This week, we will be seeing Google, Microsoft and Meta Platforms releasing their March-quarter earnings. We have seen how mega caps stocks from the Mag 7 have caused the market to move into a downturn amidst a sell-off last week.
This week with Google and Microsoft releasing their result on 25 April 2024 after the market close, investors would be watching closely for how their revenues could be lifted by the artificial intelligence–powered services they are providing.
We need to take note that last week tech stocks suffered a sell-off after AI spending was reported to be cut, so how much did Google and Microsoft managed to gain in their revenues before spending was cut.
March PPI (Data Processing) Dropped AI Revenues Might Benefit
There is something we need to be aware of when inflation was high, the forecast growth for software and IT services stems largely from cloud spending, according to Gartner.
Inflation, which has driven up cloud pricing previously, if it start to creep back, will contribute to the uptick. Cloud vendor price hikes and increased utilization will combine to boost global spending on public cloud services. This might have a downward impact to Google and Microsoft revenues.
If we looked at the Producer Price Index (PPI), the U.S. government's March wholesale inflation data suggests rising prices remain a factor for IT commodities including cloud computing. The Producer Price Index (PPI), for March 2024, reported a year-over-year price decrease of 3% for data processing, hosting and related services, a category in which cloud is an important contributor.
This should be good news for Google and Microsoft March quarter revenues, as IT spending should increase driving up
AI Could Have Surprising Effect On Interest Rates
The Producer Price Index (PPI), a measure of the prices producers receive for their goods and services, increased 0.2% in March, a bigger slowdown from February's 0.6% than economists were expecting.
But the PPI for data processing, hosting and related services dropped, so we could be seeing a different inflation trends for AI spending. Now question is will we see a higher PPI for data processing, hosting and related services hence driving up the cloud pricing, businesses and companies have not really put AI and generative AI fully into their IT budget.
AI and generative AI will shift spending among some budget line items, but they will not make the technology spending pie bigger. AI investment, more broadly, will support overall IT spending growth. Enterprise interest in generative AI, however, appears to be high.
So will the inflation creeping back start to impact the amount companies need to spend on IT budget, how will these eventually translate into revenue earnings for Google and Microsoft?
We need to understand that if AI is finally in the boom phase, or Artificial General Intelligence (AGI) has finally become common, we could see that demand for capital expenditures (CAPEX) would be extremely high. As the productivity of capital is a major factor in shaping real interest rates, so if the capital productivity rises significantly because of AI, then real interest would also rise.
from https://www.advisorperspectives.com/
Tech Stocks Might Move The Market This Week
From how the PPI have shown a decrease in the pricing for cloud and AI related services, we could be seeing a shift from the IT spending on these services. There might also be a possibility of companies moving faster and put AI and Generative AI spending into their budget.
This could be good news for the tech stocks, but $Alphabet(GOOGL)$ and $Microsoft(MSFT)$ should benefit more, as both the Alphabet’s Gemini and Microsoft’s Copilot should see increased take up rate.
What I would look out for is the number of subscriptions that each of these tools could provide. This should be the numbers that could move the stock price.
Summary
While PPI drop, there might be a chance that IT spending could be more expensive, but we need to look into the individual category, because without understanding what components might influence IT leaders decision on IT budget, it would be difficult to sell as well.
For both Google and Microsoft, their AI services have their own functionalities, so I am not going to discuss it here, but what is important is their targeted customer base, could there be company who has both in their organization?
Next will be how much profit per subscription was made, cost of acquiring one customer? I will be monitoring the development of the news for these 2 mega tech stock earnings this week.
Appreciate if you could share your thoughts in the comment section whether you think Google and Microsoft could help to propel the S&P 500 this week?
@TigerStars @Daily_Discussion @Tiger_Earnings @TigerWire appreciate if you could feature this article so that fellow tiger would benefit from my investing and trading thoughts.
Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.
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