AI: Big Tech tailwinds

..Meta, Microsoft & Google market optimism

It’s quarterly earnings time, and three of the top US AI focused tech mega caps Meta, Microsoft, and Google, worth almost $5 trillion in market cap, all reported their results this week.  Amazon and Apple don't report until August 3 next week. 

Spoiler alert: they’re all doing well with their core businesses, and AI remains a strong positive driver from an investor perspective, and thus a tailwind for all. Their stocks are up this year, and Meta and Google up 5% plus after their reports. The AI driven tech wave remains well in place. 

This despite each company investing billions this year and next in capex (capital expenditures), for AI and other technology parts of their businesses. A lot of that AI spend is going to Cloud supply constrained, GPU driven infrastructure, which I’ve discussed at length. 

Let’s look at some highlights on the earnings reports and calls, starting with Meta today (links in quotes below are mine):

“Meta’s shares surged by more than 7% in af­ter-hours trad­ing, a sign that in­vestors are en­cour­aged by im­prove­ments in digi­tal ad­ver­tis­ing even as con­cerns about the meta-verse re­main. The com­pany re­ported sec­ond-quar­ter rev­enue of $32 bil­lion, up 11% com­pared with a year ago, and the largest quar­terly growth since the fi­nal quar­ter of 2021.”

“Thus far in 2023, Meta has seen its shares more than dou­ble as [Founder CEO] Zuckerberg has fo­cused on cost-cut­ting, de­vel­op­ing new gen­er­a­tive AI tech­nol­ogy and the launch of Threads, a microblogging app the com­pany launched to com­pete with the busi­ness for­merly known as Twit­ter, which bil­lion­aire owner Elon Musk re­branded as X. “

“The com­pany said it ex­pects its 2023 ex­penses to be be­tween $88 bil­lion and $91 bil­lion, higher than its pre­vi­ous out­look of be­tween $86 bil­lion and $90 bil­lion. In the past year, Meta has had mul­ti­ple rounds of layoffs im­pact­ing about 21,000 jobs, or nearly a quar­ter of the com­pa­ny’s work­force.”

“Meta re­ported that Face­book’s daily ac­tive user base in­creased to 2.06 bil­lion users, up from 2.04 bil­lion the pre­vi­ous quar­ter. The in­crease de­fied ex­pec­ta­tions of an­a­lysts sur­veyed by Fact­Set who thought user num­bers would re­main flat.”

As I’ve written extensively, Meta CEO Zuckerberg is laser focused on AI opportunities, both driving its efforts around AI open source infrastructure support (Llama 2 driven and more), and rapidly developing AI enabled products, services, and advertising for its 2 billion plus global users and advertisers. 

Zuckerberg’s plans for Threads for example, are just getting started despite the media focus on weekly ebbs and flows vs Twitter/X.com. And Llama 2 driven efforts have both defensive and offensive business opportunities for Meta. Will have a lot more on all this in the months to come, including Meta’s ambitions for smart AI agents, as I update the three year AI road map in future posts. 

Microsoft and Google also had similarly positive earnings reports, and AI tailwinds to discuss:

“Google and Mi­crosoft are two very dif­fer­ent busi­nesses chas­ing the same Next Big Thing. For­tu­nately, both are do­ing well enough to pro­vide the siz­able funds needed for that ef­fort.”

“The two re­ported rel­a­tively strong re­sults for the June-ended quar­ter late Tues­day, fea­tur­ing im­proved rev­enue growth and prof­itabil­ity as a re­sult of cost re­duc­tions. Google’s core ad­ver­tis­ing busi­ness re­turned to growth fol­low­ing two straight quar­ters of de­clines, while Microsoft’s cloud and en­ter­prise soft­ware busi­nesses beat Wall Street’s pro­jec­tions for the fi­nal quar­ter in its fis­cal year, de­spite slow­ing cor­po­rate spend­ing on tech­nol­ogy across the globe.”

“But the duo’s core busi­nesses have nearly taken a back seat to the es­ca­lat­ing hype over gen­er­a­tive ar­ti­fi­cial in­tel­li­gence—the tech­nology be­hind chat­bots such as Chat­GPT.”

“That col­ored their re­spec­tive re­ports very dif­fer­ently on Tues­day. Mi­crosoft, whose share price has surged 46% since the start of the year thanks to the com­pa­ny’s ag­gres­sive adop­tion of genAI tech­nol­ogy in its prod­ucts, saw its stock slip more than 3% af­ter hours. The com­pany pro­jected rev­enue for the Sep­tember quar­ter that was slightly be­low Wall Street’s pro­jections.”

“Google-par­ent Al­pha­bet, whose stock price has risen a more mod­er­ate 39% this year, jumped 6% fol­low­ing its own re­port, which didn’t in­clude any of­fi­cial fi­nan­cial pro­jec­tions.”

“Neither earnings release suggests any change in the two companies’ pursuit of AI. In fact, both showed why the two are the best suited to build on a technology that requires massive computing resources—and equally massive pocketbooks. Microsoft now generates nearly $60 billion in annual free cash flow, while Alphabet produces $71 billion. Both have had a little over $28 billion in capital expenditures over the past four quarters—more than the annual revenue of three-quarters of the companies in the S&P 500.”

“And both sent clear signals Tuesday that they would take those numbers even higher. Alphabet’s $6.9 billion in capex for the recent quarter came in well below the $8 billion Wall Street had anticipated, but Chief Financial Officer Ruth Porattold analysts on the company’s earnings call that it will keep increasing for the rest of this year and into next “to support the opportunities we see in AI” across the company.” 

“Microsoft is leaning in even more aggressively, with capex for the June quarter jumping 30% year over year to a record $8.9 billion. CFO Amy Hood said the company will increase that amount sequentially each quarter through its new fiscal year.”

Even though Wall Street had initial concerns about Google's core Search empire being threatened by AI driven search, it’s becoming increasingly clear that Google has formidable AI resources to bring to the table, even if they sometimes seem to go at it at their own pace. And that pace, as I've said before, is a feature and not a bug, given the global scale and complexity of Google’s business, and the intense regulatory concerns around AI. 

On a separate note, it’s useful to read this detailed piece by David Pierce of The Verge on how even the best funded and executed startups, to reinvent AI driven Search, face formidable challenges against Google. It talks about an admirable effort by a company by ex-Googlers called Neeva, to go up against Google, with every advantage imaginable, and the difficulties it faced mounting a serious, sustained challenge at scale.

Replace ‘Neeva’ with ‘OpenAI’ or any other ‘AI Native’ startup today, and one sees how difficult it’s going to be to scale a successful AI challenge against Google. Doesn’t mean it can’t be done. 

Just that the execution path is as daunting as Luke Skywalker flying down the Death Star trench to hit the smallest of vents open to Space, with swarms of X-fighters  and laser cannons in the chase. 

They’re going to need the Force alright. Even perhaps Elon with xAI Force. Stay tuned. 

(Note: Discussions on this site are for information purposes only. No investment advice is intended at any time).