technology ·
The AI trade's trick-or-treat earnings season
Google's AI overviews are reportedly eating into the search engine's primary income stream, which is ad revenue. Although search queries are increasing, the results displayed in AI mode generate lower margins for the company.
This mixed signal comes as the tech-heavy Nasdaq experienced a brief correction, dropping 10% from its previous high and losing $1.2 trillion in value during October, following numerous earnings reports highlighting significant risks tied to AI.
However, the picture is not entirely bleak; some investors uncovered evidence within the earnings statements suggesting the AI investment thesis is progressing as anticipated.
Google is seeing its Cloud division approach Microsoft's Azure cloud revenue, a remarkable shift considering Google was previously a minor player in the cloud sector. Furthermore, demand for its TPU chips is projected by analysts to grow substantially in the coming quarters.
For Microsoft and Amazon, both firms demonstrated explosive growth in their cloud operations, though the market expressed disappointment that Amazon's growth did not surpass expectations.
Amazon's net income declined despite soaring operating profits because it did not replicate the pretax gain from its Anthropic investment that boosted earnings a year prior. Microsoft's net income saw a slight lift, which supported its profit growth, thanks to its OpenAI investment.
Regarding capital spending, while some asset-light tech companies have seen free cash flow turn negative to finance AI ambitions, they argue this reflects demand exceeding supply.
The market's focus remains on the demand outlook; Jeetu Patel, President and Chief Product Officer at Cisco, expressed optimism but noted that a major cyber event impacting core AI demand could pose a downside risk.
DeepWater partner Gene Munster suggests the market is beginning to grasp the dangers of an agentic world, questioning revenue models for companies like Google without ad search income or Amazon if shoppers rely on bots.
