The Q1 Tech Earnings Breathe Life Among The Digital Giants
With just Apple left to report in the tech earnings season, three major trends have emerged
- Digital Ad Winter Is Thawing. Alphabet, Meta, and Amazon are the big 3 in digital ads. Alphabet showed declines in ad revenue but posted $69.79B a 3% YoY increase and $1B above what analysts were expecting. YouTube dropped 2.5% YoY in ad revenue but paid subscription sales showed a 9% increase., Meta surprised the market with a 3% increase in the ad business hitting $28.6B for the first quarter. This reversed its trend of three quarters of decline. Meanwhile the 3rd largest player, Amazon showed continued growth in ads with a 27% growth rate at $31 billion.
The winners in ad monetization not only have the eyeballs but also are the dominant player in each business model. Google - search, Meta - social networks, and Amazon - commerce are showing that they are fierce competitors for digital advertising.
- Cloud Revenues Slow Down But Are Not Insignificant. Cloud adoption continues to power growth for Microsoft, Alphabet, but not Amazon. While the growth is slowing, double digit gains are nothing to sneeze at. Google Cloud gave Alphabet profits with 28% growth at $5.82 billion and finally was break even after 15 years. Microsoft showed 22% growth in cloud revenues. Amazon's more mature clientele shows that the market is about to enter an era of cloud optimization which means cloud revenues could take a hit. Amazon’s AWS showed this with a 16% cloud growth rate.
The era of cloud optimization is coming. Customers are starting to refactor workloads to optimize for data ingress and egress charges. Expect more rationalization in the next few quarters.
- AI Story Drives Valuations - A Tale Of Two AI Stories
The war for AI mind share in a post ChatGPT world is what’s driving tech valuations higher. While Microsoft kick started a war with Google earlier this year with Satya Nadella, MIcrosoft's CEO telling partners in Q1 that he would "bury" Google. Though Microsoft took the fight to Google in public, the reality is that Microsoft may not win the war as its servers are the oldest and it’s not taking a responsible approach to AI. The exponential amount of disinformation and misinformation will create massive cost to customers and society without the proper controls.
Meanwhile, Google has the best team, the best tech, but has been too slow to roll out offerings due to its bulkanized organizational structure and internal incentive system. Unlike Microsoft's command and control structure, collaboration is nearly impossible at a very federated Google. Google believes that creating a new "division" may help expedite innovation. However, Google must move faster, despite the realization that trust is important for AI adoption.
The Bottom Line: Tech Is Alive And Well Despite The Fed
The major tech players known as MATANA (i.e. MIcrosoft/Meta, Apple, Tesla, Alphabet, Nvidia, and Amazon) have shown much resilience despite interest rate hikes, massive cuts in valuations, a reset in earnings forecasts, and layoffs. MATANA stocks are poised for a rebound but will they move past their trading ranges in Q2? All eyes on the Fed Rate discussion this week and Apple's earnings to see what's next.
Your POV
Do you think the tech onslaught is over? Will the digital giants pull the market out of this self-inflicted crisis caused by The Fed.
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