The recent earnings season saw a violent sell-off in many technology names that have surged this year as investors question the AI boom.
There is no doubt that big companies continue to spend heavily on AI infrastructure. While big tech companies continue to spend more money on AI infrastructure, the alphabet (NASDAQ: GOG) (NASDAQ: GOOGLE) And Microsoft (NASDAQ: MSFT) Although the company’s earnings were very good, many investors were expecting more. With the economy slowing down overall and the unemployment rate recently rising to 4.3%, the selloff has been intense recently.
However, reading the comments from leading tech companies, this investor believes that concerns about the AI revolution are short-sighted. Based on statements from major tech CEOs and one from a leading memory company in late June, there is a strong case to be made that the spending boom will continue. That makes the recent pullback in AI stocks a long-term opportunity.
Google, Microsoft report strong AI growth results
At first glance, it’s quite understandable why investors sold these stocks when they made profits. While both Microsoft and Google beat expectations in terms of revenue and profits, they also spent more on Capital expenditures To build AI data centers.
While Alphabet beat expectations with 14% revenue growth and 31% earnings per share growth in the quarter, which was impressive, capital expenditures nearly doubled compared to last year. While Microsoft beat expectations, posting 15% revenue growth and 10% earnings per share growth — though operating income growth matched the 15% revenue growth — its capital expenditures were up 55% compared to the year-ago quarter.
Investors are clearly concerned that the current growth in operating income is not matching the growth in spending. This means that big tech stocks will either fall because they are spending money on projects that do not generate enough income. return on invested capital Or finally stop spending so much, which could hurt people like Nvidia (NASDAQ: NVDA) and other semiconductor stocks.
However, management at each company remained bullish on AI. Alphabet CEO Sundar Pichai noted that the company’s AI solutions are used by about 2 million developers. Meanwhile, Google Cloud revenue beat expectations, accelerating its growth rate as profitability soared to $1.2 billion, a new quarterly record. Pichai also added:
We’re at this point where we have to dig deep and make sure that we’re making deeper progress in unlocking value in these use cases, in these workflows, which I’m very confident is happening. But these things take time. But if I were to take a longer-term view, I definitely see a huge opportunity here.
Microsoft has also been vocal about its AI products. CEO Satya Nadella noted that its powerful AI CoPilot product launches are seeing momentum across the customer base. Microsoft 365 CoPilot seats have doubled quarter-over-quarter, and Github CoPilot is now larger than Github overall was when Microsoft first bought it in 2018, according to Nadella. While Azure’s growth has missed the Street’s expectations technically, Azure is still growing 30% in constant currency, the strongest of the three major cloud providers.
Cash-rich companies continue the race toward general artificial intelligence
So while these tech giants may have seen some slowdown in parts of their economically sensitive businesses, AI products remain strong. At the same time, all the major cloud companies have significant cash on their balance sheets and the ability to invest.
Could they slow spending if the economic climate worsened enough? Perhaps, but here’s a quote from a memory expert: Micron Technology (NASDAQ: MU) CEO Sanjay Mehrotra hinted in late June that spending could continue, regardless of the economy:
We are in the early stages of a multi-year race to enable artificial general intelligence, which will revolutionize all aspects of life. Enabling AGI will require training ever-increasing model sizes with trillions of parameters and advanced inference servers. AI will also spread across AI-powered computers and smartphones, as well as smart cars and smart industrial systems.
AGI is seen as the “holy grail” of AI. It means that a machine will be able to think, reason, and learn just like a human, while also having access to all the world’s knowledge. This would lead to superintelligence that could theoretically benefit humanity in revolutionary ways.
While many believed that AGI wouldn’t arrive until 2050, recent developments have brought the goal closer. Elon Musk predicted AGI within two years, and OpenAI CEO Sam Altman predicted AGI in about five years.
Tech giants have the power to continue this race.
Mehrotra’s comment seems to suggest that big tech companies around the world are in the AI race for the long haul, or at least until we see AGI.
While the big tech companies may be slowing down compared to expectations, they are still incredibly profitable companies with huge balance sheets. So as long as AGI seems like a realistic goal in the medium term and these companies have the money, the AI race looks like it’s still on.
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Is the AI Stock Bubble Bursting? These CEOs Say No: The Boom Is Here To Stay Originally posted by The Motley Fool