Big Tech Earnings Could Determine AI Rally’s Success or Failure

AI stocks have seemed to have the ability to defy gravity for some time now. We’re about to see if they can continue to do so for a long time.

This week, tech companies that have played a key role in the generative AI boom, including Amazon, Apple, Microsoft and Meta, reported earnings as the market growth they helped create teeters on the brink of a correction.

U.S. markets have been suffering in recent weeks, with the S&P 500 having its worst day of 2022. The technology-heavy Nasdaq-100 index also fell after quarterly results from Tesla and Google parent Alphabet suggested artificial intelligence would not deliver the expected gains.

Tesla, which has delayed the unveiling of AI-powered robot taxis until October, reported net income fell 45% to $1.47 billion in the latest quarter, falling well short of analysts’ expectations.

Google, on the other hand, reported a 13.5% year-over-year increase in quarterly revenue to $84.7 billion, but its CEO Sundar Pichai left investors wondering how much its massive capex on AI chips, data centers and other technologies translates into profits.

If its Big Tech competitors also have trouble convincing investors that AI is more than just a money grab, we could see the AI bull market lose steam.

The hype surrounding artificial intelligence faces a serious test

The reason AI stocks have managed to defy gravity is quite simple.

Silicon Valley companies that spend most of their time, resources, and investment in generative AI talk about the technology as something that will change the lives of industries and consumers for the better.

Nvidia CEO Jensen Huang, whose chips help power the large language models behind AI applications like ChatGPT, said last month that “generative AI is reshaping industries and opening up new opportunities for innovation and growth.”

Meanwhile, when Apple revealed its AI platform, Apple Intelligence, last month, CEO Tim Cook described it as a “new chapter in Apple innovation” that “will transform what users can do with our products — and what our products can do for our users.”

Investors have been buying this kind of rhetoric for a while now. The S&P 500’s rally since March has been driven by chip companies like Nvidia and Big Tech AI stocks, the so-called “Fab Five,” including Alphabet, Amazon, Apple, Microsoft and Meta.

They did so by acknowledging that AI development is an expensive technology. Infrastructure and research costs are high, something Google acknowledged last week when it said its capital spending nearly doubled year over year in the latest quarter to $13 billion.

However, large expenditures with no signs of return on the horizon will not suffice for long, as Google can also attest.

For Amazon, that will mean showing some positive messaging and specifics about its work on its own AI chips, called Trainium, as well as building out its cloud business, which is key for customers who need computing power to train AI models.

Apple will face less pressure because the impact of Apple Intelligence on iPhone, iPad, and Mac sales will only begin to be visible once it begins rolling out its AI platform later this year.

Meta’s Mark Zuckerberg will likely face questions again about the company’s AI spending, as he did in his last earnings report, after he raised his guidance for this year’s capital spending from about $37 billion to $40 billion.

Microsoft’s Satya Nadella, who has invested billions of dollars in his partnership with OpenAI, will also face questions about how his AI tools like Copilot are doing.

Some have strong expectations that tech companies will generate profits over the long term. In a research note last week, Wedbush analyst Dan Ives wrote that while last week’s sell-off was “brutal,” it “wasn’t the end of the tech sector’s bull run.”

That may be true, but there’s no denying that tech companies are spending a ton of money in the name of AI. Those who invest in them will want to see that investment paid off sooner rather than later.