Reality-Check Looms For AI Giants

AI-based tech stocks have been outperforming other shares this year, but that doesn't mean they will see an immediate revenue or bottom-line increase.

The AI Craze Continues

Major tech companies are expected to double down on AI commentary, which has helped push some companies' shares up substantially. But, with Q2 earrings getting underway, there is a dose of reality. AI counts for less than 1% of IT spending and is expected to rise to 8-10% next year. Before that, the broader information technology sector is expected to decline revenue by around 1.5% this year. The reason is that it takes time for the investments to pay off, with the upfront costs being booked now for potential returns over the coming years.

Meanwhile, other projects have underperformed. Meta's bet on the Metaverse came at a cost of $39B so far and still hasn't returned dividends. The threads extension to Instagram meant to compete with Twitter - now being renamed "X" - is running out of steam, with user numbers down 70% since the peak earlier this month. It might not have completely failed yet, but it illustrates tech firms' difficulty outside of AI. Tech firms have continued to cut jobs through the year to shore up their margins, though the layoffs have slowed in recent months. No wonder tech companies are expected to talk most about AI in their earnings and conference calls.

What to Expect from Tech Giants

Microsoft (MSFT) started the AI craze with ChatGPT and seems ahead in generating revenue from the new tech. Its recent inclusion of AI in Microsoft 365 is seen as having the potential to generate up to $36B in revenue with high margins. Microsoft is expected to report a quarterly increase in earnings to $2.55 on improved sales of $55.4B.

Alphabet (GOOG) seems the most threatened by AI and still hasn't managed to pull out a rival product. This is despite founder Sergei Brin repeatedly being reported as coming back to the company to work on a response to Bing's AI functionality. After Bard seemed not to take off, Google is now looking at Gemini. Still, the incorporation of AI in Bing hasn't led to a decline in Google traffic, which has marginally picked up market share since last year. Google's earnings are expected to be slightly higher at $1.34 on marginally improved revenue of $72.8B.

Meta (META) can't get a break, as discussed above, with its recent announcements not taking off. The company continues to rely on local advertising revenue through its flagship Facebook, which continues to add users. Earnings are expected to come in at $2.91 on $31.1B in revenue.

GOOG Flag Pattern Points to Continuation

Alphabet appears in pullback mode, following the completion of a flag at $115 and an initial leg up shy of $130 at $127. If the short-term support holds firm, prices might extend as high to reach the measured-move projection near $140. Conversely, losing the bottom will open the door to double digits, provided the highly active $106 succumbs to bearish pressure.

Source: SpreadX / Alphabet

Key Takeaways

As AI-based technology stocks surge, major tech companies like Microsoft, Alphabet, and Meta are expected to emphasise their AI efforts. However, the broader IT sector is projected to face a revenue decline this year, with AI accounting for less than 1% of IT spending. Microsoft leads in AI revenue generation, while Alphabet struggles to produce a rival product. Despite incorporating AI, Google has not seen a decline in traffic, and Meta relies on local advertising revenue from Facebook. Earnings expectations for the three companies vary, with Microsoft projected to report increased earnings, Alphabet's earnings slightly higher, and Meta enduring ongoing challenges.