This week, five technology giants from the “Magnificent Seven” – Apple, Alphabet, Amazon, Meta, and Microsoft – will publish their financial results, and investors will be keenly tracking information about their key business sectors such as advertising and cloud services. However, spendings on AI and their tangible effects will be even more important. These companies, with a total market capitalisation of $12 trillion, have driven market growth this year, which makes their results crucial for the ongoing bull market in stocks. Investors using the Saxo platform perceive the tech sector as the one that will perform best in the last quarter of the year. It is worth noting, however, that just over 20% of respondents pointed to it, while in previous quarters this value was over 30%.
Charu Chanana, Head of Currency Strategy Department at Saxo Bank, analyses the situation of the tech giants.
Since reaching its peak on 10 July, the gap between large tech companies and the rest of the market has begun to shrink, a result of more detailed analysis of the effectiveness of their AI spending. Microsoft, Alphabet, Amazon, and Meta increased their investment expenditures in the third quarter, allocating a total of $56 billion to the development of areas such as AI, a 52% increase y/y. Although the transformational potential of AI is widely recognised, investors are starting to question when and on what scale these significant investments will pay off. This financial results season may prove to be a crucial test for the mega-market-cap leaders, many of whom (except for Apple and Meta) have not yet recovered their July highs, even though their valuations exceed historical norms and the valuation of the broader market.
Alphabet: Growth driven by advertising and the cloud, but spending on AI remains significant
– Results publication: Tuesday (October 29), after the close of trading
– Estimated revenues: $86.44 billion (versus $76.69 billion in Q3 2023)
– Estimated EPS: $1.84 (vs $1.55 in Q3 2023)
– Estimated capital expenditures: $12.88 billion (+60% y/y)
– Key growth drivers: revenues from YouTube and search engine advertising, development of cloud services
– Key risks: regulatory oversight related to monopolistic practices, long-term risk to Google’s search engine business, competition from Meta’s AI search engine, growth of Waymo (autonomous car business) following recent agreement with Uber.
– Other comments: Alphabet’s position elicits relatively moderate expectations. The company has underperformed the S&P 500 index since the second quarter, mainly due to ongoing regulatory concerns. However, this may present an opportunity if financial results show growth in AI and cloud areas despite these adversities.
Meta: AI-optimized ads provide an edge
– Results publication: Wednesday (October 30), after the close of trading
– Estimated revenues: $40.26 billion (vs $36.15 billion in Q3 2023)
– Estimated EPS: $5.25 (vs $4.39 in Q3 2023)
– Estimated capital expenditures: $11.03 billion (+69% y/y)
– Key growth drivers: ad revenue and profitability, driven by AI optimization of Meta, which increases efficiency for advertisers
– Key risks: Return on investment in AI, slowing economic growth
– Other comments: With Meta’s current stock price close to record levels, expectations are high, and any signs of a slowdown in ad spend due to weakening consumer confidence may impact sentiment. It will be crucial for Meta to demonstrate that investments in AI effectively translate into revenue growth.
Microsoft: Growth of Azure, and costly expansion of AI
– Results publication: Wednesday (October 30), after the close of trading
– Estimated revenues: $64.52 billion (vs $56.52 billion in Q1 FY2024)
– Estimated EPS: $3.11 (vs up to $2.99 in Q1 FY2024)
– Estimated capital expenditures: $14.55 billion (+47% y/y)
– Key growth drivers: Development of Azure
– Key risks: Prospects and costs related to AI, competition from Meta’s AI search engine, drop in margins due to data center expansion, adoption of Copilot.
– Other comments: Although Microsoft’s Azure growth remains solid, the market will closely monitor capital expenditures related to AI. Key to stock performance will be maintaining or growing margins despite heavy investment in AI infrastructure.
Apple: Limited exposure to AI, but service revenues in focus
– Results publication: Thursday (October 31), after the close of trading
– Estimated revenues: $94.31 billion (vs $89.50 billion in Q4 FY2023)
– Estimated EPS: $1.59 (vs $1.46 in Q4 FY2023)
– Key growth drivers: Lower than competition spendings on AI, strong growth in service revenues
– Key risks: Signs of weakening demand for the latest iPhone, popularity of Apple Intelligence, production limitations of Vision Pro.
– Other comments: Apple’s high stock price, close to historical highs, sets the expectations bar higher, especially amid weakening consumer spending. Strong results and forecasts for service revenue, not AI, will be key to justifying current valuations.
Amazon: Short-term AI costs vs long-term potential
– Results publication: Thursday (October 31), after the close of trading
– Estimated revenues: $157.29 billion (vs $143.08 billion in Q3 2023)
– Estimated EPS: $1.16 (vs $0.94 in Q3 2023)
– Key growth drivers: AWS, e-commerce, and digital advertising sales.
– Key risks: Forecasts for investment expenditure, which could lower earnings, especially in the context of the satellite initiative, Kuiper Project.
– Other comments: Amazon’s growth in AWS and advertising sales remains solid, but high capital expenditures could put pressure on profitability. Given a possible decline in advertising budgets due to weakening consumer confidence, Amazon’s guidelines for costs and investments in AI will be closely analysed.
What do the financial results of the giants mean for Nvidia?
Constant investment expenditures (capex) for the development of artificial intelligence, borne by technology giants like Alphabet, Amazon, Microsoft, and Meta, are a double-edged sword. On the one hand, they can accelerate these companies’ growth and strengthen their competitive advantage in the AI field. On the other – they put pressure on profitability, especially as investors start to question the return on these huge investments.
For Nvidia, however, the continuation of these expenditures is unequivocally beneficial as it directly translates into demand for its advanced graphics processors (GPUs), which are key to handling AI tasks. As long as the tech giants remain committed to developing their AI infrastructure, Nvidia has a chance to benefit as a preferred supplier, securing its growth path, even if some tech giants feel profitability pressure.
While continued capex from big tech companies is undoubtedly a growth factor for Nvidia, there are potential risks that could limit this potential. Supply constraints, particularly for Nvidia’s upcoming Blackwell chips, could limit its ability to meet rising demand from AI-based projects. Additionally, competition in the AI hardware sector is increasing, as companies like AMD and Google are developing their own AI chips, which could ultimately affect Nvidia’s market share. Finally, if regulatory oversight of AI or tech spending tightens, it could weaken the capex budgets of big tech companies, indirectly impacting Nvidia’s sales forecasts. Despite these risks, Nvidia remains well positioned as a key beneficiary of the current AI boom. It is worth remembering that Nvidia will announce results on November 20.
Source: https://ceo.com.pl/giganci-technologii-publikuja-wyniki-inwestycje-w-ai-pod-lupa-inwestorow-87244
