Google, Microsoft, Amazon financial reports consecutively "failed", Wall Street doesn't believe in investing heavily in AI will bring returns
Since the release of the financial reports, Google and Microsoft's stock prices have fallen by more than 8%, while Amazon's dropped by nearly 9% in a single day. As the businesses most clearly benefiting from generative AI, the cloud computing divisions of the three tech giants saw steady growth in the second quarter. However, this was not enough to appease investors, who are increasingly eager to see returns from the significant investments in data centers and other AI infrastructure
From Alphabet, the parent company of Google, which released its financial report last week, to Microsoft and Amazon, which respectively announced their financial reports on Tuesday and Thursday this week, the tech giants failed to convince Wall Street this earnings season. Their heavy investments in the field of artificial intelligence (AI) have not significantly boosted the companies' revenues.
Stock market investors have voted with their feet, expressing dissatisfaction with the financial reports of the three tech giants through their stock price performance. Based on the closing prices, Alphabet's stock price has dropped by about 8.3% as of Friday since the release of its financial report after hours last Tuesday, Microsoft's stock has dropped by about 8.2% over the three days following its financial report release this week, and Amazon, which announced its financial report after hours on Thursday, opened significantly lower by 9.4% on Friday, hitting a new daily low in early trading with an intraday drop of 12.8%, ultimately closing down by about 8.8%.
Daniel Morgan, Senior Portfolio Manager at Synovus Trust, commented that AI technology represents a huge opportunity that continues to grow. Unfortunately, the upfront investments in this area have been substantial and increasing. Therefore, investors cannot help but ask: can these corporate giants generate enough profit growth from their investments?
The commentary noted that the AI-related performance of the three tech giants in this earnings season did have some bright spots. Their cloud computing business segments showed steady growth, which is the most obvious beneficiary of generative AI businesses. However, this growth is not enough to appease investors, who are increasingly eager to see returns from the significant investments made season after season in data centers and other AI infrastructure.
Deutsche Bank recently pointed out in its analysis: "So far, revenue has been mainly limited to the cloud business area, where companies train and run AI models. However, outside of the cloud business, signs of investment returns are more qualitative than quantitative, and the returns on AI investments are still difficult to measure in concrete numbers."
Wall Street News previously mentioned that the market performance in this earnings season shows that investors are becoming increasingly impatient with tech companies' approach of profiting from heavy investments in AI. The shadow of costs is looming over the tech giants, and market concerns about the returns on massive AI investments are growing. Faced with market concerns, tech giants unanimously state that they will continue to "burn money." After announcing their financial report last week, Sundar Pichai, CEO of Alphabet and Google, emphasized that the risk of underinvestment in the AI field far outweighs the risk of overinvestment.
Both Meta and Microsoft, which announced their financial reports this week, are expected to increase capital expenditures. Meta emphasized that capital expenditures in 2025 will significantly increase, with infrastructure costs being a key driver to continue supporting AI research and product development. Brett Iversen, Vice President of Investor Relations at Microsoft, stated that the company will continue to increase spending to meet "strong customer demand," with capital expenditures expected to be higher in the 2025 fiscal year than in the 2024 fiscal year This Thursday, Amazon announced that the third-quarter operating profit guidance range was all lower than analysts' expectations, with operating profit growth significantly slowing down more than expected, with the lowest increase of less than 3%. As profits are under pressure due to AI investments, Amazon's Chief Financial Officer (CFO) Andy Jassy also told analysts during the earnings call, "When we increase capital expenditures, it is actually a positive indicator."
Amazon's capital expenditures in the first half of this year totaled $30.5 billion, with most of it used for the cloud business division AWS. Jassy stated that Amazon has developed sophisticated algorithms to guide its investment decisions in order to build enough capacity to meet demand without affecting profits. He promised that these investments are worthwhile because they can support AI services, which Amazon previously referred to as a business with a revenue turnover rate of "tens of billions of dollars".
Compared to Alphabet, Microsoft, and Amazon, which overall declined after the financial reports were released, Meta, which originated from the social media Facebook, has been going against the trend. Since announcing its financial results after hours on Wednesday, Meta has accumulated a 2.8% increase by the end of trading on Friday. This is a narrowing of the increase after a 1.9% decline and a fall last week.
Meta unexpectedly raised the lower end of its full-year capital expenditure range this time, citing AI investments as the reason. However, Meta's second-quarter revenue exceeded expectations. Meta CEO Mark Zuckerberg believes that the company's spending on AI has driven improvements in ad targeting and content recommendations. He believes that Meta's massive spending on AI is a short-term sacrifice for long-term benefits