[OPINION] Alphabet and Microsoft: Searching for AI Monetisation
It’s been a huge week for US stocks as four of the Magnificent 7 — which have been the driving force for the majority of gains in the S&P500 over the past year — delivered their earnings results last week.
Monday, February 5th 2024, 6:50AM
By Megan Stals, Market Analyst at Stake
While the hype around AI has been a key reason for driving collective upwards momentum in tech, earnings from Alphabet, Apple, Meta and Amazon suggest that we can expect to see certain names pull ahead of the pack in 2024.
Microsoft and Alphabet both showed strong numbers, but in the face of high expectations the stocks failed to rally in after hours trading. Google parent Alphabet exceeded earnings per share and revenue estimates, but search revenue narrowly missed expectations ($48 billion vs $48.15 billion), leading the stock to drop by around 6% in after hours trading.
While the miss on search was small, this may reignite fears that AI challengers could be slowly chipping away its search dominance. That said, the growth in Google Cloud improved this quarter, which bodes well for its ability to sell cloud services. Applications of its Gemini Pro large language model are just beginning to roll out, and this offers significant promise.
Microsoft on the other hand beat expectations across the board, and despite dropping 1% after hours, these results further support the narrative that the company is ahead in the AI race. The key highlight was its cloud division, which saw 30% revenue growth, in further evidence that it will continue to build momentum at the expense of AWS. We did not get specific numbers on revenue from its AI-powered Copliot product, but given Microsoft’s existing customer base in productivity software, there’s clearly potential for revenue growth if it can upsell to more users in 2024.
Despite the hype around AI, both results show that we are yet to see significant real revenue growth for this area just yet. However, given how numbers are already strong, this suggests that there are still big growth opportunities ahead for patient investors. Microsoft is clearly further ahead on its AI journey, but this is also reflected in its 40 times price to earnings ratio, compared to Alphabet at 29 times.
Apple’s Vision Woes
After losing its title of the world’s most valuable company to Microsoft, and seeing four successive quarters of revenue declines, Apple (AAPL) entered into earnings season with something to prove. While results broke its revenue downtrend with a 2% annual increase in sales, it’s still not clear how Apple will accelerate growth back to double digits.
Despite Apple seeing better than expected iPhone sales, its 13% revenue drop in China looks problematic as competitors such as Huawei and Samsung continue to reclaim market share — partly down to China’s ban on government employees using iPhones. Revenue from its services segment, which contains platforms such as Apple Music, Apple TV and
Apple Pay, also fell below analysts expectations. Services are a key part of Apple’s future growth story, so investors will be hoping for more.
While the results still show that Apple is a solid business, it needs a clearer growth narrative to catch back up to Microsoft’s market cap. That said, the company’s Vision Pro headset, which is set for release tomorrow, may give reason for the bulls to stay optimistic. Many investors will be sceptical given the lacklustre results from Zuckerberg’s Metaverse, but
Apple does have a history of bringing tech innovation to mainstream adoption due to their strong ecosystem combining products and services.
Meta takes the earnings crown
Of all of the tech earnings this week, Meta was the standout, boasting a huge sales increase of 25%, $50bn of share buy backs, and its first ever dividend. The stock experienced a slight dip earlier this week, seemingly in retaliation to Google’s disappointing ad revenue, but has since surged 15% in after hours trading. Meta is also investing heavily in AI, which could improve engagement with its social media platforms and improve ad revenue over the long term.
A merry Christmas for Amazon
Amazon showed strong results thanks to its ecommerce business, driven by a strong holiday season, and its significant cost cutting exercises beginning to bear fruit. Amazon’s newly released AI shopping assistant, Rufus, could help temper concerns that Amazon is falling behind when it comes to AI, and its retail advertising business continues to be strong.
Interestingly, growth in its cloud division AWS met rather than exceeded expectations, with revenues of $24.2bn. While Amazon expects this to pick up, the rise of Microsoft Azure is an ongoing threat and something that investors should watch.
How investors reacted
It’s clear that investors are still positive on most of the stocks we saw reporting last week. Since earnings, Google has seen twice the number of buys compared to sells, while Microsoft has seen five times the number of buys to sells. Meta and Amazon have also seen a spike in buying activity, yet there was notably less enthusiasm for Apple stock.
« What does the rest of 2024 have in store? | AI: The great acceleration » |
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