Big tech stocks have been flying this year as investors scramble to get in on the ground floor of what could be the next technological revolution. In the first half of the year the Nasdaq Composite chalked-up 33% gains as tech’s ‘Magnificent Seven’ stocks soared.

Analysts put the surge down to three factors: the market’s ‘year of efficiency’ focus with operating costs reeled in to bolster profitability, a growing confidence that the Federal Reserve’s tightening cycle was nearing its endgame, and the emergence of generative AI (artificial intelligence) applications that promise a new era of growth and prosperity.

There was a fear that earnings and revenue growth were the missing ingredients but after the latest quarterly earnings reports, there are signs of optimism here too. Big tech share prices have, by and large, continued to rally. Here’s what Shares gleaned from latest big tech earnings.

AI IS MEASURING UP TO THE HYPE

Two AI heavyweights, Microsoft (MSFT:NASDAQ) and Google-parent Alphabet (GOOG:NASDAQ), published their first earnings reports since sinking billions of dollars into AI projects. Carrying huge implications beyond AI – cloud computing and the tech sector broadly – investors had their eyes fixed on the figures and forward earnings guidance and the verdict was mixed for the two stocks.

Microsoft’s earnings topped fiscal fourth quarter forecasts, with revenue up 8% to $56.19 billion, slowly accelerating for a second straight quarter. Growth from its Azure cloud computing arm advanced by 26% year-on-year, albeit slowing from the prior quarter’s 27% advance.

Having announced AI pricing for enterprise customers, Microsoft commented that AI revenue growth will be ‘gradual’ and that it expects ‘increased capital spending on AI initiatives,’ reeling in investor expectations. Microsoft’s capital expenditure is accelerating and it is important for the market to understand this investment in the business.

Microsoft and Alphabet shares are up 40% and 37% respectively since Shares told investors to buy both stocks towards the end of 2022, after months of weakness in the technology sector.

NVIDIA SHARES HAVE SOARED THIS YEAR

All this talk of AI investment has done wonders for chip design firm Nvidia (NVDA:NASDAQ), with the share price up 205% year-to-date. Its next quarterly results are scheduled for 23 August and the analysts are predicting big things. The consensus forecast is $2.07 earnings per share on $11.1 billion revenue, up 90% and 54% respectively year-on-year.

Even Tesla (TSLA:NASDAQ) has enjoyed an AI tailwind as Elon Musk’s electric cars company uses AI to train its autonomous-driving technology.

In addition to price cuts for its Model Y and Model S, electric vehicle charging deals with Ford (F:NYSE), General Motors (GM:NYSE) and Rivian Automotive (RIVN:NASDAQ) have helped to supercharge Tesla’s shares this year, up 111% in 2023, and Morgan Stanley recently estimated that the charging network could be worth more than $100 billion by 2030.

GOOGLE’S BIG ADVERTISING RECOVERY

Alphabet’s search advertising on its Google platform has bounced back strongly after declaring a ‘code red’ for Google Search late last year as rivals like ChatGPT and Microsoft’s AI-equipped Bing came on the scene. The latest Google search advertising revenue grew to a better-than-expected $42.6 billion, showing that most people haven’t made ChatGPT their default search engine as pessimists feared.

That represented 5% year-on-year growth for Google Search, while revenue from YouTube advertisements was 4% higher than a year ago at $7.67 billion, accelerating from zero growth on both fronts in the first quarter.

Meta Platforms’ (META:NADAQ) strong results go beyond a better spending environment. It is gaining traction in monetising Reels, the TikTok-style short video feature on its Facebook and Instagram social media networks, with chief executive Mark Zuckerberg saying Reels is generating more than $10 billion in annual run-rate revenue, up from $3 billion last autumn.

THE FUTURE LOOKS CLOUDY

Cloud computing spending growth has slowed in recent quarters, as customers focused on optimising capital budgets and getting smarter about buying cloud computing and storage. Analysts think this process is nearing completion, and there were positive signs on that score in recent tech sector results, foreshadowing good news for Amazon’s (AMZN:NASDAQ) Amazon Web Services cloud computing arm, also known as AWS.

A lot of the credit goes to AWS whose revenue revved up an impressive 12% in the three months to 30 June as customers loosened their purse strings. But Amazon’s e-commerce business wasn’t left in the dust either, with solid 10.5% growth. Across all divisions, group revenue ticked up 11%, and Amazon topped it off with brighter-than-expected outlook commentary, resulting in a near-9% share price jump that added almost $120 billion to its market value.

Microsoft’s cloud growth rate slumped from 51% in the June 2021 quarter to 26% in the latest three-month period, but the company sees September-quarter growth in the same ballpark, with work on AI projects a potential lever for faster growth in the future.

POCKETS BULGING WITH CASH

Investors will see all of the ‘Magnificent Seven’ companies invest money in multiple ways ahead, but they generally have plenty to spare. After spinning through latest quarterly reports, Shares calculates more than $228 billion of cash between them.

Sure, that’s down a lot from the half trillion-dollar levels of peak pandemic, but it allows for the sort of investment down the line that will see some, if not all these companies continue to dominate, not just in AI, but other opportunities that emerge in time.

BIG TECH NOT TOTALLY IMMUNE

Against the backcloth of other big tech players, Apple (AAPL:NASDAQ) results were a bit disappointing, beating analyst expectations but showing signs that global consumers are juggling the cost-of-living pinch with their desire for the latest gadgets.

Almost all of Apple’s hardware product categories sold less this quarter than they did in the same period in 2022. iPhone revenue fell 2% to $39.67 billion, while Macbooks, computers and iPads were worse, leaving the shares weaker following its results, much like Microsoft.

Yet Apple’s increasingly important services business (Apple Music and TV, iCloud, Apple Pay, etc) picked up the slack. The number of paying subscribers for its digital services has exceeded one billion worldwide and it now has more than $10 billion in its high yield savings account, a great achievement in a short space of time and highlights its potential as a financial services behemoth. We suspect we will see more of this sort of thing as the company finds its feet in that market.

The services arm provides a welcome cushion to the group, but Apple still needs to revive hardware sales growth otherwise the market is going to worry about the next generation of customers to join its ecosphere.

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