In the past week, technology stocks experienced a significant downturn, officially entering a correction phase. This decline followed a series of earnings reports from some of the world’s largest tech companies, which were met with mixed reactions from investors. Specifically, the Nasdaq Composite index dropped by 4.1% over just two days (Wednesday and Thursday), marking the index’s most challenging two-day performance of the year. Since July, the index has fallen by 12%.
Two companies that drew particular attention were Alphabet (GOOGL) and Meta Platforms (META). While both companies exceeded earnings expectations, their results raised concerns about cloud and advertising spending within the tech industry. Even though Amazon.com’s CEO, Andy Jassy, provided an optimistic outlook on artificial intelligence later in the week, it was evident that the enthusiasm for Big Tech had waned among investors.
ALSO READ: Musk’s Twitter Takeover: A Year In, X Faces Challenges with Misinformation, Ads, and Declining Usage
Here are some key takeaways from the recent tech earnings reports:
- Cloudy Skies for Alphabet: Despite reporting revenue and profit that exceeded Wall Street estimates, Alphabet’s stock took a hit, falling more than 10%. The primary cause for concern was the performance of Google Cloud, which saw a 22% increase in revenue to $8.4 billion during the quarter. However, this growth fell short of Street estimates by approximately $200 million and was lower than the 28% growth seen in the preceding quarter. Chief Financial Officer Ruth Porat mentioned that the cloud business was impacted by “customer optimization efforts,” indicating that some IT executives believed their cloud costs were still too high.
- Google’s AI Ambitions: There were high expectations for Google Cloud, as the market anticipated that Google would leverage its expertise in AI software to gain a larger share of the cloud market. Google had recently introduced several AI tools and services, including the Bard chatbot, which allows users to search not only the web but also their own documents and emails. Google was viewed as having deeper AI expertise than its rival, Amazon Web Services (AWS). However, the results fell short of these expectations, and Microsoft’s Azure cloud computing arm outperformed Google Cloud, growing by 28%.
- Microsoft’s Azure Success: Microsoft’s Azure cloud computing arm exceeded expectations, primarily due to a three-percentage-point contribution from AI-related workloads, surpassing their own forecasts. Azure is now not only larger than Google Cloud but is also growing faster. As a result, Microsoft’s stock outperformed Apple, bringing it closer to the title of the world’s most valuable company.
- Amazon Web Services (AWS): While AWS sales increased by 12.3% to $23.1 billion in the quarter, aligning with Wall Street estimates, it was not a spectacular performance compared to its competitors.
- Advertising Trends: Both Alphabet and Meta experienced significant growth in their core business of selling online ads. Google Search ad revenue rose by 11%, while YouTube ad revenue increased by 12%. Meta’s ad revenue grew by 28%, with ad impressions up by 30%. However, Meta’s CFO, Susan Li, mentioned that ad spending softened at the beginning of the fourth quarter, likely due to external factors like conflicts in the Middle East, which also affected Snap’s ad campaigns.
- Amazon’s Ad Success: Amazon reported a 26% increase in ad sales, reaching $12.1 billion, making it a significant player in the advertising market.
- The Impact of AI: Companies like Microsoft, Meta, Alphabet, and Amazon are heavily investing in generative AI, which requires substantial capital and a skilled workforce. This has led to increased costs and capital spending for these tech giants.
- IBM’s AI Initiatives: IBM’s WatsonX initiative, aimed at assisting large companies with AI projects, garnered significant interest, with bookings reaching the “low hundreds of millions of dollars” in the September quarter, indicating an annual run rate of about $1 billion. This positive news led to a 4.6% increase in IBM’s shares.
- PC Revival: Intel reported strong third-quarter results, with promising revenue guidance for the fourth quarter. The company’s strategy to compete with Taiwan Semiconductor in contract chip manufacturing seems to be gaining traction.
- Apple’s Spotlight: The coming week is anticipated to revolve around Apple, featuring a prime-time product launch and an earnings report. The product launch is expected to introduce updated Mac laptops, while the earnings report will provide insights into Apple’s performance, including the sales of the iPhone 15.
Despite strong tech earnings, the market correction suggests a shift in investor sentiment towards the tech industry, as they react to various factors influencing the performance of tech giants.
