AI is still the hottest topic in the US stock earnings season! But...

According to Zhitong App, the term "artificial intelligence" (AI) remains the hottest topic discussed by tech companies such as Microsoft (MSFT.US), Alphabet-C (parent company of Alphabet, GOOGL.US), AMD (AMD.US), ServiceNow (NOW.US), and SK Hynix in their latest earnings conference calls. However, unlike in 2023, global investors are no longer focusing on the "AI vision" presented by the management teams of listed companies. Instead, they are looking for more evidence to prove that their significant investments in this emerging technology will yield high returns.

Data compiled by LSEG, a statistical agency, shows that in all the earnings conference calls held by S&P 500 companies in the just-concluded month of January, as many as 38% of the conference calls mentioned the term "artificial intelligence". This proportion is higher than the 34% during the third quarter earnings season and is basically consistent with the second quarter earnings season. During that time, the discussion on artificial intelligence surged as it was the hottest topic.

Microsoft, Alphabet-C (parent company of Alphabet), and AMD discussed how their customers would embrace their newly launched software and hardware products related to generative artificial intelligence in their earnings conference calls this week. However, the rising costs of developing these cutting-edge features, coupled with the somewhat disappointing revenue expectations for these AI products, led to a decline in the stock prices of these three tech giants on Wednesday, with Alphabet's decline reaching as high as 7%.

The sustained high popularity of the term "artificial intelligence" in earnings conference calls highlights the importance that investors and Wall Street analysts attach to these technologies with "technological innovation" significance. Investors generally believe that the tech giants in the US stock market are most likely to benefit from this technology.

Last year, the unprecedented frenzy of global tech companies investing in AI technology propelled the benchmark S&P 500 index into a technical bull market, with a 24% increase. The overall triple-digit gains of the seven major tech giants in the US stock market, known as the "Magnificent Seven," made the biggest contribution to this. The seven major tech giants in the US stock market, known as the "Magnificent Seven," include Apple, Microsoft, Alphabet-C, Tesla, NVIDIA, Amazon, and Meta Platforms. In the past few trading days, tech giants such as Microsoft, Alphabet, AMD, NVIDIA, and Broadcom have reached new all-time highs and continue to set new records.

As of the end of January, the term "artificial intelligence" was mentioned an average of 3.5 times per earnings conference call of S&P 500 constituent companies, higher than the 3.3 times during the same period in October 2023 when quarterly earnings were disclosed.

In the just-concluded January, Alphabet, the parent company of Alphabet, and Microsoft were far ahead of other companies in terms of the number of mentions of artificial intelligence in their earnings conferences, with "AI" and "Artificial intelligence" appearing 53 and 52 times respectively. Following closely behind is the globally renowned software company ServiceNow, which mentioned artificial intelligence 51 times in its earnings conference call last week; AMD mentioned artificial intelligence 42 times in its earnings conference call this week.

Investors focus on the revenue expectations brought by AI technology, and management's "pie in the sky" can no longer stimulate stock prices

Unlike in 2023, global investors are no longer focused on the "AI vision" proposed by management, but are more inclined to look for more evidence to prove that their large bets on this emerging technology are expected to yield high returns.

As a result, investors are starting to punish tech companies whose AI deployment progress is slower than expected or whose AI-related business revenue falls short of expectations, such as Alphabet, the parent company of Alphabet, and AMD. The former saw a sharp decline of 7% in its stock price at the close of Wednesday's US market due to slow progress in AI-related products, while the latter experienced a drop of over 5% at one point due to AI chip sales expectations for 2024 falling far short of Wall Street's expectations, with a decline of over 2.5% at the close of Wednesday's US market.

Some tech companies have recently talked extensively about how their heavyweight AI products will be embraced by customers in the future, **but the cost of developing these cutting-edge features continues to rise, and the revenue expectations for some AI products provided by these companies are very vague, which has frustrated investors who hope that innovative technology will significantly boost profits. Microsoft and Alphabet-C parent company Alphabet both reported that revenue from cloud computing services in the fourth quarter of last year grew significantly, surpassing the expectations of Wall Street analysts. This is because customers have been testing new AI features and building their own AI services.

However, the operating costs in the cloud computing sector are also rapidly rising, highlighting the fierce competition among cloud computing giants in attracting new customers focused on AI. They have to invest heavily in servers, data centers, and research and development. These costs have dampened investor expectations, which are usually driven by the positive profit prospects of AI. In recent months, the AI boom has pushed the S&P 500 and Nasdaq 100 indices to record highs.

Russ Mould, investment director at AJ Bell, said, "The high valuations of tech stocks mean that even the slightest signs of disappointment will be seized upon by investors. Microsoft's expectation of only a slight slowdown in revenue growth for its cloud computing division this quarter was enough to cause a small drop in its stock price."

Gene Munster, managing partner at Deepwater Asset Management, said he hopes to see more returns from the Alphabet and Microsoft shares held by the company. "Investors want to see more contributions from AI-related businesses," he said when referring to Microsoft and Alphabet. "Microsoft is still in the early stages of generating revenue from AI, but it is showing some clear upward trends in the field of artificial intelligence."

In terms of valuation, Alphabet's stock price is expected to rise by about 58% in 2023, with a P/E ratio of 22.26x. The expected P/E ratios for Microsoft, Meta, Amazon, and Apple are 33.09x, 22.46x, 42.60x, and 27.73x, respectively.

After experiencing a decline in stock prices on Wednesday, Alphabet-C (Google) parent company Alphabet and Microsoft saw their market values evaporate by approximately $140 billion and $80 billion, respectively.

Capital expenditures difficult to reduce before AI generates revenue, investors concerned that AI deployment may impact profits

Alphabet-C parent company Alphabet reported a 45% surge in capital expenditures for the quarter (Q4 2023), reaching $11 billion. Meanwhile, CFO Ruth Porat stated that this year's expenditures will be significantly higher than in 2023.

Microsoft, on the other hand, reported that capital expenditures may soar by 69% to $11.5 billion due to the need for continuous funding to support AI technology deployment. The company also expects this indicator to experience "significant growth" multiple times in the future. These costs have greatly undermined investor expectations, which are usually driven by the positive profit prospects of artificial intelligence.

"By providing positive prospects... the data provided by Microsoft is sufficient to support the current stock price, but it needs to continue to maintain a strong growth trajectory to support a higher stock price," said Gil Luria, an analyst at D.A. Davidson.

Luria expects that Microsoft will still be able to increase overall profits while maintaining a relatively stable total number of employees. Once Microsoft has sufficient and efficient data center capacity to meet the huge cloud computing demands related to AI, the amount of investment next year may significantly decrease.

AMD AI chip expectations "maxed out" on Wall Street!  A $3.5 billion expectation is not enough for Wall Street

AMD, a dual-industry giant in CPUs and GPUs, has been regarded by most investors as one of the most direct beneficiaries of the global AI boom since 2023, with its benefits possibly second only to Nvidia, which dominates the AI chip market.

AMD announced its Q4 performance on Wednesday morning Beijing time and raised its revenue forecast for its newly launched artificial intelligence (AI) chip, the Instinct MI300 series chip, by $1.5 billion to $3.5 billion in 2024. However, for some Wall Street analysts who have given AMD high stock price expectations and high valuations, this expectation is far from enough. Chris Caso, an analyst at Wolfe Research, said that the most optimistic expectation on Wall Street has reached $8 billion, while the lowest forecast is $4 billion.

"Overall, AMD's performance this quarter was mediocre, with operating profit and operating profit margin significantly declining," said Jesse Cohn, an analyst at Investing.com. "In the face of high market expectations, the company has almost no room for error, and investors are clearly very disappointed with the forward-looking guidance for this quarter."

As global enterprises are seeking to develop and operate their own ChatGPT-like generative AI applications, enterprise budgets are flowing towards processors used in AI servers, such as Nvidia's H100 and AMD's flagship AI chip, the MI300X AI chip, launched at the end of last year. For AMD, a "latecomer" in the AI chip field, the good news is that most global enterprises are looking for alternative products to Nvidia's expensive and severely supply-constrained advanced AI chips. And AMD's newly launched MI300X AI chip is one of the few viable alternatives in the market. However, Wall Street analysts previously predicted that the market size of AMD in the AI chip field in 2024 would be between 4 billion and 8 billion US dollars. KeyBanc and other Wall Street investment institutions have given a strong expectation of 8 billion US dollars. The target stock price of up to $200 and the higher stock valuation given by Wall Street are closely linked to these numbers.

KeyBanc Capital Markets analyst John Vinh recently reiterated a "buy" rating on AMD and raised the target price from $170 to $195. Vinh believes that AMD will be one of the biggest beneficiaries in the AI chip field. The analyst predicts that although the demand for gaming and programmable chips is difficult to predict, the sales of AMD's new AI chips in 2024 may reach $8 billion, far exceeding the institution's previous estimate of $3 billion to $4 billion.