AI’s Effect on Big Tech: Comparing Earnings and Growth Prospects

AI's Effect on Big Tech: Comparing Earnings and Growth Prospects

Big Tech’s investments in AI paid off in 2023, driving a 26% return in the S&P 500, with Apple, Microsoft, Meta, Amazon, Alphabet, and Nvidia as the highlights. Their Q4 earnings will reveal who’s profiting most from the AI boom, amid generative AI hype. Tesla, however, faces an expected earnings decline.

When the “Magnificent Seven” reveal their annual earnings over the next few days, investors will be watching for indications that the multi-billion-dollar investments made by large tech companies in the development of artificial intelligence are paying off.

As investors became more enthusiastic about AI‘s potential last year, Apple, Microsoft, Meta, Amazon, Alphabet, Nvidia, and Tesla supported the S&P index of blue-chip US companies, accounting for 62% of its total 26% return for 2023. Friday, as a result, saw the S&P 500 close at an all-time high following a furious surge in tech stocks.

When the seven companies report their fourth-quarter results over the next two weeks, analysts at Bank of America predict that six of them—excluding Tesla, whose earnings are expected to decline—will account for the majority of the growth in earnings across the S&P 500. They also stated that in the absence of the six companies, fourth-quarter earnings for the index would have decreased on an annual basis.

The excitement, moreover, surrounding generative AI, or systems that can produce human-like text, images, and code in a matter of seconds, has increased interest in Big Tech stocks. On average, their shares saw a gain of 105% compared to the previous year.

AI Revolution

Colin Sebastian, senior research analyst at Baird, believes that Microsoft has a lead with OpenAI integration, and companies like Alphabet and Amazon are doing whatever they can to catch up. When Microsoft announced last year that it was investing $US10 billion in OpenAI, it became the largest backer of the company behind the AI-powered chatbot ChatGPT, and it set off a chain reaction of deals between large tech companies and AI start-ups.

As an early indicator for profiting from AI in 2024, revenues at Microsoft’s cloud computing service Azure and subscription AI software Copilot, both of which are expected to rise as a result of the company’s integration with OpenAI technology, will be closely observed.

This month, Microsoft reportedly surpassed Apple to become the world’s largest company by market value. Stock in Nvidia, in the meantime, gained 239% last year and is on track to surpass Amazon’s market capitalization of $1.6 trillion.

However, recent turmoil at OpenAI, where Sam Altman was ousted as CEO before being swiftly reinstated, doesn’t seem to be having much of an impact on investor appetite.

Investments in AI

Analysts will be closely observing whether other major tech companies update their financial projections this year as their investments in AI start to pay off.

As they race to incorporate the technology into their products, rivals like Meta and Alphabet-owned Google have unleashed a wave of spending on AI start-ups and internal research and development.

Though they have been slower to make significant public investments in AI, Apple and Amazon are about to release products that may be seen as an attempt to catch up. As Daniel Ives, research analyst at Wedbush Securities, says, this is a key period laying the groundwork for who is going to win in the AI arms race.

Image credits: Shutterstock, CC images, Midjourney, Unsplash.