What the latest 'Big Tech' results reveal about AI

Big tech companies are planning further spending increases as they continue to race for dominance in the field of artificial intelligence (AI). The recent financial results are META (US:META), Alphabet (US:GOOG) and Microsoft (US:MSFT) Although all of these investments exceeded market expectations, not all of them received a positive response from the market.

Meta was the first company to report, and on the surface its performance was promising. Revenue for the three months ended March rose 27% from a year earlier to $36.5 billion, beating the FactSet brokerage consensus estimate of $36.1 billion. Even more impressive is his 114% increase in earnings per share as headcount reductions kept operating costs in check. Most notably, marketing and sales costs decreased 16% to $2.6 billion.

However, despite this strong performance, Meta's stock price has fallen 15% over the past week. This is because the company has raised its full-year capital investment outlook to $35 billion to $40 billion, from the previous range of $30 billion to $37 billion. The company said this was to “accelerate infrastructure investments to support our artificial intelligence roadmap.”

However, there are also concerns about how long it will take to see a return on this spending. On the earnings call, CEO Mark Zuckerberg said the company needs to “meaningfully expand its investment horizon before we can generate significant revenue from some of these new products.” Meta uses AI to promote relevant content to users to keep them online longer, and it seems to be working. Currently, 30 percent of Facebook posts and more than 50 percent of Instagram posts are served by AI. This increased his average daily user count by his 7% and his price per ad by his 6% in the quarter.

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Meta is also integrating AI chat bots into apps like WhatsApp, Instagram, and Facebook, and expects usage to continue to grow and the additional scale to be monetized.

To calm analysts' minds, Zuckerberg pointed to other times when the company invested in new projects such as Instagram Reels and Stories, as well as Facebook, which ultimately turned out to be highly profitable. pointed out the shift to mobile apps. “We have historically experienced large fluctuations in stock price at this stage of our product strategy. We are investing in new product expansion, but we are not yet profitable,” he explained.

Jefferies analyst Brent Till believes Meta's historic performance means investors need to have confidence in the company's ability to turn investments into profits in the future. . “We are confident in Meta's proven ability to successfully scale and monetize new products, and we look forward to Meta's ability to use AI to do just that,” he said.

Microsoft and Alphabet, which had already significantly increased spending last year, also raised their capital spending forecasts in their quarterly results. The company's stock price initially rose after the announcement. Microsoft has since returned profits, but Alphabet's announcement of its first dividend sent its stock up 6%.

Analysts' view is that Microsoft and Alphabet both have clearer paths to profitability than Meta. “Meta's AI investments have increased engagement and advertiser return on investment, increasing marketing budgets on the platform, but are also being invested in new products such as Meta AI and Llama that have not yet been monetized. ” he said Thill.

Meanwhile, Microsoft is capitalizing on AI demand through its cloud computing division Azure, which allows businesses to train their own AI models. Microsoft's Azure revenue rose 31% year over year, beating broker consensus estimates of 28%. Encouragingly, 7 percentage points of this growth came from AI products, up from 6 percentage points in the previous quarter and 3 percentage points in the quarter before that.

This growth might have been faster if the company had not faced capacity constraints. “Currently, near-term AI demand slightly exceeds our available capacity,” Chief Financial Officer Amy Hood said on an earnings call.

That claim means Melius Research analyst Ben Reitz isn't concerned about the company's “monster” capital expenditures. He expects quarter-over-quarter capital spending to continue to increase and exceed $60 billion in fiscal 2025. This is more than double the $28.1 billion Microsoft spent in the year ending June 2023. But he believes demand for cloud services “supports the 'AI gold rush' we're seeing with staggering capital investment and spending prospects.”

Microsoft's strength is that it is already one of the largest enterprise software providers, with over 400 million users of its Office 365 products. Reitzes said the real meaning of Microsoft's strategy is to create a new computing interface for AI through which all AI tools will flow, just as Windows has become the interface by which most office workers interact with computers. I believe that it lies in creating.

“The key here is that this tool provides a way to handle the entire customization and management lifecycle of non-Microsoft First Officers within one platform,” he explained.

The fact that Microsoft's forward price-to-earnings (PE) ratio is trading at 31 compared to Meta's 21 and Alphabet's 22 points to the fact that the market believes the company is leading the AI ​​race. ing. But Alphabet's results suggest that Google is acting in concert. Alphabet's revenue rose 15% year over year to $80.5 billion in the first quarter, and its operating margin expanded 7 percentage points to 32%, beating the consensus brokerage estimate of 28%.

Meanwhile, the cloud computing business grew 28% to $9.5 billion, and cloud operating income jumped from $191 million to $900 million. Sales growth exceeded expectations of 25%. Although the company did not outline AI's exact contribution to these numbers, CEO Sundar Pichai said that “60% of funded generative AI (GenAI) startups and nearly all GenAI unicorns 90% are Google Cloud customers.” .

Like Meta and Microsoft, Alphabet had capital expenditures of $12 billion in the quarter, beating expectations of $9.9 billion. “The strong year-over-year increase in capital spending in recent quarters reflects our confidence in the opportunities that AI presents across our business,” said Ruth Porat, Chief Financial Officer.

AI grabs the headlines, but these spending are only possible because each of these companies has a near-monopoly in their respective industries. Meta's advertising sales increased by 27%, Google's search sales increased by 14%, and Microsoft's commercial software sales increased by 13%. All of this can be funneled into computing hardware.

There are no clouds in the Amazon

Amazon (US: AMZN) Amazon Web Services' cloud computing division reported a 17% year-over-year increase in revenue, ending a strong quarter. The company highlighted a number of initiatives it has been working on around AI, including a partnership with Nvidia. We also touched on our proprietary AI chip, Trainium, which is used by customers like Anthropic and Databricks.

Outside of computing, cost reductions and revenue growth helped boost earnings per share (EPS). North American and international sales increased 12% and 10%, respectively, compared to the previous year. Meanwhile, operating expenses increased by just 4%. This led to an EPS increase of more than 200% to $0.98, beating the FactSet brokerage consensus estimate of $0.84.

chip designer Nvidia (US: NVDA) The stock continued to rise on the back of these capital spending numbers, which is not surprising given that most of these companies buy graphics processing units (GPUs) from the company. . The company's stock price has recently fallen from its highs, but it has risen 5% over the past week.

This huge expense is TSMC (TW:2990) Recent income. The Taiwan-based chip manufacturer predicts that revenue from AI will grow at an average rate of 50% per year over the next five years, reaching more than 20% of revenue by 2028. There is.

Pessimists would argue that these companies shouldn't bet so much on technology whose benefits have yet to be proven. Optimists will say their confidence is proof that the technology is innovative. Either way, these results should satisfy the market for at least another quarter.