April 15, 2024

Investors will look for AI-driven gains during Big Tech earnings season

Investors will be looking for signs that the multibillion-dollar investments made by big tech companies to develop artificial intelligence are translating into financial gains, as the “Magnificent Seven” report their annual earnings in the coming days.

Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia and Tesla propped up the S&P index of blue-chip U.S. companies last year as investors became excited about the potential of AI, generating 62 percent of its total returns for the year. 26 percent by 2023. The S&P 500 closed at a record high on Friday after a dizzying rally in technology stocks.

Six of the seven companies (excluding Tesla, whose earnings are expected to decline) will drive most of the earnings growth across the S&P 500 when they report their fourth-quarter results over the next two weeks, according to Bank of America analysts. . They added that year-over-year fourth-quarter earnings across the index would have declined without the six companies.

Excitement for Big Tech stocks has accelerated thanks to the hype around generative AI (systems that can generate human-like text, images and code in a matter of seconds), and the cutting-edge technology promises massive productivity gains. and at the same time will revolutionize entire industries. Its shares made an average gain of 105 percent over last year.

During the upcoming earnings season, investors will closely monitor the divergent fortunes between companies, for signs of which group is moving fastest to benefit from the AI ​​boom.

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“All investors will be focused on Microsoft’s earnings in the last week of January, because it is a preview of what is to come for the rest of software and chips over the next 12 to 18 months,” said Daniel Ives, research analyst. from Wedbush Securities. . “This is a key period that sets the stage for who will win in the AI ​​arms race.”

Microsoft and chipmaker Nvidia have been at the forefront of the AI ​​revolution so far. Microsoft kicked off a flurry of deals between big tech companies and AI startups when it announced a $10 billion investment in OpenAI last year, becoming the biggest backer of the makers of the AI-powered chatbot ChatGPT.

Revenue from Microsoft’s subscription AI software Copilot and cloud computing service Azure, both set to grow from the group’s integration with OpenAI technology, will be closely watched as an early barometer to take take advantage of artificial intelligence in 2024.

The recent tumult at OpenAI, where Sam Altman was ousted as CEO before being quickly reinstated, appears to have little effect on investor appetite for Microsoft, which has once again overtaken Apple as the world’s largest company by value. market this month. Meanwhile, shares of Nvidia, maker of market-leading AI chips, gained 239 percent last year, on the verge of surpassing Amazon’s market capitalization of $1.6 trillion.

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While Microsoft and Nvidia have been the first to show clear revenue growth resulting from their AI products, analysts will closely monitor whether other big tech groups will update their financial forecasts this year as their AI investments begin to pay off. fruits.

Competitors such as Google, owned by Meta and Alphabet, have unleashed a wave of spending on artificial intelligence startups and internal research and development as they rush to integrate the technology into their products.

Also under scrutiny will be groups forced to reinvest to address greater growth opportunities in AI, such as increasing spending on high-end chips that are in short supply.

Google launched its first standalone AI consumer product in May with its Bard chatbot, followed by a second-generation model called Gemini in December. But critics said the company had been limited by its hugely profitable search business and wary of introducing generative AI products that could cannibalize its business model.

Meanwhile, Apple and Amazon have been slower to announce major public investments in AI, but are prepared to launch products that could be seen as a play to catch up.

“Microsoft clearly has an advantage in OpenAI integration and companies like Alphabet and Amazon are doing everything they can to catch up,” said Colin Sebastian, senior research analyst at Baird.

The fourth-quarter results will cap a year of resilience for Big Tech after the post-pandemic slowdown in 2022 forced companies into layoffs and deeper cost cuts early last year.

Amazon Web Services, Microsoft and Google have benefited from growth in global business spending on cloud services, while Meta and Google were boosted by rising advertising and consumer spending as concerns about a economic recession at the end of 2023 did not materialize.

There have been hundreds more job cuts this month at companies like Google and Amazon, in some cases to cut costs while boosting investment in AI. But they are much fewer than in January 2023, when Google, Meta, Microsoft and Amazon laid off between 6 and 13 percent of workers, indicating a more buoyant start to the year for the sector.

Profits at Nvidia, Amazon, Meta, Google, Microsoft and Apple are expected to slow to 33 percent year-over-year growth in the first quarter of this year, according to analyst consensus estimates. Tesla shares have plunged so far this year ahead of fourth-quarter earnings after analysts revised earnings estimates downward.

The rush of AI investments in 2023 is expected to be followed by the integration of the technology into more applications this year, which could dramatically change the landscape of successful AI products.

Analysts at Jefferies predicted that Amazon would launch an “all-out AI catch-up offensive” this year. In November it launched Amazon Q, an artificial intelligence-powered assistant for users of its cloud services.

Apple is rumored to be accelerating its generative AI efforts this year, including the possibility of an iPhone that can run large language models despite the devices’ limited memory. In October it quietly launched an open-source artificial intelligence model, “Ferret,” that is capable of understanding images.

“Google and Amazon experienced strong cloud activity this quarter due to the aggressive shift toward AI across the company. [business]”Ives said. “That’s where the use cases [for AI] explode, and where [the companies] start benefiting significantly in terms of real monetization.”

Additional reporting by Nicholas Megaw

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