4 months ago • 5 mins
Investors are on a knife’s edge. Big Tech served up about as many treats as tricks in its quarterly updates last week. But major indexes slid, pulled down by Alphabet, Meta, and Apple. And there’s another monster week ahead.
Microsoft delivered a quarterly report card worthy of being stuck to the front of the fridge, with cloud-driven revenue growth and profit that surpassed analysts’ expectations. Amazon also aced its quarter, seeing its profit actually triple, with straight-A revenue gains across its cloud business Amazon Web Services (AWS), advertising unit, and retail. Alphabet’s results, while a solid B+, fell short on the all-important cloud metric, which grew at only (only) 22%, compared to Microsoft Azure’s 28%. But Alphabet did score good grades in advertising revenues. Meta, meanwhile, like a student not living up to its potential, seemed to disappoint investors. But its results weren’t actually bad, with revenue growth jumping 23% and the company even signaling its willingness to cut more costs during its big “year of efficiency”.
On the macro front, it was a case of oceans apart between the US and everyone else. European economies appear to be teetering on the edge of recession – look no further than the three-year low in PMI data for evidence – but the US economy, by comparison, is beaming. The better-than-expected 4.9% third-quarter US economic growth (and still-above-target inflation) might pile pressure on the Federal Reserve to go back to raising interest rates, even as slow-going European economies have pushed the European Central Bank into a rate-hike hiatus. And then there’s China, which is fighting its own battle against faltering economic growth and a potentially more treacherous foe than inflation – deflation. But a series of baby step measures, including lower bank reserve requirements and lower interest rates (both aimed at encouraging lending), plus last week’s latest gambit – added government spending – might just be enough. After all, recent economic data has suggested the economy could be ready to turn up.
Away from Big Tech and big economic data, mergers and acquisitions have made a bit of a comeback. US oil giant Chevron announced a $60 billion acquisition of Hess (the second massive oil deal this month after Exxon’s $65 billion merger with Pioneer), and Swiss pharma company Roche chipped in with a $7 billion purchase of Telavant. M&A activity doesn’t move markets on its own, of course, but a rise in dealmaking is a sign of confidence returning in the boardroom. And that’s worth taking note of.
The subtext for a lot of these Big Tech results is – yup, you guessed it – AI. Alphabet’s stock got slapped down last week partly because investors saw its cloud revenue slowdown as a sign that its AI game is weak. And there might be some truth to that. Spending related to generative AI added three percentage points to Microsoft Azure’s 28% growth, proving that the software giant’s still out in front. What’s more, its Copilot software has only just landed, and the AI assistant tool could bring in hundreds of millions of dollars all on its own.
But all hope is not lost for Alphabet. Earlier this year, investors feared that a resurgent AI-powered Bing (Microsoft’s search engine) would start to nibble at Alphabet’s ad revenues. But judging by Alphabet’s 11% ad sales growth, that business is not exactly in peril. In other words, so far, AI doesn’t appear to be hurting Alphabet’s results, but it’s got work to do to turn the technology to its advantage.
For the other three tech behemoths – Meta, Amazon, and Apple (which has not yet reported) – AI is still just bubbling under the surface. Meta’s in spending-and-building mode, offering only glimpses of what it’s up to behind the scenes. (For example, this Lex Fridman podcast with Mark Zuckerberg conducted completely in the metaverse. Very cool.) Amazon, meanwhile, recently bought a stake in AI startup Anthropic, a competitor to OpenAI. That adds Claude 2, a ChatGPT look-alike, to Amazon’s arsenal and could augment its cloud revenues too. As for Apple, well, no one knows how AI might infiltrate our iPhones, laptops, and smartwatches. But you can bet your life that Apple is planning something more than just a souped-up Siri.
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