Investors were laser-focused on AI for tech earnings in the second quarter on expectations that companies including Microsoft Corp. and Advanced Micro Devices Inc. might be benefiting as much as Nvidia Corp. has.
Nvidia
NVDA,
which has a staggered fiscal-year in which it reports earnings one month after most other technology companies do, gave investors a jolt at the end of May when it said revenue in the three months through July would jump by about 50% from the previous period.
That set up sky-high expectations for companies that are embedding AI-related technology across their product suites as well as chip companies that are selling to them. The second quarter, therefore, became a litmus test.
Last week, Amazon.com
AMZN,
and Apple
AAPL,
were among the last of the large tech companies to report financial results for the second quarter.
Here’s a breakdown of AI’s impact on the most popular technology companies’ second-quarter earnings, as well as a discussion on which companies fared best, and which have the most compelling story for the long term.
“ Microsoft executives mentioned “AI” 48 times on the company’s earnings call, up from six times a year earlier. ”
Microsoft: Investors were most keen to learn how Microsoft
MSFT,
monetized artificial intelligence last quarter. After all, the Redmond, Wash.-based company is the biggest investor in OpenAI, the creator of ChatGPT.
There are two fronts where Microsoft is driving AI: Its Azure cloud platform and its vast suite of apps via a new product called Copilot. In fact, in the second sentence of Microsoft’s earnings release July 25, CEO Satya Nadella mentioned the magic acronym: “Organizations are asking not only how — but how fast — they can apply this next generation of AI.”
Microsoft executives mentioned “AI” 48 times on the company’s earnings call, up from six times a year earlier, according to a comparison of the transcripts.
Nadella said Azure is grabbing market share as customers “migrate existing workloads and invest in new ones.” He said that while Azure is the second-largest cloud-storage provider after Amazon’s AWS, Microsoft’s product is “in the lead when it comes to these new workloads.”
Microsoft cloud, of which Azure is a large part, accounted for more than 50% of total sales for the first time in the 12 months through June, exceeding $110 billion. That gives Microsoft a vector to sell AI products, from ready-to-use models for tasks including understanding images, language and decision-making, to making it easy for developers to add AI to their own apps.
As for Copilot, Microsoft is calling it a “third pillar” for the company in that it enables “businesses and employees to do more with the technology they already have.”
Microsoft unveiled pricing for Copilot last month, saying it would charge $30 a month per user. The basic 365 suite of products — Word, Excel, PowerPoint and others — costs $70 a year.
Alphabet: Among Big Tech companies, Microsoft gets all the attention around AI, even though Alphabet
GOOG,
GOOGL,
is also a major player, having made dozens of acquisitions in artificial intelligence and automation over the years.
Alphabet purchased Nest Labs in 2015. Rebranded as Google Nest, it’s a home-automation system that links smart thermostats, wireless cameras, speakers and other components. Alphabet bought DeepMind, an artificial intelligence research laboratory, in 2014. Last April, CEO Sundar Pichai said he’d combine AI units at the Mountain View, Calif.-based company into a new division called Google DeepMind, helping to “significantly accelerate our progress in AI.”
On the company’s second-quarter earnings call July 25, CFO Ruth Porat said she expects to increase capital expenditures in the second half of 2023 and into 2024, with the “primary driver” being to “support the opportunities we see in AI across Alphabet.” In the three months through June, servers accounted for the largest portion of capex spending amid a “meaningful increase in investments in AI compute,” she said.
In total, Alphabet executives mentioned “AI” 47 times on the call, three times that of the year-earlier period.
In addition to building out its servers to handle customers’ AI needs, Alphabet is also employing artificial intelligence in its consumer products, including Search, Assistant, Maps and YouTube. Alphabet controls 86% of the internet search market, followed by Microsoft’s Bing, at 7%, according to HubSpot.
Meta Platforms: The biggest competition Meta Platforms Inc.
META,
faces for AI dollars comes from itself. CEO Mark Zuckerberg famously renamed Facebook in October 2021, predicting the concept of the metaverse would be The Next Big Thing. When the artificial intelligence starting gun was fired in November 2022 by OpenAI’s ChatGPT, Meta pivoted, diverting some planned capital expenditures toward AI.
Still, Zuckerberg said on the company’s second-quarter call July 26 that Meta is committed to building out both the metaverse and AI, as he sees the two areas as “overlapping and complementary.” Facebook users may have recently noticed recommended content from people they don’t follow. Chalk it up to AI. Those new connections have “driven a 7% increase in overall time spent on the platform,” the CEO said.
In 2022, Menlo Park, Calif.-based Meta chose Microsoft as its cloud partner to help accelerate AI research and development. Meta had previously worked with Amazon’s AWS, so the combination strengthens Microsoft and its AI ambitions.
Meta also is benefiting from AI in its advertising business. CFO Susan Li said on the call that almost 80% of advertisers use at least one AI-powered search ads product.
AMD: AMD
AMD,
has made big strides under CEO Lisa Su, a doctoral holder in engineering from MIT who essentially rescued AMD when she took over in October 2014.
Like Nvidia, AMD is going full-steam ahead with chips designed for AI usage. Su said on the company’s second-quarter conference call Aug. 1 that AMD’s AI “engagements” increased more than seven-fold. The Santa Clara, Calif.-based company’s EPYC and Ryzen CPUs “ramped significantly” in the quarter, she said. EPYC chips are used for servers, and Ryzen chips are used mainly for gaming.
But the holy grail is a chip that can compete with Nvidia’s H100, which controls 80% to 90% of the market for AI chips. For that, AMD will need a GPU (graphics processing unit), not a CPU (central processing unit). In mid-June, about six weeks before second-quarter earnings were released, AMD said at an event that it’s built a GPU-only variant, the MI300X, of a CPU.
Su said several weeks later that there is a “large opportunity with GPUs, so we have increased our resources significantly.” She said on the conference call that there will be an “aggressive” launch in the fourth quarter and a widespread rollout in 2024.
“ Amazon has been using AI longer than many tech companies have existed.”
Amazon.com: Amazon has been using AI longer than many tech companies have existed, employing the technology in its internet-retail business for a quarter-century. Still, the Seattle-based company hasn’t highlighted AI as its cloud rivals have.
Amazon must tell that story better, investors have said. On Aug. 3, the company did just that, laying out the size and scope of its opportunity. “Every one of our teams is working on building generative AI applications that reinvent and enhance their customers’ experience,” CEO Andy Jassy said.
As the biggest cloud provider, Amazon’s AWS unit has the greatest number of customers and stored data. So as companies build generative AI models, “we’re optimistic that the largest number of these will be built on AWS.”
That’s as enterprise customers deployed new workloads in the quarter, the company said in the earnings release. AWS had been under pressure as customers cut spending as rising interest rates eroded corporate budgets.
Apple: Even companies with only a tangential connection to artificial intelligence are hyping the technology. At Apple, it’s just the opposite. CEO Tim Cook will answer questions on AI, but he himself has been known to speak with analysts and developers for two hours without bringing up the topic.
That’s all by design. AI is seamlessly woven into Apple products. It’s used, but not recognized, by consumers. Even Siri, the iPhone assistant, communicates as if she were a long-time friend.
Asked about AI on the company’s second-quarter earnings call Aug. 3, Cook said: “We’ve been doing research across a wide range of AI technologies, including generative AI for years. We tend to announce things as they come to market, and that’s our MO, and I’d like to stick to that.”
The Cupertino, Calif.-based company’s newest product, the Vision Pro virtual-reality headset, will use AI in spades. The $3,500 product, scheduled to be sold starting next year, will use predictive AI to sense a user’s state of mind.
Inputs such as eye movement, heartbeat and blood pressure will be fed through a system that seeks to understand a user’s mental state — whether he or she is curious, afraid and so on. That suggests Vision Pro will be ripe for gaming and entertainment. But the real power of the device is the ability to overlay information on top of “reality.” It may also stand in as a “smart” monitor, except one that’s two inches from one’s eyes.
Vision Pro will compete with Meta’s $1,000 Quest Pro. There’s been speculation that Alphabet will release a rival in 2024 after scrapping its ahead-of-its-time Google Glass spectacles in January 2015. That would set the next stage for AI’s ramp up in a three-way competition among Big Tech heavyweights.
What it all means: There was no underlying theme that stood out more than AI this quarter. With NVIDIA still on deck, the wave of tech earnings to date showed an abundance of enthusiasm for AI.
And while the names above touted their wares in AI, there were many more including Intel
INTC,
and Qualcomm
QCOM,
showing confidence in their company’s AI position and indicating that the monetization and strategy will play out over a longer period of time.
Yet as companies universally try to attach to the AI wave, the ability to clearly articulate monetization has been the clear demarcation between stocks that have seen the biggest gains and those that have seen their AI overtures met with apathy.
Over the next quarter, the shine around AI will continue to settle as the newness wears off and investors seek clarity between winners and losers in the AI gold rush. Look for the companies that can explain how AI is driving growth, retention, expansion, or measurable innovation. Many companies are looking to convince investors of their role in AI development, but when it comes to AI making these companies more investable, the winners will be few and far between.
Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Meta Platforms and dozens of other technology companies. Neither he nor his firm holds equity positions in companies cited. Follow him on Twitter @danielnewmanUV.
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