The performance of U.S. technology giants is differentiated, and AI has become a new engine for revenue growth

China Fund News reporter Zhao Xinyi

As the "weather vane" of U.S. stocks, the every move of the technology giant has attracted much attention. Judging from the disclosed first-quarter results, Microsoft, Google's parent company Alphabet and Meta among the "Big Seven" performed well, with basic performance indicators such as revenue and net profit increasing year-on-year, while Tesla performed poorly, with both revenue and net profit declining, and free cash flow was in crisis.

AI is a powerful tool for revenue generation

Benefiting from the growth of advertising and cloud business revenue, Alphabet's performance in the first quarter of this year far exceeded expectations: revenue of $80.539 billion, a year-on-year increase of 15%, and net profit increased by 57% year-on-year to $23.66 billion, exceeding expectations of $18.95 billion.

The cloud business is seen by the market as Google's new growth engine, with revenue in the first quarter increasing 28.4% year-on-year to $9.57 billion. The core advertising business also lived up to expectations, with a total revenue of $61.66 billion. Among them, Google's search and other advertising revenue was $46.156 billion, and YouTube's advertising revenue was $8.09 billion.

Sundar Pichai, CEO of Alphabet, said the search, YouTube and cloud computing sectors were strong. With its leadership in AI research, infrastructure, and extensive coverage of global products, Google is poised to be well-positioned for the next wave of AI.

Alphabet also announced an initial cash dividend of $0.2 per share, and Alphabet's board of directors has authorized up to $70 billion in additional Class A and C share repurchases.

On the first trading day after the earnings report, Alphabet's stock price soared by more than 10%. Wells Fargo raised its price target to $168 from $141.

AI has also become a powerful tool for Microsoft to generate revenue. Boosted by enterprise customers' demand for cloud computing and artificial intelligence products, Microsoft's fiscal revenue for the third quarter ended March 31, 2024 showed that Microsoft's operating income for the quarter increased by 17% to $61.9 billion, and net profit increased by 20% to $21.94 billion.

Among them, Microsoft's cloud revenue increased by 23% year-on-year to US$35.1 billion, and the growth rate of AI-related business increased by 7 percentage points.

In the first quarter, Meta achieved revenue of US$36.455 billion, a year-on-year increase of 27%, and net profit of US$12.369 billion, a year-on-year increase of 117%.

Although Microsoft, Alphabet, and Meta are all "top students" in terms of business performance, the market is very sensitive to the potential crisis of each company, and the stock prices of the above companies have diverged greatly after the announcement of the financial report.

Meta expects the company's revenue in the second quarter to be 36.5 billion ~ 39 billion US dollars, a year-on-year increase of 18%, lower than the market expectation of a 20% increase.

The company's CEO Mark Zuckerberg's speech made investors even more worried. "It will take a long time for the investment in AI to pay off," he said. ”

In the trading days after the earnings report, Meta's stock price plummeted by more than 10%.

Since 2024, Tesla's situation seems to be getting tougher. The stock has fallen 32% for the year due to a combination of factors such as first-quarter results and deliveries that missed expectations, 10% layoffs globally, and price cuts, and rising concerns about its outlook.

Specifically, Tesla achieved revenue of $21.3 billion in the first quarter, down 9% year-on-year, the first year-on-year decline in revenue since 2020, net profit of $1.129 billion, down 55% year-on-year, and adjusted earnings per share of $0.45, which did not meet market expectations.

Also of concern to investors is Tesla's gross margin and free cash flow. In the first quarter, Tesla's gross margin was 17.4%, down 199 basis points year-on-year, and free cash flow turned negative. Tesla attributed it to a $2.7 billion inventory backlog and a $1 billion investment in AI infrastructure.

Perhaps to salvage the impact of the poor performance in the first quarter, Tesla announced that it was about to launch more affordable models. Elon Musk, the company's chief executive, said that the new model could be launched on the market as early as the end of this year. In addition, Musk also announced the sale of the humanoid robot Optimus (Optimus Prime) by the end of 2025.

Tesla's stock price immediately improved, rising more than 12% in the trading day after the results were announced.

The long-short debate intensified

The wave of AI set off by technology giants has been carried out so far, and the strategic layout and market performance of each company have been significantly differentiated. The "Big Seven" seems to have come to the crossroads of reshuffling, with Nvidia, Meta, Microsoft, and Amazon's stock prices rising rapidly in the first quarter, outperforming the market, and being called the "Fab Four" by the market.

However, at the same time, the market's divergence on the future of the technology sector has gradually increased, and the long-short debate has intensified.

Positive view: firmly "buy" AI. Goldman Sachs believes that the current stock market is in the first stage of the AI-led technology boom, and the impact will continue to expand, boosting more and more industries.

SPDB International believes that the global development of artificial intelligence is changing with each passing day, accelerating towards the era of AGI (Artificial General Intelligence). Artificial intelligence is one of the most noteworthy investment directions in the next decade, and AI+ will gradually penetrate and reshape most industries, with a broad market space.

According to Bloomberg's forecast, the S&P 500 and Nasdaq 100 indexes will have earnings growth rates of 9.1% and 13.5% in 2024, and revenue growth rates of 2.9% and 7.7% respectively, respectively.

"The 'Big Seven' has increased its earnings share in the S&P 500 Index to 21.4% from 20.1% in 2023, and investors are still optimistic about the earnings performance and supporting role of technology leaders this year. CITIC Securities said.

There are also market participants who believe that the earnings momentum of the tech giants is weakening. UBS Group AG's chief U.S. equity strategist said that the upward momentum of U.S. tech giants is disappearing, and the ratings of the six major U.S. tech giants, Alphabet, Apple, Amazon, Meta, Microsoft, and Nvidia, have been adjusted from "overweight" to "neutral".

He believes that big tech companies are losing momentum as earnings momentum cools. However, he stressed that the downgrade is not due to higher valuations or doubts about AI technology, but rather to the tough competitive environment and cyclical pressures that these stocks face.

Jeremy Grantham, co-founder and chief investment strategist at asset management firm GMO, has previously said that U.S. stock prices are ridiculously high and are likely to be in trouble. The concept of artificial intelligence, which is now being hyped by the market, is a "bubble destined to burst".