Big Tech's AI Ambitions Fail to Impress Wall Street, Triggering Tech Stock Selloff
August 2, 11:33 am
Amazon,, Microsoft, and Alphabet faced high expectations this earnings season. Investors anticipated that the billions of dollars these tech giants have invested in AI infrastructure would start translating into significant sales. Unfortunately, Wall Street was left unimpressed, leading to a noticeable selloff in tech stocks.
Disappointing Earnings Reports
Shares in Alphabet, the parent company of Google, have dropped 6.1% since its earnings report last week. Microsoft’s stock has also declined in the days following its earnings release. Amazon, the most recent to report, saw its shares slide in premarket trading after its earnings announcement on Thursday.
Silicon Valley had touted 2024 as the year of widespread adoption of generative AI, technology capable of creating text, images, and videos from simple prompts. This technology, including Google's Gemini and Microsoft's Copilot, was expected to generate meaningful profits. However, these anticipated returns have not materialized as hoped, raising doubts about the value of AI investments.
Daniel Morgan, a senior portfolio manager at Synovus Trust, emphasized the growing opportunity of AI but also noted the substantial upfront investment required. Investors are now questioning whether these tech giants can achieve enough profit growth from their hefty investments in AI.
Cloud Growth: A Silver Lining
Despite the overall disappointment, there were bright spots in the earnings reports. The cloud-computing divisions of Amazon, Microsoft, and Alphabet showed healthy growth, benefiting from the computational resources demanded by generative AI. However, this growth was insufficient to satisfy investors eager for faster returns from extensive spending on data centers and other AI infrastructure.
Amazon projected a third-quarter operating income below analysts' expectations, even as CEO Andy Jassy pursued cost-cutting measures to allocate more resources to AI. Amazon’s capital expenditures reached $30.5 billion in the first half of the year, primarily invested in its AWS cloud unit. Jassy assured that these investments are guided by sophisticated algorithms to balance capacity and profitability.
Alphabet's outlook on AI growth remained vague, with Chief Investment Officer Ruth Porat highlighting the company's strengths in AI and generative AI solutions without providing specific details. This lack of clarity contributed to a 5% drop in Alphabet's shares the day after its earnings report.
Microsoft also faced scrutiny over its AI investments. The company's Azure cloud computing service saw a slowdown in sales growth, despite AI driving 8 percentage points of Azure’s growth in the quarter. Analysts questioned whether the sales growth could justify the heavy spending, with CEO Satya Nadella stressing that investments were driven by customer demand.
Meta and Apple Buck the Trend
Meta, the parent company of Facebook, stood out by raising its capital expenditure forecast, citing AI investments. The company’s second-quarter revenue exceeded expectations, with CEO Mark Zuckerberg crediting AI for improvements in ad targeting and content recommendations. Zuckerberg framed the significant AI spending as a short-term sacrifice for long-term gains.
Similarly, Apple announced that new AI features would boost iPhone upgrades in the coming months, helping the company recover from a sales slowdown, particularly in China.
Chipmakers and Equipment Suppliers Hit Hard
The backlash against AI spending also impacted chipmakers and equipment suppliers. Nvidia Corp.’s shares tumbled 6.7% on Thursday and continued to decline in premarket trading on Friday. SK Hynix Inc., a leading AI memory chip supplier, saw a 10% drop in Seoul trading, reflecting a broader decline in semiconductor stocks in Asia.
Chip-making equipment producers like ASML Holding NV and Tokyo Electron Ltd. also experienced share declines. Meanwhile, Intel Corp. faced its worst share decline in almost 25 years, falling over 22% in premarket trading after reporting a disappointing sales outlook and plans to cut jobs.
The $1 Trillion Question
To justify the potential $1 trillion investment in AI infrastructure over the coming years, companies need to demonstrate that AI can solve increasingly complex tasks. Incremental improvements in fields like coding and advertising are not enough. Jim Covello, head of equity research at Goldman Sachs, predicted that the AI rally might falter if significant use cases for the technology do not emerge soon.
In a mid-July interview, Mark Zuckerberg defended the industry's spending, urging the market to look towards the future. "The downside of being behind is that you're out of position for the most important technology for the next 10 to 15 years," he said.
US Job Market and Economic Implications
On top of disappointing earnings, the US labor market added fewer jobs than expected in July, with the unemployment rate rising to its highest level in nearly three years. The Bureau of Labor Statistics reported 114,000 new nonfarm payroll jobs, falling short of the 175,000 expected by economists. The unemployment rate increased to 4.3%, up from 4.1% in June, indicating a broader summer slowdown in the US labor market.
The tech stock selloff, coupled with a cooling job market, poses significant implications for the US economy. As tech companies navigate investor expectations and economic uncertainties, the pressure to demonstrate tangible returns from AI investments will only intensify.
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