Tech Titans Stage a Rebound As AI Brings New Optimism.

"The tech giants are shaking off the postpandemic blues.

Microsoft, Amazon.com, Meta Platforms and Google parent Alphabet last week delivered quarterly reports showing strong growth and improving margins in areas from digital advertising to e-commerce to cloud computing.

They also are starting to see some initial payoff from big investments in artificial intelligence while trying to assure Wall Street that more wins are ahead.

Average revenue for those four companies last quarter rose by about 13% from a year earlier, the fastest rate since the final quarter of 2021.

The technology industry is taking off again after grappling with a slowdown for close to two years, in which it reduced staff and cut other costs after a pandemic growth spurt. The early earnings results show the postpandemic hangover may have run its course.

Discussion of AI dominated earnings calls, offering hints about who is ahead in the race to turn the hot technology into hit products. Microsoft said 3 percentage points of the growth in its cloud-computing revenue came from customers paying to use its cloud to offer generative AI products such as ChatGPT. Amazon said it expects tens of billions of dollars in revenue from generative AI in the next several years.

Alphabet and Meta posted robust advertising growth and pointed to their own AI plans.

It is a big shift from less than a year ago. Earlier this year, Meta Chief Executive Mark Zuckerberg said the company was in a year of efficiency after the "humbling wake-up call" of last year prompted it to lay off more than 20,000 employees and slash other costs. On last week's earnings call, Zuckerberg mentioned efficiency seven times but AI more than 30 times.

Using technology to save money was the focus of Microsoft's pitch a year ago, with CEO Satya Nadella repeating how Microsoft had to help customers who were "doing more with less." In this latest earnings report, he used the mantra once.

Amazon, which laid off about 27,000 corporate employees in the past year, said profit tripled in the July-to-September quarter thanks to strong sales in its advertising and retail units. While its cloud-computing unit grew at a slower pace than Wall Street had expected, it assured investors that business was strong in the current quarter and gushed about its AI ambitions.

"Every one of our businesses is building generative AI applications to change what's possible for customers, and we have a lot more to come," CEO Andy Jassy told analysts.

There were 22 references to Bedrock and CodeWhisperer -- Amazon's two generative AI products -- in its latest earnings call, up from the nine references in the previous quarter.

Net income and profit margins for each of the four top tech companies that released results last week were at the highest they have been in at least 21 months. Microsoft and Alphabet announced significant capital-expenditure increases compared with a year earlier.

Part of the increase in capex for those companies is coming from the need to build up the computing infrastructure to power AI. Microsoft has signaled its plan to spend near-record amounts on its cloud-computing business, buying chips and other hardware running AI software.

What is remarkable is that "despite accelerating costs, we have margins up for all these companies," compared with a year earlier, said John Blackledge, an analyst at Cowen.

Investors haven't necessarily been responding positively to the results, in part because of unrest in the Middle East and concerns over how expensive it is to build AI technology amid high interest rates.

Meta shares fell after it warned the war between Israel and Hamas could soften strong ad spending. Alphabet shares dropped 9% the day after it unveiled its results." [1]

1. Tech Titans Stage a Rebound As AI Brings New Optimism. Rana, Preetika; Dotan, Tom. 
Wall Street Journal, Eastern edition; New York, N.Y.. 31 Oct 2023: B.2.