Investors were not impressed by latest megacap tech results
The risk of being overexposed to a narrow field of equities was highlighted Wednesday as investors showed frustration with big tech after disappointing results from two titans.
Google’s parent Alphabet and Tesla reported their quarterly results – the first of the big tech firms to do so this quarter - and the market was not impressed, sparking a pullback from megacap stocks which saw the tech-heavy Nasdaq fall by 3.6%, its worst day since October 2022 and the S&P 500 dropped 2.3%.
The strong equities rally in 2024 has been fuelled by the large technology firms, with an AI frenzy one of the key factors, driving up stocks of Nvidia, Microsoft, Amazon, and others that are seen as critical to its growth.
But there has been concern of an AI bubble that could damage investors as the dot com bubble did a quarter of a century ago. Expectations of high earnings from the Magnificent Seven and others have added to the riskiness of the ‘all in on big tech’ strategy.
Goldman Sachs has been questioning the significant investment made by firms in their AI operations – and investors in buying their stocks – given there has been little to show in returns so far.
Alphabet
Alphabet did produce increased revenue and earnings, but while search and cloud continue to grow, its YouTube ad revenue missed expectations, and second quarter capital spending on its AI operations totalled $13 billion. The high spend on AI is one of the concerns of analysts who question how ROI will pan out.
Yahoo Finance quoted UBS Global Research’s Stephen Ju: “So as far as we are concerned, the [return on invested capital] debate remains only partially resolved, especially as we are now contemplating what is a higher [capital expenditure] estimate for 2025 and 2026.”
Alphabet reported revenue of $84.7 billion for the second quarter, up from $74.6 billion in the same quarter of 2023. Earnings beat expectations with $1.89 a share compared to the $1.84 expected.
“Our strong performance this quarter highlights ongoing strength in Search and momentum in Cloud. We are innovating at every layer of the AI stack,” said CEO Sundar Pichai. “Our longstanding infrastructure leadership and in-house research teams position us well as technology evolves and as we pursue the many opportunities ahead.”
Tesla
Meanwhile, Tesla’s results also raised concerns.
Again, the firm’s revenue outperformed what was anticipated - $25.05 billion versus $24.6 billion – but adjusted profits were $0.52 compared to the $0.60 expected.
But it also reported that growth for 2024 would be “notably lower” than 2023. EV deliveries were down for a second consecutive quarter and its profit margin fell to its lowest in five years. Add to this a delay for its robotaxis launch.
Tesla stock was down 12% Wednesday following its results, but had surged 80% from an April low to early July as expectation of the potential of its AI innovations could bring.
“The disconnect from reality means anything can happen,” said Mike O’Rourke, chief market strategist at Jonestrading told Bloomberg. “While it is understandable Tesla shares traded off following the report, it remains hard to understand why they were at such levels prior to the report.”
