Strong ad sales, stable enterprise spending wind beneath Big Tech
earnings
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[October 23, 2023] By
Yuvraj Malik and Zaheer Kachwala
(Reuters) - U.S. technology giants are likely to post their strongest
quarterly revenue growth in at least a year as their legacy businesses
stabilized, but investors looking for signs of a boost from artificial
intelligence (AI) may be disappointed.
Microsoft, Google-parent Alphabet, Facebook-parent Meta Platforms and
Amazon are expected to have built on the recovery in their enterprise
software and digital ads businesses as professional and consumer
spending stayed resilient despite an uncertain global economy.
The quartet's shares have rallied -- between Microsoft's 36% and Meta's
157% -- this year, boosting their combined market value to over $6
trillion and lifting the benchmark S&P 500 index.
"After a year where enterprise spend was held down by concerns about the
economy, we're heading into a year where those concerns are slowly
subsiding, making for a more stable spending environment in enterprise
software and advertising," said Gil Luria, senior software analyst at
D.A. Davidson.
While enterprise demand stabilized for legacy products, that has not
extended to cloud computing, the mainstay for Microsoft and Amazon. The
duo likely just barely budged off their previous quarter's record-low
cloud growth rates.
Microsoft, though, is likely to flag some wins from its investment in
OpenAI and integrating the technology across its products, analysts
said. The company had promised aggressive spending to meet demand for
its AI products.
RBC Capital Market estimates Microsoft will clock over $3 billion in
revenue from generative AI offerings this fiscal.
For others, such AI investments, like buying expensive Nvidia chips, may
hurt their bottom lines in the short term.
"It's probably not going to be material to revenue until 2025 because
enterprises are still figuring out their generative AI strategy," RBC
analyst Rishi Jaluria said.
On Tuesday, Microsoft is likely to report a nearly 9% rise in
first-quarter revenue, according to LSEG data, driven by strength in its
enterprise productivity software business.
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The logos of Amazon, Apple, Facebook and Google are seen in a
combination photo from Reuters files. REUTERS/File Photos/File Photo
Its costs, however, are estimated to have jumped 8.4%, the most in a
year.
On the same day, Alphabet is expected to post a 10% rise in
quarterly sales. Revenue from Google Services, which includes
YouTube, Search and the sale of apps, is expected to have grown by
8.5%.
Alphabet and Meta are set to benefit from an uptick in digital ad
sales ahead of the holiday-shopping season.
Last month, media research and investment firm Magna raised its
forecast for U.S. ad spending growth to 5.2%, from 4.2%, for
calendar 2023. It expects digital ad sales to rise 9.6% in the
period.
Meta is expected to report its quarterly revenue increased by more
than a fifth, the most in two years, and lay out its AI plans, after
unveiling a series of AI ad tools last month.
But cloud computing growth for all the companies is expected to show
little improvement as clients look for ways to optimize their
infrastructure costs.
Market leaders Amazon Web Services and Microsoft's Azure likely grew
by 12.4% and 26.2%, respectively (Azure estimates from Visible
Alpha) in the quarter.
While they will have inched up from their record-low growth rates in
the previous quarter, Google will take their place with an estimated
25.7% growth.
Amazon, however, is expected to be shielded by strong retail sales,
thanks to a strong labor market. The e-commerce giant is projected
to post an 11.3% rise in revenue on Thursday.
Meta reports on Wednesday and Apple will round off Big Tech earnings
with results next week, on Nov. 2.
(Reporting by Yuvraj Malik and Zaheer Kachwala in Bengaluru; Editing
by Sayantani Ghosh and Savio D'Souza)
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