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As five of the “Magnificent 7” tech giants—Apple, Alphabet, Amazon, Meta, and Microsoft—report earnings this week, investors will be keenly watching their updates on core businesses such as advertising and cloud services, and more importantly, spending on artificial intelligence (AI) and its tangible returns. These companies, with a combined market cap of $12 trillion, have driven market gains this year, making their results pivotal for the ongoing equity rally. However, since peaking on July 10, the gap between Big Tech and the rest of the market has been narrowing amid closer scrutiny on the efficacy of their AI spend. Microsoft, Alphabet, Amazon, and Meta collectively ramped up their capital expenditures in Q3, pouring $56 billion—a 52% year-over-year increase—into areas like AI. While the transformative potential of AI is widely acknowledged, investors are now questioning the timing and scale of returns from these hefty investments. This earnings season could serve as a critical test for these megacap leaders, many of whom (except Apple and Meta) have yet to reclaim their July highs, even as they trade at valuations above historical norms and the broader market. Alphabet: Growth anchored by Ads and cloud, but AI spending looms large Earnings due: Tuesday (Oct 29) after-market. Revenue estimate: $86.44 billion (vs. $76.69 bn in Q3 2023). EPS estimate: $1.84 (vs. $1.55 in Q3 2023). Capex estimate: $12.88 bn (+60% YoY). Key drivers: Youtube and Search ad revenue, Cloud computing growth. Key risks: Regulatory scrutiny over monopoly practices, Long-term risks to Google’s Search business, Competition from Meta’s AI search engine, Waymo (self-driving car business) growth after a recent pact with Uber. Other thoughts: Alphabet’s setup remains relatively undemanding, having underperformed the S&P 500 since Q2, largely due to ongoing regulatory concerns. This positioning could offer an opportunity if earnings reflect AI and cloud momentum despite…

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Filed under: News - @ October 29, 2024 10:28 am