China Fund News reporter Yao Bo
Technology giants such as Microsoft, Google, Apple, Amazon, and Meta have disclosed their latest financial reports. In the fourth quarter of 2023, the five giants achieved impressive performance, averaging double-digit revenue growth.
However, after the performance announcement, the stock prices of technology giants did not generally rise, indicating that investors' optimistic expectations for artificial intelligence (AI) are no longer consistent. Some analysts even compared the current optimism to the new "Internet foam".
In the past year, a few large companies that have driven the rise of the US stock market have diverged, making investors increasingly concerned about the sustainability of the rise.
The average revenue of the five giants increased by 14%
Recently, technology giants such as Microsoft, Google, Apple, Amazon, and Meta have successively disclosed their latest financial reports. Statistics show that in the fourth quarter of 2023, the average quarterly revenue of five companies increased by 14%, with a total market value exceeding 10 trillion US dollars (approximately 72 trillion yuan).
The stock price performance after the performance announcement surprised the market, with 3 out of 5 companies experiencing a decline in stock prices. Although there was a rebound afterwards, it did not reach the previous high, reflecting a significant difference between the commercialization potential of AI technology and reality.
Microsoft's latest financial report shows that in the fourth quarter of 2023, its Azure Cloud Services division saw a 30% surge in revenue, surpassing Google Cloud's 26% growth rate and Amazon Cloud Services's 13% growth rate.
However, the growth of Microsoft's cloud business has not yet met the expectations of some investors, especially the driving effect of its AI business. Only 6 percentage points of the 30% growth in Azure cloud services were contributed by AI. In addition, Microsoft's 365 Copilot - Office Program AI Assistant - is considered a major tool for Microsoft to monetize through AI, but Microsoft has not disclosed the adoption rate and monetization situation of Copilot, which has caused investor dissatisfaction.
Google, as a search and cloud computing giant, cannot be ignored for its profound accumulation in the field of AI. With Microsoft's strong rise in AI technology, Google's impact and efficiency in integrating and utilizing its own AI technology have become the focus of market attention. The financial report shows that Google's core search advertising business has experienced a slowdown, with revenue of $65.5 billion in the fourth quarter of last year, lower than market expectations. Although Google emphasizes the importance of AI technology in improving search and cloud computing services, there are still doubts in the market about whether Google's investment in AI is sufficiently proactive, and there are also concerns that fluctuations in its advertising business may affect the implementation of AI plans.
The financial report shows that both Google and Microsoft's cloud computing businesses have achieved strong growth, but the slight differences have a significant impact on stock prices.
The two companies that are relatively less affected by AI elements have also experienced differentiation. Apple's revenue growth turned positive for the first time in nearly a year, but a 13% decline in sales in the Chinese market and poor first quarter performance expectations weighed on its stock price; Amazon has benefited from stronger than expected performance and guidance, leading to a strong rise in stock prices.
AMD, the leading AI chip manufacturer, has also received considerable attention. The sales of its AI accelerator chip MI300 have exceeded expectations, and it is expected that this year's sales will reach $3.5 billion, far exceeding the expected $2 billion. This processor is similar to Nvidia's popular product H100 and is used to develop AI models through a large amount of data, with a huge market demand. But the company's stock price fell briefly after the financial report was released. The market is concerned that despite the enormous potential of AI technology, the realization of its commercial applications and profitability may be more complex and time-consuming than expected by the market.
Meta turns dividends into profits
The stock price of Facebook's parent company Meta surged after the financial report was released, with its market value skyrocketing by nearly $200 billion in a single day, setting the world's largest daily increase in individual stock market value. To win over investors, Meta has opened up a new way for technology companies to rise through the traditional practice of dividends. This social media giant plans to return up to $86 billion in red envelopes to shareholders, including quarterly dividends of 50 cents and $50 billion in stock repurchases.
This strategy reflects Meta's confidence in its long-term cash flow. Usually, large technology companies retain a large amount of cash for reinvestment and responding to industry changes, with little direct return to shareholders through dividends. Currently, as the dominant position of these companies in the S&P 500 index becomes increasingly stable, the pressure to return funds to shareholders is also increasing. Companies such as Apple, Alphabet, Microsoft, and Amazon all have significant cash reserves. Meta's move provides new ideas for cash flow management for large technology companies.
In fact, this directional change is not only an adjustment of financial strategies, but may also be a response to changes in the political and regulatory environment. Previously, Meta faced antitrust scrutiny for its acquisition of WhatsApp and Instagram, and its future large-scale acquisitions may face stricter regulations. Dividends and buybacks indicate that Meta is changing its "disorderly expansion" strategy and reducing its reliance on large-scale acquisitions.
In addition to dividends, Meta also continues to focus on AI. According to the announcement, Meta will continue to invest heavily in artificial intelligence in 2023, focusing on generative AI and related technologies that support its social media products and advertising positioning.
The capital market provides positive feedback to Meta. On February 3rd, Meta's stock price rose 20%, closing at a record high of $474.99, with a daily increase of $19.7 billion in market value, surpassing the record daily increase of approximately $190 billion set by Apple and Amazon in 2022.
Morgan Stanley analyst Brian Novak pointed out that Meta's excellent execution ability, faster growth rate, and continuously improving capital structure efficiency paint a better development prospect for it. He mentioned that Meta's AI applications in users and advertisers are very powerful, and more tool products will be expanded this year.
Overestimated or difficult to maintain
In the past year, the stock prices of seven major technology stocks, including Google, Amazon, Apple, Microsoft, Meta, Nvidia, and Tesla, have surged by 80%, while the average increase in the S&P 500 index is only 3%. At present, the trading prices of the seven major technology stocks are 48 times their profits, more than twice the valuation of the S&P 500 index. According to Bloomberg's estimate, the profits of the seven giants mentioned above will grow at an average annual rate of 14% over the next 3 to 5 years, only 4 percentage points higher than the predicted growth rate of the S&P 500.
Analysis suggests that AI may find it difficult to replicate the high popularity of 2023 in 2024, making it more difficult for technology companies to maintain overvaluation.
Ken Laudan, the fund manager of Buffalo's large stock fund, revealed that he recently reduced his holdings of some Internet and software giants. The reason for this is not that he is worried about the long-term growth of these technology giants, but that he believes that the relative return may not be as good as other holdings. He emphasized that the AI field will not bring the same surprises as in 2023 in 2024.
On the other hand, even if the realization rate is as high as that of Microsoft, the leader of AI projects, it is difficult to confirm that the scenario of using AI to make significant profits will come one after another. Davidson's Managing Director Luria believes that for most companies, making big money using artificial intelligence services is still out of reach. Although companies are increasing their application of artificial intelligence, tech giants may only consider AI functionality as a benefit of existing products, rather than a paid standalone product. He stated that tools developed around generative artificial intelligence are very attractive, but they are still in their early stages and there is still a considerable distance before AI becomes a substantial driving force for performance growth.
Market expectations indicate that the success of technology giants in the AI field depends on the subsequent commercialization process. The giants need to continue to increase investment in AI technology research and development to ensure that their products and services maintain a leading position in the market. Not only the innovation of key technologies, but also the market values the company's grasp and response to market demand. For example, Microsoft's AI assistant product 365 Copilot, whose rapid application demonstrates Microsoft's keen vision for efficient and intelligent tools, requires clearer evidence when it comes to financial numbers.
Despite the impressive performance of technology giants, if there are any signs that do not meet optimistic expectations, the market will cast a vote of no confidence.
Strategists of JPMorgan Chase and Bank of America compared the capital concentration of big technology companies today with the Internet foam more than 20 years ago, and believed that the rise of big technology companies was likely to be unsustainable.
However, some fund managers believe that it is currently difficult to assess whether technology giants have entered the stage of speculation. In the initial stage of the current technology turnover cycle, it is difficult to distinguish the high and low valuations of technology stocks in the first few years.