIA’s growth remains robust, the pace is naturally slowing as comparisons toughen.
⚙️ Data Center accounted for 88% of overall revenue (flat Q/Q), growing 112% year-over-year and 17% sequentially. Key drivers within Data Center:
⚡ Compute: Demand for Hopper GPUs fueled 22% sequential growth. These chips enable AI model training and inference at scale, with H200 revenue reaching “double-digit billions.”
🔌 Networking: Sequentially declining due to demand lumpiness, growth is expected to resume in Q4. Spectrum-X Ethernet solutions for AI tripled year-over-year.
🎮 Gaming revenue grew 14% sequentially to $3.3 billion, driven by GeForce RTX GPU demand and strong back-to-school sales. Supply constraints are expected to impact Q4.
👁️ Professional Visualization revenue rose 7% sequentially to $486 million, with Omniverse and AI-related workflows driving adoption.
🚘 Automotive revenue surged 30% sequentially to $449 million, driven by strong adoption of NVIDIA’s AI-powered autonomous driving and cockpit solutions.
📉 Margins showed slight pressure due to the Blackwell production ramp, with gross margins dipping to 75%. Management expects further compression toward the low-70s in early FY26, followed by a rebound as production scales. Operating expenses increased, reflecting investments in next-generation products.
🔮 Looking Ahead: Demand for both Hopper and Blackwell chips continues to outstrip supply and is expected to remain constrained into FY26. Management’s improving supply visibility will support future growth. While NVIDIA remains at the forefront of the AI revolution, tougher comparisons and rising competition from AMD and custom AI chips could present challenges.
A growing number of skeptics argue that we may be approaching a ceiling in the scalability of AI applications. Jensen Huang, however, remains optimistic, pointing to untapped opportunities driven by advancements like reinforcement learning and inference-time scaling.
During the Q&A portion of NVIDIA's earnings call, the first question addressed this critical debate: has scaling for pre-training large language models (LLMs) hit its limit?
Huang offered an insightful perspective:
“This is an empirical law, not a fundamental physical law. But the evidence is that it continues to scale. What we're learning, however, is that it's not enough, that we've now discovered two other ways to scale.
One is post-training scaling. Of course, the first generation of post-training was reinforcement learning human feedback, but now we have reinforcement learning AI feedback, and all forms of synthetic data generated data that assists in post-training scaling.
And one of the biggest events and one of the most exciting developments is Strawberry, ChatGPT o1, OpenAI's o1, which does inference time scaling, what is called test time scaling. The longer it thinks, the better and higher-quality answer it produces.”
Huang’s comparison between physical laws (universal and immutable, like gravity) and empirical laws (patterns observed through experimentation) is crucial. The scalability of AI—an empirical trend where better models arise from increased data and compute—continues to evolve. Huang’s remarks suggest these new scaling methods, though still in early stages, could extend AI's growth trajectory.
AI is still in its infancy. Mobile-first apps like Uber and Airbnb didn’t emerge until 3 years after the iPhone’s launch. Similarly, the most transformative applications of AI may still be on the horizon.
“NVIDIA Hopper demand is exceptional and sequentially, NVIDIA H200 sales increased significantly to double-digit billions, the fastest product ramp in our company's history.”
Kress provided updates on the three major customer categories:
☁️ Cloud Service Providers (CSPs): Contributed ~50% of Data Center revenue (up from 45% last quarter), with hyperscalers like Amazon, Microsoft, and Google leading the charge.
💬 Consumer Internet Companies: Meta, with its Llama models, is a key player, leveraging AI for applications like agents, deep learning recommender engines, and gen AI workloads.
🗄️ Enterprise: Thousands of companies are building generative AI apps and co-pilots across industries like healthcare, education, and robotics.
“Blackwell is in full production after a successfully executed mass change. We shipped 13,000 GPU samples to customers in the third quarter, including one of the first Blackwell DGX engineering samples to OpenAI. […] Blackwell is now in the hands of all of our major partners and they are working to bring up their Data Centers.”
Kress highlighted Oracle’s Zettascale AI Cloud Computing clusters, scaling to over 131,000 Blackwell GPUs. Blackwell GPUs offer a 4x reduction in cost compared to H100s for GPT-3 benchmarks, enhancing total cost of ownership.
“We expect NVIDIA AI Enterprise full year revenue to increase over 2 times from last year and our pipeline continues to build.”
NVIDIA’s software, service, and support revenue is set to exit the year annualizing at over $2 billion. This segment—less prone to hardware cyclicality—could become a cornerstone of long-term growth as the CUDA-compatible installed base expands. If you invest in NVDA for the next decade, this part of the thesis is crucial.
“As a percentage of total Data Center revenue, it remains well below levels prior to the onset of export controls. We expect the market in China to remain very competitive going forward. We will continue to comply with export controls while serving our customers.”
As a reminder, the US regulations affect the highest performance levels.
“We're essentially saying that these data centers are really AI factories. They're generating something. Just like we generate electricity, we're now going to be generating AI. And if the number of customers is large, just as the number of consumers of electricity is large, these generators are going to be running 24/7. And today, many AI services are running 24/7, just like an AI factory. […] It's unlike a data center of the past.”
Huang has a knack for explaining the shift from traditional data centers to facilities purpose-built for gen AI.
“There's now a whole new era of AI, if you will, a whole new genre of AI called physical AI. Just those large language models understand the human language and how the thinking process, if you will. Physical AI understands the physical world.
And it understands the meaning of the structure and understands what's sensible and what's not and what could happen and what won't. And not only does it understand but it can predict, roll out a short future. That capability is incredibly valuable for industrial AI and robotics.”
NVIDIA’s Omniverse is central to this vision, enabling simulations and digital twins for industrial applications.
“The age of AI is upon us and it's large and diverse. NVIDIA's expertise, scale, and ability to deliver full stack and full infrastructure let us serve the entire multi-trillion dollar AI and robotics opportunities ahead.”
From enterprises adopting AI agents to industrial robotics investments, Huang sees vast, untapped markets.
“Everybody knows that if they innovate on top of CUDA and NVIDIA's architecture, they can innovate more quickly […] (This) large installed base (means) that whatever you create could land on a NVIDIA computer and be deployed broadly all around the world in every single data center all the way out to the edge into robotic systems.”
With a gigantic installed base in the making, CUDA could be NVIDIA’s next big growth avenue. The main difference? It would be recurring revenue with software-like margins.
NVIDIA maintained its aggressive buyback pace in Q3:
$9.5 billion in FY24.
$7.7 billion in Q1 FY25.
$7.2 billion in Q2 FY25.
$11.0 billion in Q3 FY25.
While this signals management's confidence in the company’s prospects, some investors might question whether the current cash influx would be better spent on R&D, M&A, or other growth initiatives to sustain long-term growth.
NVDA was notably absent from high-profile hedge funds’ top picks in the latest 13F filings we discussed on Tuesday, suggesting a cautious stance in 2024. Funds have trimmed their exposure slightly, but NVIDIA remains one of the most owned stocks—investors aren’t jumping ship.
Here are the current forward PE ratios (via Ychartz):
NVIDIA 52.
AMD 41.
Microsoft 32.
Apple 31.
Despite a seemingly higher multiple, NVIDIA’s valuation reflects its rapid earnings growth. With $19 billion in net profit in Q3, this isn’t a dot-com-style bubble like Cisco in 2000. NVIDIA’s profits are tangible, and its fundamentals are solid.
So what’s the catch? NVIDIA’s forward earnings rely heavily on sustained demand for Blackwell GPUs. But what comes after? The semiconductor industry is notoriously cyclical, and NVIDIA’s reliance on a few very large customers creates a concentration risk. A shift toward internal solutions by CSPs could significantly impact revenue.
Meanwhile, competition is heating up. AMD grew its Data Center revenue by 25% sequentially in Q3 (albeit from a much smaller base). Could differentiated offerings help AMD close the gap? We recently visualized AMD’s earnings and covered these dynamics.
Jensen Huang directly addressed a critical question during the Q&A: when will the hardware cycle enter its “digestion” phase? His response:
“I believe that there will be no digestion until we modernize a trillion dollars with the data centers. […] As you know, IT continues to grow about 20%, 30% a year, let's say. And let's say by 2030, the world's data centers for computing is, call it a couple of trillion dollars. And we have to grow into that. We have to modernize the data center from coding to machine learning. […]
The second part of it is generative AI […] If you look at OpenAI, it didn't replace anything. It's something that's completely brand new. It's in a lot of ways as when the iPhone came, it was completely brand new. It wasn't really replacing anything. And so we're going to see more and more companies like that.”
This is such a crucial soundbite showing Huang’s belief that the shift to GPUs combined with the rise of gen AI could extend this hardware cycle well beyond traditional models. Analysts may be underestimating the timeline, as gen AI opens entirely new markets.
If Chat-GPT was the "iPhone moment of AI"—as Huang described—then it’s like 2009 for the app economy. The true transformation is still ahead, with the potential for many more AI-first companies (the next Instagrams, Ubers, and Airbnbs) to emerge. The shift from mobile-first to AI-first is just beginning.
That’s it for today!
Stay healthy and invest on!
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Disclosure: I am long AAPL, AMD, AMZN, GOOG, and NVDA in App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
2024-11-19 21:01:55
Welcome to the Premium edition of How They Make Money.
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In case you missed it:
Every quarter, funds managing over $100 million must share their portfolio moves as part of their 13F filings. These filings can be goldmines, providing unique insights into recent decisions made by some of the best money managers. So, let’s look at the Q3 update.
Today at a glance:
Hedge funds’ strategies.
Top buys and top holdings in Q3.
Case studies.
Implications for individual investors.
As usual, this seasonal article comes with some caveats. Blindly replicating the trades of the so-called ‘smart money’ is a recipe for disaster. Investing decisions are like shots from the 3-point range on a basketball court. Even Steph Curry—the best shooter in history—misses more than half of his attempts. In investing, there is no such thing as a sure bet.
Your patience and capacity to stay the course matters more than what you put in your portfolio. Your success hinges on your behavior. Peter Lynch says you should “know what you own and why you own it."
Conviction is a critical step in an investing framework because all companies go through a rough patch, and their stock inevitably collapses, at least temporarily.
As wonderfully put by Ian Cassel:
“You can borrow someone else’s stock ideas but you can’t borrow their conviction. True conviction can only be obtained by trusting your own research over that of others. Do the work so you know when to sell. Do the work so you can hold. Do the work so you can stand alone.”
Some limitations of 13F filings:
Offer a partial view, leaving out smaller funds.
Can be dated, given their submission 45 days post-quarter.
Exclude non-US equities, bonds, and commodities.
Omit short positions and cash reserves.
With all this said, let’s peek at what hedge funds were buying and holding in Q3 2024 and what we can glean from it.
Hedge funds are financial titans known for their sophisticated and flexible investment strategies aimed at achieving sky-high returns.
Here's a breakdown of the pillars shaping their strategies:
Market conditions: Hedge funds adjust their sails according to the economic winds. In bull markets, long positions may be favored, while bear markets might see an uptick in short selling or other defensive tactics.
Sector trends: Changes in consumer behavior or new legislation can drive hedge funds toward specific industries, influencing their buying patterns.
Company fundamentals: A company's earnings, cash flow, and management quality often dictate investment choices.
Macroeconomic factors: Global events, from interest rate changes to geopolitical shifts, play a significant role in hedge fund decision-making.
Quantitative models: Many funds employ complex, proprietary models, uncovering opportunities that traditional analyses might miss.
Risk management: Hedge funds don't just chase returns; they also strategically diversify to mitigate risks.
Investor sentiment: The market's mood can lead to undervalued opportunities or selling points in a euphoric market.
It doesn't always work out. The Global X Guru ETF (GURU), mirroring some top hedge funds, illustrates a sobering reality: it has trailed behind the S&P 500 (SPY) over the past decade.
The hefty '2 and 20' fee structure (2% of managed assets and 20% of profits) adds to this underperformance and can significantly erode returns. Intense market competition has put this model under scrutiny.
For individual investors, the takeaway is clear: while hedge funds' dynamic strategies and potential for high returns are enticing, understanding their methodologies and the associated costs is crucial.
In early 2020, before the COVID rally and subsequent market collapse, I selected a list of 20 top-performing hedge funds, according to TipRanks. Their methodology was based on the alpha generated compared to the S&P 500. It’s not perfect, but it’s a good starting point. Let me know if you’d like to see specific funds on this list.
So let's see what these funds, often featured in my social media feeds and podcast rotation, have been up to lately.
Remember, technology, communication, and consumer services represent most of the S&P 500, so it's not surprising that these categories are well represented in the list below.
The portfolios reveal the usual suspects. The nine stocks below represent nearly half of the top holdings:
☁️ Hyperscalers: AMZN, GOOG, MSFT.
⚙️ AI tech stack: AMD, META, NVDA, TSM.
💳 Payments: MELI, V.
Now, let’s turn to the most timely part!
What are the stocks that picked the spotlight in Q3 as top buys?
The list included more surprises than usual, with the Magnificent 7 mostly absent from the top picks this quarter. Still, we find some familiar names if you are a regular reader of this newsletter.
2024-11-16 23:01:36
Welcome to the Saturday PRO edition of How They Make Money.
Over 160,000 subscribers turn to us for business and investment insights.
In case you missed it:
📧 Free members get our Friday articles and sneak peeks.
💌 Premium members receive monthly reports with 200+ companies visualized, one extra weekly article, and access to our archive.
💼 PRO members enjoy everything in Premium, plus our Saturday timely coverage of the most important earnings of the past week.
Today at a glance:
🎮 Tencent: Gaming Fuels Growth
📦 Alibaba: Cloud and AI Bright Spot
🌐 Cisco: AI Momentum and Recovery
⚙️ Applied Materials: AI-fueled Demand
🛍️ Shopify: Growth Acceleration
🎧 Spotify: Margin Expansion
🏦 Nu Holdings: Record Profitability
🚚 JD.com: More Margin Gains
🌊 Sea Limited: Shopee Powers Growth
🎮 NetEase: Resilient Gaming Segment
🏈 Flutter: US Growth & Raised Outlook
🐶 Datadog: Multi-product Adoption
🎤 Live Nation: Superfan-Fueled Growth
🏍️ Grab: Profitability Boost
👟 On: Record Sales Momentum
💻 Lenovo: AI-Driven Momentum
⏹️ CyberArk: Strength in Subscription
🥕 Instacart: Deeper Integration
💳 StoneCo: Solid Momentum
🌎 dLocal: Record TPV, Lower Margins
☄️ Semrush: Profitable Growth
🍽️ Olo: Platform Expansion
Tencent's Q3 revenue grew 8% to 167.2 billion yuan ($23.2 billion), led by a 13% rebound in gaming revenue (14% for domestic and 9% for international games). Black Myth: Wukong, in which Tencent has an equity stake, was a massive hit, selling over 20 million copies. Blockbuster titles like DnF Mobile and Delta Force drove growth, along with robust performances from PUBG MOBILE and Honour of Kings. Marketing services (formerly online advertising) grew 17%, powered by demand for WeChat's video accounts and mini-program features. Monthly active users on WeChat/Weixin rose 3% to 1.38 billion.
Profit surged 47% to 54 billion yuan ($7.6 billion), beating estimates, though fintech and cloud services posted modest 2% growth amid weak consumer spending. Tencent highlighted early benefits from AI integration in marketing and operations but noted slower AI adoption in China's cloud market compared to the US. Management remains optimistic about long-term growth, underpinned by gaming, advertising momentum, and investments in evergreen titles.
Alibaba's September quarter (Q2 FY25) saw revenue grow by 5% to $33.7 billion ($0.5 billion beat). Adjusted earnings beat expectations, driven by equity investments and a steady operating margin. The cloud segment stood out, accelerating to 7% growth, fueled by triple-digit AI product growth and rising public cloud adoption.
However, the core Taobao and Tmall business saw a modest 1% revenue increase, reflecting continued competition and cautious consumer spending. Management remains optimistic about its AI-driven initiatives and improving monetization of its e-commerce platforms, which gained momentum during the Singles’ Day Festival. Despite these positives, ongoing macroeconomic headwinds and stiff competition from JD.com and PDD continue to pressure growth.
2024-11-15 21:02:47
Welcome to the Free edition of How They Make Money.
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The ‘Serial Pauser’ Dilemma
Churn—the cycle of gaining and losing subscribers—is a critical challenge in the Subscription Video On Demand (SVOD) industry. A recent report from Antenna revealed that a third of canceled users resubscribe within six months, creating a new breed of “serial pausers.” This behavior highlights the uphill battle platforms face in retaining subscribers, particularly those relying on live sports (like Paramount+) and the occasional blockbuster show (like Max). As the fight for loyalty evolves, one truth stands out: there is Netflix—and then there is everyone else.
Today at a glance:
Trends and Market Share.
Disney: DTC Profits Rise
Comcast: Cable Restructuring
Warner: Box Office Woes
Paramount: Streaming Growth
For a glossary on SVOD, AVOD, OTT, DTC, and more, revisit our Industry Showdown article for an extensive market overview.
The chart below shows the paid subscriber trends in the past four years.
💡 Reminder: Some platforms, like YouTube Premium, Amazon Prime, and Apple TV+, don’t share quarterly numbers. Disney+ Hotstar is excluded for now due to its planned merger with Reliance in 2025.
The shift from linear TV to streaming has been a high tide lifting all boats. According to Nielsen, streaming accounted for 41% of US TV Time in September 2024, representing a 3.5-point increase year-over-year, eating away at Cable.
Key trends to watch:
🛑 Password-sharing crackdown: Following Netflix’s success with paid sharing, Disney launched the initiative in the US at the end of September. The impact will show in Q4 and beyond. Max will also start paid sharing soon.
📺 Amazon Prime Video is bigger than you think: CEO Andy Jassy shared earlier this year that the service has over 200 million monthly viewers globally. With a unique mix of exclusive shows, live sports, and a seamless integration with e-commerce, Amazon may leverage its ecosystem advantage to challenge Netflix.
▶️ YouTube remains the living room king: The platform accounts for over a quarter of US TV streaming time (excluding YouTube TV) and is still gaining share. Alphabet recently revealed YouTube ads and subscriptions generated over $50 billion in revenue in the past 12 months (compared to $38 billion for Netflix).
👨👩👧👦 Subscriber trends: Pillar content like the Olympics for Peacock or House of the Dragon for Max boosted sign-ups. However, questions remain about retention for every service not named Netflix.
Disney ends its fiscal year in September, so the June quarter was Q3 FY24.
🎬 Streaming Gains: Disney's direct-to-consumer (DTC) segment, including Disney+, Hulu, and ESPN+, posted a second consecutive profitable quarter with $321 million in operating income. Core Disney+ subscribers grew to 123 million, up 4.4 million, driven by strong uptake of ad-supported tiers.
🍿 Blockbuster Success: The Studio division achieved $316 million in profit, fueled by box office smashes Inside Out 2 and Deadpool & Wolverine. Disney became the first studio to surpass $4 billion in global box office revenue in 2024.
🏰 Parks and Experiences Challenges: Operating income for the Parks, Experiences, and Products segment declined 6% to $1.7 billion, impacted by rising costs, hurricanes, and competition from the Paris Olympics. Domestic attendance remained steady, while international parks faced softness.
📺 Linear TV Decline: Revenue for traditional TV networks dropped 6%, with profits falling 38% to $498 million, as cord-cutting and reduced ad sales weighed on performance. Disney remains committed to integrating linear and streaming rather than divesting assets.
🔮 Future Optimism: Disney forecasts high-single-digit earnings growth for FY25 and double-digit growth for FY26 and FY27. Upcoming releases like Moana 2 and Mufasa: The Lion King are expected to sustain momentum alongside expanded features like the ESPN tile on Disney+.
What to make of all this?
Disney’s Q4 showcased continued progress in its streaming turnaround, supported by blockbuster box office results. However, challenges in the Linear TV segments highlight the complexities of navigating a transitional media landscape. With a strong content pipeline and a focus on profitability, Disney appears well-positioned to rebound under Bob Iger’s leadership through 2026.
🎖️ Olympics Boost: The Paris Summer Olympics drove NBCUniversal’s revenue up nearly 37%, generating a record $1.2 billion in advertising and adding 3 million subscribers to Peacock, which now has 36 million paid subscribers
📈 Streaming Gains: Peacock revenue surged 82% year-over-year to $1.5 billion. Losses narrowed to $436 million from $565 million last year, signaling progress in its transition to profitability.
📉 Cable Challenges: Comcast lost 365,000 cable TV subscribers as cord-cutting accelerated. Revenue from its video segment fell 6.2%, prompting the company to explore a potential spinoff of its cable networks, including Bravo and CNBC, to focus on growth areas.
🎢 Theme Parks Cool: Theme parks revenue dipped 5% to $2.3 billion due to lower attendance, reflecting a post-COVID normalization in domestic park activity.
💻 Broadband Mixed Bag: Broadband lost 87,000 net customers, partly due to the end of a government subsidy program. However, revenue increased 3%, with average revenue per user climbing 4%.
What to make of all this?
Comcast's Q3 highlights the duality of its challenges and opportunities. The Olympics showcased the strength of its media and streaming assets, but struggles in legacy businesses like cable TV and theme parks remain evident. The proposed cable networks spinoff could help streamline its focus, but the road ahead will test Comcast’s ability to sustain momentum in Peacock and broadband amid fierce competition.
📈 Streaming Surge: Max added a record 7.2 million subscribers, reaching 110.5 million globally, driven by the international rollout and hits like House of the Dragon. The streaming segment posted a 9% revenue increase, contributing to Warner's first quarterly profit since 2022.
📉 Box Office Dive: Studio revenue fell 17% year-over-year, with theatrical revenue plummeting 40% due to a weaker film slate (Beetlejuice Beetlejuice and Twisters vs. last year’s Barbie). Video game revenue also dropped 31%, affected by tough comparisons.
📺 Mixed Network Results: Network revenue grew 3%, thanks to the Olympics broadcast in Europe and Shark Week, but advertising sales declined 13% amid cord-cutting challenges. The $9.1 billion NBA-related impairment from Q2 still looms over the segment.
🛠 Debt and Cost Pressures: Free cash flow fell 69% to $632 million, and Warner is grappling with $41 billion in debt. However, a renewed deal with Charter Communications signals strategic partnerships to stabilize the business.
🔮 CEO Optimism: David Zaslav emphasized Max’s strong momentum and reaffirmed confidence in achieving $1 billion streaming profits by 2025, hinting at password-sharing crackdowns to drive additional revenue.
What to make of all this?
Warner Bros. Discovery’s Q3 showcased significant streaming growth and its first profit in years, but its reliance on Max contrasts sharply with struggles in film and traditional TV. The path forward hinges on streaming profitability, international expansion, and adapting to cord-cutting pressures. With a heavy debt load and declining cash flow, can Warner find its path to financial stability?
📺 Streaming Success: Paramount+ added 3.5 million subscribers, driven by sports like NFL and UEFA and original programming such as Tulsa Kings, reaching 72 million subscribers. The streaming segment posted its second consecutive profitable quarter with $49 million in operating income.
📉 TV and Film Struggles: Revenue in Paramount's TV segment declined 6%, impacted by lower advertising revenue and declining cable subscribers. The film division's revenue plunged 34%, with theatrical revenue dropping 71% due to a weaker slate than last year (Mission: Impossible - Dead Reckoning in Q3 2023).
🤝 Merger Progress: The Skydance Media merger remains on track to close in the first half of 2025, marking a critical step in Paramount’s restructuring. The deal comes after Paramount explored 12 alternative bidders.
✂️ Cost Reductions: Paramount continues its $500 million cost-cutting initiative, having completed 90% of its planned reductions. The initiative has resulted in layoffs and asset write-downs.
🛠 Strategic Shift: Paramount seeks a joint-venture partner for streaming to compete with Netflix and Disney, while continuing to manage the decline of its legacy cable TV networks.
What to make of all this?
Paramount's streaming business shows promising growth, with sustained profitability and subscriber additions, but challenges persist in TV and film. The Skydance merger offers potential for transformation, though achieving stability in its traditional media businesses remains a significant hurdle.
Amazon Prime Video is part of the broader Amazon Prime subscription. We cover Prime Video in our Amazon coverage here.
We discussed Apple and Roku for PRO members here.
That’s it for today.
Stay healthy and invest on!
Disclosure: I’m long AAPL, AMZN, GOOG, NFLX, and ROKU in the App Economy Portfolio. I share my ratings (BUY, SELL, or HOLD) with App Economy Portfolio members.
Author's Note (Bertrand here 👋🏼): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
2024-11-12 21:03:22
Welcome to the Premium edition of How They Make Money.
Over 160,000 subscribers turn to us for business and investment insights.
In case you missed it:
Palantir CEO Alex Karp opened last week’s earnings call on a lighthearted note:
“Given how strong our results are, I almost feel like we should just go home.”
With shares surging over 23% in a single day, investors seemed to agree.
Last year, we explored Palantir’s story and leadership. At the time, we highlighted the potential of its Artificial Intelligence Platform (AIP) and the role of boot camps in accelerating commercial revenue growth. The premise was simple: Palantir helps its customers move from prototype to production faster, driving demand for its commercial products.
Here’s what we concluded a year ago:
“If AIP lives up to its potential, Palantir's financial performance could dramatically improve in the coming years. By harnessing network effects to drive new contracts and leveraging operational efficiencies for more software-like margins, the next few quarters are poised to reveal some significant insights. One thing is clear: this leadership team thinks the future looks bright.”
Since then, the stock has tripled. So, it’s time to revisit the story:
Why has Palantir’s stock risen over 250% this year?
Is the valuation sustainable?
Today at a glance:
Palantir Q3 FY24.
Recent business highlights.
Key quotes from the earnings call.
What to watch looking forward.
Disclosure: Palantir has been a holding in App Economy Portfolio since January 2024. I’ve added to my position multiple times this year, most recently in October.
For an explainer on metrics like net dollar retention, check out our article on the 7 traits to watch in cloud stocks.
Key metrics to watch:
Billings: Total customer invoices during the quarter, reflecting near-term revenue growth and demand.
Remaining Performance Obligations (RPO): Future revenue commitments from commercial contracts, a leading growth indicator. Government contracts typically have termination for convenience clauses that exclude them from the RPO scope.
Net Dollar Retention: A measure of revenue growth from existing customers, excluding new accounts. For Palantir, this metric surged thanks to strong AI adoption. However, it’s a lagging indicator using the trailing 12 months.
Let’s visualize the most recent trends.