The artificial intelligence (AI) boom has hit a stumbling block in the latest reporting season, with some stocks struggling to impress investors.
While Alphabet has so far been the standout winner, Microsoft, Meta and Tesla have all underwhelmed, largely due to the vast amount of capital expenditure (capex) required in the great AI arms race.
AJ Bell investment director Russ Mould said: “It’s earnings season and, with some great expectations baked into Mag Seven prices, all eyes are on the technology sector to see if it can deliver the goods. So far, the AI trade got a bit of a reality check.
“Talks of an AI bubble are now part of the furniture, but only time will tell if future earnings can justify current share prices. There is some consolation in the fact that there have been mixed reactions to big tech earnings so far. That shows at least that the market still has some powers of discrimination.”
Below, Trustnet rounds up all that investors need to know about the latest earnings results from the tech giants.
Alphabet
The big winner of the past week or so has been Google owner Alphabet. Total revenue rose 15% to $102.4bn, boosted by the core advertising business, which includes Google Search and YouTube, and strong revenue in its Cloud products.
Matt Britzman, senior equity analyst at Hargreaves Lansdown, added: “Alphabet delivered a record-breaking quarter, proving its core search and cloud businesses remain resilient in the face of AI disruption.”
Mould added that investors “gave the thumbs up” to the numbers, with a jump in Gemini users and increase in core advertising revenues “assuaging fears that Google might succumb to newer ways of scouring the internet, powered by generative AI”.
Shares in the tech giant have risen 7.8% in pre-market trading.
Microsoft
Upbeat earnings were not enough for Microsoft, however, where AI infrastructure spending of $35bn in the past three months was a bit too rich for investors, despite revenue rising 18% and operating income up 24%.
Satya Nadella, chairman and chief executive officer of Microsoft, said: “Our planet-scale cloud and AI factory, together with Copilots across high value domains, is driving broad diffusion and real-world impact. It’s why we continue to increase our investments in AI across both capital and talent to meet the massive opportunity ahead.”
However, Britzman noted that, while the firm showed “solid growth and rising demand”, “supply constraints are starting to bite”.
Shares slipped slightly, down 1.9% in pre-market trading.
Meta
The bad news continued with Meta, where shares are down 9% in pre-market trading. The company behind Facebook and Instagram produced record quarterly revenue, beating expectations, although a hefty one-off tax bill hit overall earnings, which plummeted.
Yet it was the sheer volume of capex spend that concerned investors, with the firm upping its projected full-year expenses and warning that future spending will be “notably larger” than previously thought.
Mould said: “The market took fright at Meta’s burgeoning spending plans, sending the shares down sharply.
“Mark Zuckerberg says that it makes sense to aggressively front-load building capacity for AI infrastructure and, if there proves to be excess data centre space, this could simply be used for Meta’s core services. That doesn’t sound like an entirely convincing business pitch for spending tens of billions of pounds on something which might not ultimately deliver.”
Tesla
The Elon Musk-led electric car company reported bumper revenues last week but there were issues that investors leapt upon as margins halved to 5.8% from 10.8% a year ago, meaning the 12% rise in sales was more than nullified.
Profits fell 29% year-on-year to $1.8bn, below expectations, and although deliveries were up to a record last quarter Neil Wilson, UK investor strategist at Saxo Markets, said “Tesla is not a car company anymore”.
“Hefty investment in robotics and AI needs to prove itself sooner rather than later,” he said.
Despite initially falling 3.4% the day after the announcement, shares are up 2.4% since.
Netflix
Technically not a member of the ‘Magnificent Seven’, Netflix also released disappointing figures last week. The former ‘N’ member of the premier acronym ‘FAANGs’ missed its earnings forecast, something which Chris Beauchamp, chief market analyst at IG, said described as “rare”.
“While it was down to a one-off tax charge, the shares had been looking for the right kind of news to launch them out of the sideways trading that has prevailed since early July,” he said.
Dan Coatsworth, head of markets at AJ Bell, noted the streaming platform had previously beaten earnings expectations for six quarters in a row but the tax matter in Brazil has “put a spanner in the works and taken investors by surprise”.
Shares are down 11.4% since the results, although he noted that “Netflix’s strategy is the most robust of any of the streaming platforms”.