Is the 'Magnificent Seven' Rally Over? Insights From Tech Giants' Earnings Reports

After the market close on Tuesday, Alphabet, the parent company of Google, announced its fourth-quarter earnings, falling short of analysts' projections for advertising revenue, which is central to the company's financial success. Following the earnings report, the company's stock dropped in after-hours trading.

In the fourth quarter, the company saw an 11% increase in advertising revenue compared to the same period last year, although the growth fell short of what analysts had predicted. During the earnings call, executives highlighted the impact of AI on advertising effectiveness, particularly mentioning the recently introduced AI model called Gemini. Released in December 2023, Gemini is touted to be more advanced than Microsoft's ChatGPT and is being integrated into all of Google's offerings, including the Bard search tool and its advertising suite. CEO Sundar Pichai noted that Gemini has already cut search latency by 40% and announced the upcoming launch of an even more powerful version, Gemini Ultra.

Alphabet reported that its capital expenditures for the quarter amounted to $11 billion, an increase from $8 billion in the preceding September quarter, reflecting ongoing investments in artificial intelligence and cloud infrastructure. The company also indicated that its capital spending for 2024 is expected to rise significantly compared to 2023.

Evercore ISI analyst Mark Mahaney pointed out in a "flash" research note on the results:

Microsoft exceeded expectations in its recent earnings report, highlighting strong performance in its cloud sector and gains from artificial intelligence initiatives. The company's Azure and other cloud services saw a 28% revenue growth on a constant-currency basis in the fiscal second quarter, surpassing the 27% analysts had anticipated. Notably, AI services were a significant growth driver for Azure, contributing 6 percentage points to its expansion in the December quarter, a notable increase from 3 percentage points in the prior quarter.

In the fiscal second quarter, Microsoft completed its largest acquisition by purchasing video game publisher Activision Blizzard. The company also launched custom cloud chips and began offering a new $30 monthly Copilot AI add-on for its Microsoft 365 productivity suite. However, CEO Satya Nadella and CFO Amy Hood did not disclose the number of customers who have adopted the Copilot service, though Hood expressed optimism about its early adoption and potential for revenue growth.

Additionally, Microsoft continued with job cuts during the quarter. Its LinkedIn subsidiary laid off approximately 700 employees in October, adding to the previously announced 10,000 cuts earlier in the year. Following the Activision acquisition, Microsoft also announced the elimination of about 1,900 jobs in its gaming division, which constitutes around 9% of that unit's workforce.

AMD's fourth-quarter earnings report met analyst predictions, and the semiconductor company's revenue exceeded expectations. However, AMD's forecast for the first quarter did not meet analyst forecasts, which led to a decline of over 6% in the company's stock price in after-hours trading. Despite this, AMD provided a positive update on the sales momentum of its new AI chips.

AMD CEO Lisa Su commented on the call with analysts that she anticipates a "mixed" demand environment for 2024. The net income reported for the fourth quarter was $667 million, or 41 cents per share, a significant increase from the $21 million, or 1 cent per share, reported in the same quarter the previous year.

AMD is challenging Nvidia's dominance in the GPU market with its new AI chips, which were introduced last year and are positioned to compete with Nvidia's H100 GPUs in some applications. Investors are anticipating substantial growth in AMD's data center segment in the coming years.

AMD's data center business, which encompasses server CPUs and AI chips, experienced a 38% increase in sales year over year, reaching $2.28 billion, making it the company's largest segment. This growth was largely credited to strong sales of AMD's Instinct graphics processors, which are designed for AI applications. Nevertheless, the data center business's performance was on par with the $2.29 billion estimate provided by FactSet.

Traditionally, AMD's core business has been focused on CPUs for PCs and servers. However, this part of the semiconductor industry has been relatively stagnant or in decline recently due to decreasing PC sales post-pandemic. The client segment at AMD, which includes chips for PCs and laptops, saw a 62% increase in sales year over year to $1.46 billion, propelled by recent chip launches. Conversely, sales in AMD's gaming segment, which supplies semi-custom processors for gaming consoles like Microsoft's Xbox and Sony's PlayStation, dropped by 17%. The decline was attributed to slower console sales, and AMD anticipates a significant double-digit percentage decrease in semi-custom revenue for the current quarter.

On Monday, Susquehanna analyst Christopher Rolland reaffirmed his Positive rating on AMD shares. He raised his price target to $210 from $170 but cautioned the chip maker must raise its AI forecasts for this year. Rolland said he believes investors, on average, expect AMD to generate $6 billion in data center GPU revenue this year and want AMD to raise guidance to at least $3 billion.