Big Tech earnings a test of the AI boom amid market turmoil
· CNA · JoinRead a summary of this article on FAST.
Get bite-sized news via a new
cards interface. Give it a try.
Click here to return to FAST Tap here to return to FAST
FAST
Oct 27 : Wall Street expects Amazon, Microsoft and Alphabet to report on Wednesday faster growth in their cloud businesses, but a turbulent market selloff and concerns over rising costs of AI financing are tempering optimism.
Investors are pressing for evidence that the AI boom can deliver swift returns to justify its enormous price tag. Rising bond yields at AI cloud providers such as CoreWeave and record costs to insure Meta Platform's debt have amplified concerns about how the massive AI infrastructure buildout is being funded, particularly as higher US interest rates loom.
Market turmoil has rekindled warnings of an AI bubble from investors, including hedge fund Citadel's founder Ken Griffin, and pushed companies to delay their IPOs. An expected Democratic sweep of the US midterm elections could spell more trouble for data centers that are already a target of protests over their impact on power grids, electricity bills and the environment.
Big Tech's results this week will be a litmus test for AI adoption and economic viability. These three companies — with nearly $1.7 trillion in combined backlog — plan to spend as much as $600 billion this year.
CNA Games
Guess Word
Crack the word, one row at a time
Buzzword
Create words using the given letters
Mini Sudoku
Tiny puzzle, mighty brain teaser
Mini Crossword
Small grid, big challenge
Word Search
Spot as many words as you can
Show More
Show Less
Meta's results last week showed just how unforgiving the calculus has become. Better-than-expected revenue growth and an upbeat outlook were overshadowed by increased spending plans, sending its shares down nearly 7 per cent the following day. They are now down more than 4 per cent this year.
"The appetite for capital expenditure alone is slowing rapidly," said Brian Mulberry, chief market strategist at Zacks Investment Management.
"For Amazon, Google and Microsoft specifically the growth in their cloud companies is a very important line item that will signal if further growth in capital expenditure can be funded without further risks of contracting free cash flow."
While the trio's stocks have outperformed ad-driven Meta this year, with gains ranging from 1.2 per cent to 10.1 per cent, they continue to lag behind the S&P 500's near 12 per cent rise.
Google Cloud is expected to again lead the three major players in the September quarter, with revenue surging 95.1 per cent to $29.57 billion, according to LSEG data. That would be faster than the 81.8 per cent growth in the previous quarter.
Amazon Web Services, the market leader in cloud, is expected to post 38.2 per cent revenue growth, up from 36.8 per cent in the previous quarter. Microsoft Azure is expected to expand 47.7 per cent, accelerating from 42 per cent three months earlier, according to Visible Alpha data.
Alphabet and Amazon are expected to burn cash for the second and third consecutive quarters, respectively, while Microsoft will likely generate more than $8 billion in cash flow.
GOOGLE CLOUD SUCCESS, SEARCH CONCERNS
Alphabet's cloud business and in-house chips have emerged as a bright spot in its AI push amid concerns Google's models are falling behind those of OpenAI and Anthropic. But competition from personal AI agents such as Meta's Muse as well as chatbots such as ChatGPT has raised concerns about the search business that has long powered its earnings.
Google search revenue growth is expected to slow to 14.7 per cent from 16.8 per cent in the previous quarter, even as total revenue is expected to rise at a slightly faster pace of 25.2 per cent to $128.18 billion.
"This quarter, we believe commentary is equally important to quantitative results as competition for search is growing again with agents while there is increased consternation around the payback of AI capital expenditure," Citizens analyst Andrew Boone said.
MICROSOFT CHANGES REPORTING SEGMENTS
Microsoft will report under a revamped structure for the first time on Wednesday, combining cloud, AI and business software into a division called "Agents and Infra", and Windows, gaming and ad sales into another dubbed "Devices and Consumer".
A notable change will be the disclosure of Azure's quarterly revenue, resolving investor frustration over its previous focus on growth rates without absolute figures.
Analysts expect Azure to post sales of $33.06 billion in the quarter, powering a 16.7 per cent rise in Microsoft's total revenue to $90.66 billion, slightly slower growth than the previous period.
Amazon's overall revenue growth is expected to slow to 12.3 per cent from 19.6 per cent in the previous quarter.
Newsletter
Week in Review
Subscribe to our Chief Editor’s Week in Review
Our chief editor shares analysis and picks of the week's biggest news every Saturday.
Sign up for our newsletters
Get our pick of top stories and thought-provoking articles in your inbox
Get the CNA app
Stay updated with notifications for breaking news and our best stories
Get WhatsApp alerts
Join our channel for the top reads for the day on your preferred chat app