The hype surrounding artificial intelligence was played down a lot in the third quarter, as Big Tech companies came under pressure to show results in what has become the biggest technological shift since the creation of the internet.
The upshot of last quarter’s earnings reports was steady and significant spending on AI, even as there are signs that the US economy is slowing due to high interest rates. Companies with the most exposure to AI are getting a tailwind that I expect will last for years, perhaps even well over a decade.
MicrosoftMSFT,
proved itself to be the strongest of the group, with better-than-expected revenue, higher margins and renewed acceleration in the Azure cloud division. At the other end of the spectrum is a beleaguered Qualcomm QCOM,
emerged from a tough year and raised its expectations, suggesting the maker of chips for handsets and PCs has turned the corner.
AI stories are everywhere, especially at semiconductor companies driving this new computing revolution. But a good read on the technology’s adoption can be seen at less visible companies, including IBM,
and ServiceNow NOW,
Both are gaining momentum and creating increasingly fierce competition in Big Tech.
“Microsoft is the largest corporate investor in OpenAI, the maker of ChatGPT.”
Here is my Big Tech review for the above companies and for Meta Platforms META,
Amazon.com AMZN AMZN,
Intel INTC,
and Apple AAPL,
Microsoft: Microsoft is the clear frontrunner in AI-focused Big Tech, driven by its strong monetization and adoption story. In the third quarter, it showed robust results in many areas, and strong performance was driven by AI and cloud services. Microsoft is the largest corporate investor in OpenAI, the maker of ChatGPT.
Total revenue rose 13% to $56.5 billion from a year earlier, almost $2 billion more than analysts expected. Azure, Microsoft’s enterprise cloud unit, posted an acceleration in revenue growth to 29%, up from 26% in the previous quarter, easing concerns that companies are moderating their spending.
Microsoft, despite its market value of $2.6 trillion, is still growing rapidly for a company of its size. Moreover, it is becoming increasingly profitable. Gross margins increased to 71%, an increase of 2 percentage points. And operating margins increased by 5 percentage points to 48%.
Qualcomm: The chip designer beat expectations in the third quarter and raised its expectations, pointing to momentum in China and strength in most sectors except internet of things (IoT). The new forecast assumes sales of as much as $9.9 billion in the current quarter.
In a recent conversation with CEO Cristiano Amon, he expressed confidence in Qualcomm’s strength, highlighting positive sales growth from Chinese manufacturers and significant growth in the automotive industry. He said smartphone makers have used up most of their inventory and are starting to place orders again. To boost investor confidence, Qualcomm signed a new supply agreement with Apple in September.
Although Amon is cautious, the general sentiment around Qualcomm is brightening and Qualcomm is entering recovery mode. This is one to watch.
Read: Qualcomm’s latest laptop chips hit Intel, AMD and Apple with a powerful blow
IBM: IBM, steady under CEO Arvind Krishna, posted third-quarter revenue of $14.75 billion, up 4.6% and better than expected.
The company’s focus on AI has been clear, with notable gains in software and consulting. Revenue in the software segment, which also includes AI, rose 7.8% to $6.3 billion. Customers are increasingly choosing the Watson X AI platform, the CEO said during a conference call with analysts.
The company also reaffirmed its previous full-year expectations for revenue and cash flow growth. In a conversation with CFO Jim Kavanaugh, it was clear that IBM’s overall performance was marked by operational efficiency and margin expansion, but also by confidence that the company’s AI and hybrid cloud strategies are meeting the company’s revenue and margin expectations. company, which informs the company’s strategic approach to navigating the evolving technology landscape.
Service now: ServiceNow showed consistent growth in simplifying complex software environments with its AI-powered Now platform. The company achieved a milestone annualized turnover of $10 billion and posted accelerating revenue growth for the third quarter in a row.
I spoke with CEO Bill McDermott on earnings day. In addition to the results, he highlighted efficiency gains, significant customer wins and a positive reception for the company’s Vancouver platform, which integrates generative AI into all workflows.
McDermott said in an interview with MarketWatch’s sister publication Barron’s that he expects the increase in IT spending to double to 7% as companies fear falling behind. They will cut funding for AI software elsewhere, he said.
Metaplatforms: Meta spends a lot of money on AI and mixed reality. CFO Susan Li said in the third quarter report that she expects operating losses to rise significantly at Reality Labs, a research unit working on AI, machine learning, neural control interface and full body tracking.
On the plus side, the number of daily and monthly active users across categories all increased by up to 7% during the quarter. Advertising revenue rose 24% to $33.6 billion, more than twice as fast as competitor Alphabet GOOG.
Amazon’s ad revenue rose slightly faster, by 26%, although the total dollar amount is almost a third of Meta’s.
Meta’s investments in AI are aimed at providing retailers with improved targeted advertising. CEO Mark Zuckerberg said the increase in time spent on Facebook and Instagram is the result of “our recommendations improvements.”
Amazon: Amazon delivered a mixed performance in the third quarter. Revenue at the closely watched AWS cloud unit rose 12%, slightly below expectations. In contrast, growth at Microsoft’s rival business, Azure, was 29%, and Google Cloud was 22%. Still, AWS is significantly larger than its main rivals.
A closely watched indicator at Amazon is profit margins, which have risen for the third consecutive quarter as CEO Andy Jassy’s cost-cutting program bears fruit. Operating margins were 7.8%, the highest in more than two years. By the fourth quarter of 2022, they had fallen to just 1.8%.
Jassy cited AWS’s innovation in generative AI, highlighting momentum with notable customers including Adidas, Booking.com and Merck.
Information: Intel showed overall strength in the third quarter, exceeding expectations despite tough macro conditions and competition from chip powerhouse Nvidia NVDA.
(Nvidia will report quarterly results on November 21.) and AMD AMD,
which recently predicted a mega AI number for data centers despite conservative guidance, leading to a mixed reaction from the market.
Although year-over-year growth in its core businesses did not reach ideal levels, Intel showed improvement and CEO Pat Gelsinger expressed optimism about the company’s progress.
Intel’s focus on AI-powered PCs and data center AI, coupled with outsized growth in the foundry segment, positions the company well for future opportunities. Still, data center AI should achieve faster growth. In a conversation I had with Gelsinger, we discussed the critical importance of the AI capability and I feel like he sees a tangible opportunity that should materialize for Intel as AI shifts to inference, with CPUs and accelerators becoming more common and playing to Intel’s strengths. Let’s say this: Intel still has some work to do.
Apple: Apple earnings headlines are dominated by the fact that the company has posted four straight quarterly revenue declines. That is undoubtedly important. That said, Apple could provide masterclasses in managing its sprawling operations. Operating margins increased by two percentage points to 30% in a slowing economy. Furthermore, revenues came in as expected and profits were better than expected.
The new iPhone cycle hasn’t been as exciting, and the new M3 chip isn’t as compelling as people thought. And while the revenue decline may lead some to say this wasn’t a good quarter, I’ll argue that these results, combined with strong service sector growth (up 16%), make for a decent report overall. We all knew the hardware party wouldn’t last forever. This temporary downturn in devices is forcing Apple to innovate in services and boost margins, which will be good for the company and its investors in the long run.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advice or consultancy to Nvidia, Meta Platforms and dozens of other technology companies. Neither he nor his company has stock positions in the companies mentioned. Follow him on Twitter@danielnewmanUV.
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