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Reporting season from megacap technology stocks this week signaled to investors that hefty investments on networks and infrastructure needed to feed the growing boom in artificial intelligence may be starting to bear fruit in terms of profits. Earlier this year, concern that the payoff from enormous spending on AI will be pushed back dented investor sentiment and fueled a selloff in some of the biggest AI plays. Many this week appeared to prove to shareholders that the heightened spending is worth the wait. “The AI theme is intact if you’re the mega caps,” as companies show that they can monetize their investments while maintaining existing profitability, said Deepwater Asset Management’s Gene Munster. “As long as that infrastructure continues to be built, then we continue to be in a good place for the broader AI trade.” Among the megacap stocks, Alphabet , Amazon and Microsoft grew year-over-year, cloud-based revenue by 35%, 19% and 20%, respectively. But of the five largest companies that have so far reported results — Meta Platforms , Alphabet, Amazon, Apple and Microsoft — only two finished the week higher. META 5D mountain Meta, 5 days Commentary from some of the tech companies signaled that AI demand remains robust. Microsoft’s finance chief said that demand is outpacing capacity, anticipating as much as 32% growth in the Azure cloud-based platform on a constant currency basis in the December quarter. Alphabet CEO Sundar Pichai said its “full stack” of AI products is operating at scale. Amazon CEO Andy Jassy justified stepped up AI spending, saying that investors will be rewarded over the long haul. GOOGL 5D mountain Alphabet, 5 days “People were betting against big tech making their numbers,” said Ray Wang, principal analyst and founder at Constellation Research. “What they showed was that they still have the size and the scale to crank out earnings because their cost of sale is much lower and size and scale matters.” Long-term, Wang expects a handful of technology names to come out on top given today’s high AI costs relative to the open and decentralized Internet craze of the 1990s and the 2000s.That puts companies with deep pockets at an advantage. It also makes increased spending a necessity for today’s incumbents to keep their market positions, said Mark Malek, chief investment officer at SiebertNXT. He believes many investors overlook the time and resources necessary to achieve this scale. Breaking down the megacaps, Constellation’s Wang says pressure is building on Microsoft as to whether it’s investing enough to refresh its infrastructure. He noted that Satya Nadella’s Windows and Xbox giant today uses some of the oldest data centers. Near-term, Meta Platforms and Amazon appear to be approaching the end of their heightened spending cycles, which could translate to earlier payoffs, Wang said. Strong result and accompanying commentary from Amazon should also “push the naysayers” who are worried about rapid spending and a lagging retail business “out the door,” said Eric Clark, portfolio manager of the Rational Dynamic Brands Fund. AMZN 5D mountain Amazon, 5 days Meanwhile, the still enormous spending patterns among megacap technology companies signals no downturn for de facto AI leader Nvidia. Since the launch of ChatGPT in late 2022, the stock has soared more than seven-fold, lifting the broader market and technology sector alongside. But that growth rate could ease once the initial AI buildout cycle slows, making way for the next wave of companies putting AI to use, such as potentially Oracle and Salesforce , Wang said. “There’s a good runway of growth for the next two or three quarters in Nvidia,” Clark said. “But when the rate of change is slowing, Nvidia’s stock is not going to do very well. You’re going to see the most crowded trade unwind – and usually it tends to be violent.”
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