Big Tech falls short on AI revenue expectations

Wed, Jan 31, 2024, 7:17 AM

BRADLEY SMITH: Expectations for AI were well too high here. And particularly here as we're taking a look at the Google Ad revenue and then additionally on the right side of your screen, you've got the AMD revenue forecast here as well. These are the two big areas that investors saw some of their expectations missed on in that most recent earnings period for these two companies.

SEANA SMITH: Yeah, right. And I think a lot of that at least, the share reaction in the price of these stocks here this morning ahead of the open has to do with those AI numbers and exactly what we heard. It wasn't a bad quarter really for any of those companies across the board when it comes to AI investments.

Like you just said, Google's big issue here, and the most recent quarter was ad spending and what they are seeing there, and in their core business, some softness that has the street concerned. But when it comes to Microsoft, their Azure growth was just around 30%. But that AI factor, it might be masking maybe some of the weakness that is, I guess, still very much there in some of the Azure base, the core base business there for the company.

We know that the strength of generative AI driving 6% of Azure's growth here in the quarter. So outside of that, that is causing a bit of concern here for investors. But remember, these are stocks that have had massive run ups over the last year, massive run ups going into this report. The expectations were extremely high. So if we didn't see a massive beat here across the board, even though we did get better than expected expectations here for Microsoft is simply was not enough here for the Street. And we're only seeing a sell the news type of event.

BRADLEY SMITH: Yeah, absolutely. Essentially, they kicked off the call for Google talking about four areas that they really wanted to focus in on. One of them was search subscriptions as well, and then $15 billion in annual revenue for YouTube as well here, five times their since 2019.

And here's a little bit more color from Alphabet CFO Ruth Porat providing some insights into the tech giant's spending plans. Take a listen.

RUTH PORAT: The step up in CapEx in Q4 reflects our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers, and governments globally, and the long-term growth opportunities that offers.

BRADLEY SMITH: And so all of this considered here, the long-term growth opportunity means upfront spending as of right now. That's how Sundar really kicked off the call, talking about those investments in AI and how they were going to spend a lot more time talking about where the core user could expect this to actually show up in their experience, whether they're at the end of the day, using some type of Google search feature, or where that's playing into lens, or even where we're ultimately going to see that have a role in some of the workspace features. And that is more of the cloud focus for Alphabet that they're thinking about going forward and where those investments could play out.

SEANA SMITH: Yeah, certainly. When you take a look at these numbers, it's safe to say at least, from the Street's perspective, they don't see enough progress on generative AI and what it's doing to support Alphabet's core business and exactly what that looks like going forward, and further incorporating the AI technology into their products, into other parts of their business. And they're also still largely seen as playing catch up to Microsoft.

Microsoft very much at least, viewed in many investors' minds as the leader when it comes to AI given the investment that they had early on in OpenAI and what they have done in order to integrate AI into their core products already. We're seeing that in Microsoft results. So it really just shows the pressure that is on so many of these other companies to really prove that their investments in AI are already paying off.

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Big Tech falls short on AI revenue expectations

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