The cloud rises and AI pays off — 3 takeaways from tech’s big earnings week

It’s been a big week in Big Tech earnings, and three major themes in the markets have emerged.

The tech giants Meta, Alphabet, Amazon, Apple, and Microsoft reported earnings this week, and investors were laser-focused on the results of AI investments.

Kate Leaman, the chief market analyst at AvaTrade, told B-17 that while the tech giants “all delivered solid growth, what really stands out is the clear investment in AI and how it’s setting the stage for their future strategies.”

Michael Field, equity strategist at Morningstar, told B-17 that the results were positive overall, pointing to Amazon’s record profits. He added that, while Meta and Microsoft’s earnings were “less well received,” the companies’ underlying growth was “still strong.”

Here are some of the big themes that emerged during earnings week.

Cloud is king

Microsoft, Alphabet, and Amazon saw significant growth in their cloud businesses, fueled by increased demand.

Revenue from Microsoft’s Intelligent Cloud segment, including its customer-facing platform Azure, jumped by 20% year over year, to $24.1 billion. Revenue from Azure itself was up by 34% year over year, and the company said that 12 percentage points of that growth stemmed from high demand for AI services.

Jeremy Goldman, EMARKETER’s senior director of briefings, told B-17 that Microsoft’s cloud business had decelerated from the “breakneck pace” of previous quarters.

On Wednesday’s earnings call, Microsoft’s chief financial officer, Amy Hood, said that “demand continues to be higher than our available capacity.” She added that the company expected its cloud sector to grow at a slightly slower rate, between 18% and 20%, in the second quarter.

Dan Romanoff, a senior equity analyst at Morningstar, told B-17 that capacity limits were raising questions about how much Microsoft, Google, and Amazon are investing in their public cloud offerings.

“As big as Azure is, they are operating at capacity, so clearly there is a need for more data centers,” he said.

Google Cloud’s revenue was smaller — $11.4 billion — but it grew at a rate of 35% year over year, which Alphabet said was fueled by “accelerated growth” in its AI segment.

While Google reported stronger cloud growth, Microsoft still leads it in cloud market share, and both are behind Amazon Web Services.

On Thursday’s earnings call, Amazon CEO Andy Jassy painted a particularly bullish outlook for AI in Amazon Web Services, whose revenue grew by 19% year over year, to $27.5 billion.

Tracy Woo, a principal analyst at Forrester, told BI that the increase in cloud revenue spoke to “AWS’s continued market dominance.”

“The company’s mainstay offerings in ad revenue and online retail have bolstered and shielded the same fearful perception of overinvestment in AI AWS as compared to its closest competitor in Microsoft Azure,” she said.

Investment in generative AI is starting to pay off

Big Tech has been pouring billions into generative AI — and it’s starting to pay off.

Jassy said the company’s AI sector, which includes the development tool Bedrock and its shopping assistant Rufus, was “growing more than three times faster” than AWS was when the latter was at a similar stage of its business evolution.

“We’ve proven over time that we can drive enough operating income and free cash flow to make this a very successful return on invested capital business,” Jassy said on Amazon’s earnings call. “And we expect the same thing will happen here with generative AI. It is a really unusually large, maybe once-in-a-lifetime type of opportunity.”

Google CEO Sundar Pichai also said the company’s AI investments were “paying off,” crediting AI as a key driver of Google’s quarterly growth.

In a note, Bank of America Securities called the growth of Google Cloud, which grew at a rate of 35% year over year, a “positive surprise” that suggested the “AI growth cycle has arrived.”

Pichai also said the company’s AI Overviews were “performing well” and reached over 1 billion users monthly. The company said it planned to extend the AI-search feature to over 100 countries.

The company has also been leveraging AI to boost its internal efficiency. Pichai said that more than a quarter of new code at Google was made by AI and then checked by employees.

On Meta’s earnings call, CEO Mark Zuckerberg said more than 1 million advertisers had used the company’s generative-AI tools to create more than 15 million ads in the past month. He said the company estimated that businesses using Meta’s image generation were seeing a 7% increase in conversions.

The need for more data centers and other AI infrastructure is pushing up capital expenditures across the industry.

Microsoft’s capital expenditure totaled $20 billion in the quarter that ended on September 30, up from $19 billion in the previous quarter and nearly double the $11.2 billion it spent in the same quarter last year.

Hood said the company expected this to “increase on a sequential basis” but was monitoring demand.

Jassy, on the other hand, said Amazon expected its capital expenditure to hit $75 billion this year and planned to spend even more in 2025, mostly for its AWS cloud unit.

Field, the Morningstar strategist, told B-17 that AI’s potential excited investors but that they were “less excited about how much money the Big Tech names are dropping on developing AI.”

“With Microsoft and Meta, their results were solid, but it was these concerns that drove share prices lower,” he added. “Expect this theme to continue in the coming quarters.”

AI chips are hot — but not all chipmakers are riding the wave

Samsung’s chip business has not been able to ride the AI wave as well as companies like TSMC have. The South Korean conglomerate has struggled to get its chips certified by Nvidia, causing it to cede ground to its local rival, SK Hynix.

Jaejune Kim, the executive vice president of Samsung’s memory business, said in an earnings call on Thursday that the company had made “meaningful” progress in Nvidia certification and expected higher sales in the fourth quarter. Samsung’s shares are down by 28% in the year to date.

But Samsung isn’t alone in having trouble with chips.

On Wednesday, AMD’s stock price dipped by as much as 10% even though the company’s CEO, Lisa Su, said AMD had “closed a good part of” its gap with Nvidia, which controls 80% of the market for graphic processing units, which can process large datasets required for training AI models.

Meanwhile, Jassy said on Thursday that Amazon Web Services was investing in its own Trainium and Inferentia AI chips.

“While we have a deep partnership with Nvidia, we’ve also heard from customers that they want better price performance on their AI workloads,” Jassy told analysts.

“We’re seeing significant interest in these chips, and we’ve gone back to our manufacturing partners multiple times to produce much more than we’d originally planned,” he added.