By Elsa Ohlen
Artificial intelligence will likely be a major theme in the upcoming set of corporate earnings, just as it has been in the past few quarters. That's because investors are looking closely at the investments made by big tech companies' on AI and for clues on when these might transform earnings.
The AI investment cycle looks to be here to stay. Big tech earnings begin in earnest this week, and among so-called AI hyperscalers -- large cloud-computing companies that drive industry growth -- four out of five are expected to increase their capital expenditure, which largely consists of investment in AI.
In the June quarter, megacaps such as Apple, Meta, Microsoft, Amazon and Alphabet didn't have typical stock reactions. Shares didn't move on earnings, sales or outlook, but seemingly on AI commentary and capital expenditure.
There was a clear correlation between expected and reported capex, which for these companies mainly consists of investments in AI, Barron's reported at the time.
Now, correlation doesn't necessarily mean causation. However, most experts agree that the big tech companies' capex numbers are important ones to watch.
"The big question is: are they going to keep taking these capex plans higher or could this be the first quarter where we see these capex plans more reiterated than getting raised again?" said John Belton, portfolio manager at Gabelli Funds. Any indication of spending in excess of what than the Street guiding could send shares down.
Alphabet will be the first to report out of the AI hyperscalers this earnings season on Tuesday, followed by Meta, Microsoft, Amazon.com, and Apple.
Meta, Amazon, Apple, and Microsoft are all expected to increase AI spending, according to FactSet consensus estimates. Meta is expected to raise it the most, by 35%, followed by Apple with an expected 17% increase from the previous quarter. Microsoft and Amazon are expected to increase spending more modestly, by 6.6% and 2.5%, respectively. Only Alphabet is expected to decrease spending by 4%.
However, the capex spread is big. Amazon spent $17 billion in the June quarter, compared with Apple's $2.2 billion. All but Apple have meaningfully increased capex in the last few quarters.
The reason for the big spend on AI is both the need for companies to keep up with competitors and the potential to monetize more parts of their businesses. In the end, how the updates are received will likely come down to whether these companies can convince investors that their monetization case is strong enough to justify such heavy spending.
Many large tech companies have ridden a decadelong bull market and gotten away with somewhat reckless outlays, Belton said. Now, it looks like they'll need to rationalize some of those expenses.
For example, Google-parent Alphabet needs to show how its Gen AI chatbot Gemini is going to make money. The same goes for Meta and its open-source large language model Llama.
It may not be enough to simply beat estimates and raise forward guidance, says Mark Malek, chief investment officer at Siebert. "Investors will be keen on learning how many of these companies are capitalizing on AI."
In other words, are they making money on AI and is it worth the large capital investment?
Write to Elsa Ohlen at elsa.ohlen@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 29, 2024 01:01 ET (05:01 GMT)
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