By the standards of Big Tech’s recent pandemic boom, the start to 2023 has hardly been a period for the history books.
The first-quarter growth rates of 3 to 9 per cent reported this week by Alphabet, Amazon, Meta and Microsoft are a far cry from two years ago, when surging demand for digital services boosted Big Tech’s combined revenue by 41 per cent.
But at a low point in their recent fortunes, the companies still delivered a surprise. Rather than seeing their businesses fall back even further from depressed fourth-quarter levels, as had been widely expected, Big Tech’s growth rates have turned back up again.
The solid financial performance has buoyed confidence on Wall Street at an important moment
Along with heavy cost-cutting that stemmed partly from a wave of job cuts, the revenue rebound buttressed the industry’s profit margins.
The solid financial performance has buoyed confidence on Wall Street at an important moment. Investors are preparing themselves for the tech industry’s next change in financial direction: a big increase in spending to prepare for the hoped-for generative artificial intelligence boom.
“At big tech companies, we’re seeing enormous capex numbers,” said Angelo Zino, senior industry analyst at CFRA Research. “But we expect AI to provide incremental additions to revenue in the next couple of years.”
The robust performance displayed this week showed that, despite being tied to economically sensitive areas such as advertising and IT spending, the tech industry’s biggest players have ridden out recent economic uncertainty in surprisingly good shape.
“The big tech companies are incredibly resilient, far better than predicted,” said Jim Tierney, head of US growth investments at AllianceBernstein.
The latest figures included strong signs the falling growth rates in cloud computing — a key business for Amazon, Microsoft and Google — were coming to an end, he added; something that would be “positive for the whole [tech] ecosystem” as suppliers to the giant cloud companies see orders pick up.
On Thursday, Amazon was the latest to deliver robust first-quarter figures with revenues and earnings that topped forecasts.
AWS, its cloud computing division, has slowed sharply from the 37 per cent revenue growth seen at the start of last year. But at 16 per cent in the latest quarter, it was still better than feared, lifting hopes the slowdown may be coming to an end.
The news sent its share price into sudden reverse, more than wiping out the 12% gain that had followed the release of its first-quarter figures
However, the most up-to-the-minute data provided by Amazon suggested it is not out of the woods yet. Growth at AWS dropped further to 11 per cent in April as customers looked for ways to save money in a difficult economy, the company said on a call with analysts.
The news sent its share price into sudden reverse, more than wiping out the 12 per cent gain that had followed the release of its first-quarter figures.
Despite this, Amazon’s solid first quarter appeared to confirm Big Tech had got off to a positive start this year. Microsoft had set the stage two days before, reporting good results for its own cloud division and hinting the market was already turning up again.
Chief executive Satya Nadella warned earlier this year Microsoft’s cloud operations were likely to go through a year of sluggish growth as customers tried to “optimise” their cloud contracts, a euphemism for looking for efficiencies to save money.
The turn may have come sooner than expected. “At some point, workloads just can’t be optimised much further,” said chief financial officer Amy Hood on Microsoft’s earnings call this week.
Signs that things are improving factored a “little bit in our guidance” for the current quarter, she added — a comment that fed hopes of stronger growth and lifted Microsoft’s shares 10 per cent over the following two days.
An unexpected return to growth at Meta, after three-quarters of contraction, suggested another of Big Tech’s core businesses — digital advertising — was also performing better than feared this year.
Investors have been poring over the AI details provided by the big tech titans this earnings season, perhaps more so than any other issue
— Nigel Green, chief executive and founder of wealth management firm deVere Group
Combined with severe cost-cutting, the news boosted Meta’s shares 15 per cent, further extending a powerful rally for all the biggest tech companies this year.
A barrage of questions from investors this week about generative AI showed, while the technology behind OpenAI’s ChatGPT has yet to become significant in financial terms, Wall Street is already fixated on the new technology.
“Investors have been poring over the AI details provided by the big tech titans this earnings season, perhaps more so than any other issue,” said Nigel Green, chief executive and founder of deVere Group, a wealth management firm.
What they saw left a generally positive impression. Amazon boss Andy Jassy said although overall capital spending would fall back this year, his company was still upping its data centre spending, partly in anticipation of a jump in demand fuelled by AI.
“Few folks appreciate how much new cloud business will happen over the next several years from the pending deluge of machine learning that’s coming,” said Jassy.
Microsoft and Meta went further, putting AI at the centre of their investor calls as they predicted the technology would boost performance across their businesses.
Mark Zuckerberg did not put a figure on the impact of his company’s AI investments, but the Meta chief pointed to signs the technology was already having an impact. They included a 24 per cent increase in engagement at Instagram, which the company attributed largely to Reels, its TikTok-like video service that depends heavily on AI.
Early signs like these added to confidence on Wall Street that as Big Tech pours investment into the next wave of AI, it will find plenty of ways to make money from its expensive new plaything.
If there was a shadow on the AI horizon, it was at Google, whose core search business is widely seen as the most exposed to the rise of generative AI
“Microsoft’s pricing power will jump once it has AI embedded in its services,” said Zino. “I think in particular that Meta did a great job of explaining how AI is working today and how it is already improving content. That is a contrast from the metaverse, which is still such a distant prospect.”
If there was a shadow on the AI horizon, it was at Google, whose core search business is widely seen as the most exposed to the rise of generative AI. Parent Alphabet was among the companies to warn of higher capital spending stemming from AI, with costs starting to rise in the second quarter and heading progressively higher from there.
Chief executive Sundar Pichai tried to reassure investors Google would find ways to contain the higher costs of running AI-powered services while also coming up with new ways to make money from them.
The lack of specific details, however, failed to calm the concerns and Alphabet’s shares fell back the day after it reported a return to growth in its search advertising business. — Copyright The Financial Times Limited 2023
