By Jess Jones
Big Tech earnings have rolled around again. Amid a challenging year on Wall Street and a global dip in hardware sales, market analysts are looking to the tech juggernauts for signs of growth and stability, with a focus on cloud businesses, artificial intelligence (AI) and changes to capital expenditure (capex).
Microsoft and Alphabet, the parent company of Google, are set to kick off the earnings parade on Tuesday, reporting first and third-quarter results, respectively. Both companies have seen their stock prices rise over the past year, with Alphabet’s value surging by 50 per cent and Microsoft’s by 36 per cent.
Microsoft
Microsoft’s diversified business model places it in the better position among its rivals, according to Damindu Jayaweera, technology analyst at Peel Hunt.
He said: “While the consumer facing side of things (e.g. video games hardware and software) might see weakness, in anticipation of all the AI related office-upgrades, we are sure it will have positive commentary around demand for things like Microsoft 365 as companies are starting to consolidate (e.g. Zoom vs Teams) their technology spend.”
Its close relationship with OpenAI also makes it a “better pick-and-shovel play” on AI, making it a top choice for enterprises.Copilot – Microsoft’s AI offering for businesses – is currently in its beta phase and analysts are hoping for a steer on how demand and pricing has gone down with initial users.
Alphabet
Google got off to an anticlimactic start in the AI department with the flop of chatbot Bard earlier this year, but it will soon launch Gemini – a multimedia AI model that can process text, images and audio – hoping to patch up some of the reputational damage.
It is also competing on the cloud stage with Amazon AWS and Microsoft Azure. Last quarter, Google Cloud turned its first profit of $191m after 15 years, although this was only a 2.5 per cent profit.
“Investors will be looking for that to have continued,” said Lund-Yates. There is “cautious optimism” for cloud growth but investors will be watching to see if companies are trimming their spending here – she suspects they are.
“Advertising will remain the main driver of investor sentiment for Alphabet,” Lund-Yates continued, adding that Youtube will be important to watch as it now has a higher share of US screen time than Netflix.
Meta
As for Meta, which reports third-quarter results on Wednesday, it is focusing on ramping up AI integration within its advertising platform, Advantage+.
With more precise targeting, “AI is helping advertisers get better returns”, said Ben Barringer, equity research analyst at Quilter Cheviot.
“And the digital advertising environment looks quite buoyant at the moment thanks to the move away from linear television,” he added.
Shares in the Facebook owner have skyrocketed nearly 150 per cent year-to-date but the issue for Mark Zuckerberg’s company is its cost guidance, usually given this time of year.
“Now Meta is on better footing, does that mean a big ramp in costs?” asked Barringer.
For a while, some were worried Zuckerberg was excessively investing in his Metaverse dream, and debate over ‘good’ versus ‘bad’ capex is set to continue this quarter.
Amazon
Amazon, while maintaining its status as a cloud giant, faces stiff competition in AI-related cloud services. Its efforts to catch up in generative AI have not yet dented the market share dominance of Microsoft and Google in this sector. [said]
The company’s cloud business, AWS, will also be scrutinised for signs of reaccelerated growth and stabilising demand.
But its e-commerce performance, particularly during recent Prime Day events, may hold the key to its financial outlook.
Barringer said retail margins will be “closely watched”, and investor natter will be about how much of a threat Chinese-giant Temu poses to Amazon’s retail business.
Amazon has hired 250,000 extra workers to deal with the Christmas period, 100,000 more than last year. Lund-Yates said this is a “bullish” move and suggests Amazon is confident in demand.
“Amazon has been caught out by overspending in the past though, and bulking out the workforce to this degree does increase risk should performance disappoint – a risk the market would punish the group for,” she said.
It will post a third-quarter update on Thursday before Apple’s fourth and final quarter rounds off the slew of earnings next week.
Chips galore
A crucial point of interest for investors is the capex across these tech giants, as they invest heavily in Nvidia GPU chips and AI infrastructure.
Jayaweera of Peel Hunt compares this tech spending frenzy to the historical British rail bubble of the 1840s: “these guys are the rail operators currently overbuilding capacity”.
“Whether the market lauds the AI spend, or baulks at it given likely low ROI, remains to be seen.”
In a year that has seen the tech giants significantly buoy the broader stock market, these upcoming earnings reports are a litmus test for what is to come.
A strong performance by Meta, Google, Amazon, Microsoft, Apple, Nvidia and Tesla will be essential to maintain market stability, especially considering the adverse movements in theUS Treasury market, said AJ Bell investment director Russ Mould.
“The environment needs to be helpful and Big Tech needs to deliver, or there could be trouble ahead.”
