Alphabet, the parent company of Google, is set to spearhead a significant series of mega-cap tech earnings announcements this week. Five of the world’s largest firms, with a combined investor value of approximately $12 trillion, will release updates for the September quarter, with a particular emphasis on plans for AI investment.
The tech stocks known as the “Magnificent 7,” accounting for about 20% of the S&P 500, have contributed substantially to the benchmark’s gains this year amid a widespread AI investment surge. AI is widely seen as the most impactful advancement in tech markets since the advent of the internet.
However, the group of mega-cap companies has underperformed compared to other sectors in the past three months, collectively declining by 3.5% since early July. Investors have shown reluctance in response to the substantial capital expenditures required to achieve the ambitious goals of these companies. Instead, mid-cap and defensive stocks have been favored, as they tend to perform better in a lower interest rate environment.
This week, AI spending plans will continue to take center stage as Alphabet, Meta Platforms, Microsoft, and Amazon, commonly known as hyperscalers, report their September quarter earnings over the next four days.
Apple is also set to release its fiscal fourth quarter update, scheduled for after the close of trading on Thursday. While AI will be a key focus for investors, the demand outlook for its recently launched iPhone 16 is expected to be a major factor for short-term performance.
“The significance of this week in terms of earnings cannot be overstated, as five of the largest global companies will be reporting,” commented Jay Woods, chief global strategist at Freedom Capital Markets. “Within a span of three days, five of the top six market cap companies are set to report.”
Capital expenditures will continue to be a major focus due to strong AI demand, added Woods. “The industry is aware of the substantial spending, but the question is whether we are beginning to see the benefits of these investments.”
AI-related technologies are anticipated to drive revenue growth for nearly all major tech giants in the coming years, as companies aim to leverage vast datasets to boost sales across various sectors, from dining to complex pharmaceutical testing.
These endeavors necessitate significant investments in computing infrastructure, frequently based in virtual cloud computing environments developed and managed by hyperscalers like Alphabet’s Google Cloud, Microsoft’s Azure, and Amazon Web Services (AWS).
According to MTN Consulting, the four primary hyperscalers accounted for around 80% of a record surge in tech capital spending plans during the second quarter, which saw a 51% increase from the previous year. At this rate, annualized spending is estimated at $226 billion, as hyperscalers acquire servers for existing and upcoming data center facilities.
Meta’s finance chief, Susan Li, indicated that their company’s 2024 capital expenditures might rise to between $37 billion and $40 billion, with further significant growth anticipated in 2025.
Conversely, Google’s Ruth Porat noted that quarterly capital expenditures this year would be consistently around or above the first quarter’s $12 billion tally. Amazon’s Brian Olsavsky mentioned that 2024 spending would be “higher in the second half of the year,” primarily aimed at supporting the growing demand for AWS infrastructure amid ongoing strength in both generative and non-generative AI workloads.
Despite these spending plans, revenue gains for the five mega-cap tech companies have been overshadowed. Meta reported a revenue growth of 24.3%, closely approaching its 33.4% surge in capital expenditures, recorded at $8.472 billion.
This could explain why Meta shares have outperformed other hyperscaler peers such as Microsoft (up 6.5%), Amazon (up 4.6%), and Google (flat) over the past six months.
“As the market giants prepare to release their latest earnings, the focus is not only on revenue figures but also on how AI spending is transforming the companies’ future prospects,” remarked Lukman Otunuga, senior market analyst at FXTM in London.
“The potential for volatile price movements this week marks a crucial phase for these stocks, highlighting the market’s sensitivity to both AI developments and broader economic pressures,” he added.
Post-earnings movements are likely to be linked to updates on capital spending and the timeline within which these prominent tech firms anticipate monetizing their AI strategies. The earnings growth from core business units, such as advertising at Google and Meta, and cloud computing at Microsoft and Amazon, will need to bridge the gap in the meantime.
This is also applicable to Apple, although immediate concerns focus on its ability to boost iPhone 16 sales. The iPhone 16 is perceived as integral to Apple’s broader AI initiatives, sharing development costs with app developers and search engine providers like Google and Microsoft.
“In essence, investors are keen to see AI monetization extending across the tech landscape, with the upcoming weeks serving as a pivotal moment to confirm the onset of the AI ‘use case phase’ within the enterprise sector,” stated Wedbush analyst Dan Ives.
“It begins with Big Tech, representing merely the tip of the iceberg for this 1995 Moment, but distinctly not akin to the 1999 Tech Bubble moment, as the substantial tech capital expenditures pave the way for this tech bull market persisting into 2025,” he concluded.