Big Tech faces earnings test after AI spending spree
Alphabet, Microsoft and Amazon will report earnings over the next two weeks as investors look for evidence that years of record spending on AI are beginning to generate stronger revenue growth.
The three companies have led the AI investment boom, committing billions of dollars to data centres, chips and software.
Their latest results are expected to show whether that spending is starting to deliver commercial returns, after suppliers such as Nvidia and ASML have outperformed many of the companies funding the buildout.
“The largest change this quarter is the market’s declining willingness to reward AI spending simply because it is large”, analysts at StoneX said.
Instead, investors are increasingly looking for evidence that AI investment is generating revenue quickly enough to justify another wave of capital spending, the analysts added.
Google reports first on Wednesday, followed by Microsoft and Meta the following week, before Amazon and Apple round off the busiest week of the reporting season.
Big Tech eyes growth
Google enters earnings in the strongest position after shares climbed almost 19 per cent this year.
I/O Fund analysts said the company had shown the clearest signs that AI investment was feeding through into its core business, pointing to Google Cloud’s accelerating growth and stronger demand for AI-powered search and advertising products.
“Cloud and Search are Google’s two key AI growth levers,” the analysts said, adding that continued acceleration in cloud growth and wider adoption of AI-enabled ad campaigns would be “critical” to showing the company’s AI monetisation “is here to stay:.
Microsoft faces a tougher set of questions, and despite reporting that its AI business has grown to more than $37bn in annual recurring revenue, Azure cloud growth has remained broadly unchanged over the past year, lagging rivals including Google Cloud and Amazon Web Services.
For StoneX, accelerating Azure growth is one of the most important numbers to watch, while I/O Fund said Microsoft’s latest results would need to show its heavy investment was translating into stronger cloud demand rather than simply higher costs.
Amazon, meanwhile, heads into earnings after AWS posted its fastest growth in almost four years.
I/O Fund said AWS remained the retailer’s “main AI growth driver”, pointing to continued acceleration in cloud demand alongside rapid growth in its AI chip business.
Beyond the individual companies, several strategists said guidance could prove more important than headline earnings.
Goldman Sachs expects another strong reporting season for US technology companies, forecasting that AI-related businesses will account for the majority of earnings growth across the S&P 500.
But the bank said investors were now asking a different question than they were a year ago, focusing now on whether that copious spending is becoming “a sustainable earnings driver”.
Tyler Mordy, chief executive and chief investment officer at Forstrong Global, said investors were increasingly assessing whether Big Tech’s capital spending would “translate into stronger AI-related revenue and earnings”, even as the broader investment cycle remained intact.