The Big 7 Financial Reports Kick off The AI Competition
The Big 7 financial reports kick off the AI competition, and technology software and hardware companies see a watershed. A coin has two sides. As investors pay close attention to the profitability of generative AI, they are eager to find clues about the prospects of AI commercialization in financial reports. Pessimists see tech bubbles, optimists see business prospects.
Big 7 Financial Reports
Regardless, ChatGPT sparked a frenzy of AI investment. Recently, media broke the news that Musk’s AI company xAI is seeking US$6 billion in financing, which is expected to make the company’s valuation exceed US$20 billion. Although Musk denied the news, the industry expects that the artificial intelligence field will still be better than other industries this year in terms of market performance or financing.
Five technology companies, including Google, Microsoft, Amazon, Apple and Meta, together with Tesla and Nvidia, are known as the “Big 7” of Wall Street. In 2023, the total market value of the “Big 7” will exceed US$12 trillion. Judging from the market performance of technology companies this year, hardware giants other than NVIDIA have performed weakly, while software companies have gained popularity in the market. The watershed of the “Big 7” is emerging.
The Second Company With A Market Value Of US$3 Trillion Is Born
Currently, the Nasdaq stock index has reached its highest point since the beginning of 2022, and the price-to-earnings ratio of technology stocks is also at a historically high level. Will last year’s tech stock boom continue this year? The information disclosed in the financial reports of the “Big 7” technology companies this quarter is expected to determine the trend of technology stocks in the next year.
Before the financial report was released, the stock prices of Google, Microsoft and Meta all hit record highs. Microsoft’s market value exceeded US$3 trillion at the close of trading on January 25, becoming the second American company with a market value exceeding US$3 trillion after Apple. Company; Meta’s market capitalization also exceeded US$1 trillion at the close of the day, the first time since 2021. Analysts expect that in addition to Tesla, the other six companies in the “Big 7” will report fourth-quarter earnings growth.
In his last “Global Strategy Weekly” published in 2023, Societe Generale global strategist Albert Edwards warned of the potential impact of the instability of the U.S. technology industry on the overall market. He said that the biggest surprise in 2024 may be the bursting of the US technology bubble, which may drag the entire US market into recession.
Morgan Stanley, however, holds a different view. The brokerage said that the “Big 7 Technology” may continue to rise in 2024 because the earnings performance of these companies is very good and investors will still increase their bets on technology companies. However, the agency predicts that U.S. stocks may experience a correction before the end of this year.
Judging from the performance of Tesla, one of the “Big 7” that has released financial reports, the company’s financial report was disappointing, which caused Tesla’s market value to evaporate by 80 billion US dollars that day. Since this month, Tesla’s stock price has fallen by nearly 30%.
According to data from the London Stock Exchange (LSEG), Tesla currently trades at a price-to-earnings ratio of nearly 60 times, a higher valuation than other “Big 7” companies including Apple, Microsoft and Nvidia.
Not just Tesla, hardware manufacturers seem to be having a hard time recently. Apple was also downgraded by Barclays earlier this year. At the end of 2023, Apple took a rare price cut in the Chinese market.
At present, Apple’s efforts in generative AI do not appear to be seeing significant results. Apple last week began pre-sales for its new hybrid head-mounted virtual reality device Vision Pro, which is expected to promote the company’s layout in generative AI. In October last year, Apple also quietly launched Ferret, an open source artificial intelligence model that can understand images.
AI Giant Companies Continue To Benefit
Optimistic investors believe that the boom in artificial intelligence, combined with expectations of corporate cost-cutting measures, inflation relief, and interest rate reductions, will further promote the growth of technology companies. Among them, AI-driven technology companies will benefit more, and the largest Beneficiaries include Google, Microsoft, and Meta.
Analysts at Mizuho Securities maintained a buy rating on Google in a note to investors this week, saying the company has “a strong position in the search and advertising markets and continued investments in innovation and artificial intelligence investments.”
LSEG survey analysis predicts that Google’s revenue is expected to grow by 12% this quarter, marking the fastest growth rate since mid-2022.
Daniel Ives, a research analyst at Wedbush Securities, believes that Microsoft’s financial report may be a bellwether for the performance of technology companies in the next 12 to 18 months. He also said that Google and Amazon’s cloud business will remain strong this quarter as the entire industry actively shifts to artificial intelligence, and the companies begin to explore how artificial intelligence can be monetized.
Analysts at investment bank Jeffries predict that Amazon will launch a “comprehensive offensive” this year to “catch up” in artificial intelligence. Amazon Cloud Technology (AWS) launched AmazonQ, a cloud service AI assistant, in November last year.
As a provider of chip infrastructure that supports most of the world’s generative AI, Nvidia’s financial report for this quarter is also expected to show similar growth to the previous quarter. NVIDIA’s third-quarter financial report shows that the company’s total revenue reached US$18.1 billion, a year-on-year increase of more than 205%, and net profit reached US$9.24 billion, a year-on-year increase of approximately 13 times.
Optimistic about the prospects for demand for artificial intelligence chips, OpenAI CEO Sam Altman has been focusing on chip development opportunities. It was recently reported that he is seeking to raise billions of dollars from global investors to establish a chip company and build a chip factory.
The Path To AI Monetization Is Still Unclear
DBS Bank China investment strategy analyst Deng Zhijian told China Business News: “A series of strong economic data this year will support the rise of the United States, and the rise of technology stocks will continue, but the increase may not be as high as last year.”
Deng Zhijian predicts that the average annual earnings growth of the S&P 500 Technology Index in the next three years will reach 16%, which is the highest among the 11 sub-industry classifications. He believes that even though the market may experience corrections at any time, these corrections are temporary.
Meanwhile, companies are grappling with how to turn early demonstrations of AI into moneymakers. Matthew Prince, CEO of cloud and internet security company Cloudflare, said during this year’s Winter Davos Economic Forum that generative AI can attract investors by building cool demos, but the problem lies in these What is the real value of the application?
In the field of artificial intelligence, corporate strategies are to use AI as a way to improve work efficiency. Tech giants Microsoft and Google, leveraging their vast ecosystems, have been able to use artificial intelligence technology in some software products to improve business efficiency.
Microsoft CEO Satya Nadella believes that artificial intelligence promises to increase productivity and potentially accelerate the development of science itself. But he also acknowledged that it remains to be seen how these efforts will generate revenue and profits for the company. Microsoft’s subscription artificial intelligence service software Copilot and cloud computing service Azure are deeply integrated with OpenAI’s technology, driving the company’s revenue.
Take drugmaker Novartis as an example. The company is working with Microsoft to promote artificial intelligence more broadly, including helping doctors complete programmed tasks such as diagnostic summaries. It is also expected to be used in new areas such as drug design in the future.
However, although AI-assisted research and development of new drugs is considered to be the most promising segment in medical AI, so far, no AI-assisted R&D drugs have been approved in the world. Most are still in early clinical stages, and only a few have entered phase II clinical trials.
It’s difficult to make money with AI, probably because people don’t really understand the value of AI. A recent survey of 1,400 executives released by the consulting firm BCG showed that about 90% of them believe that recent artificial intelligence has a tendency to be hyped, and they are waiting for the bubble to subside.
Zhou Hao, a global partner at Bain & Company and chairman of the private equity and mergers and acquisitions business in Greater China, told China Business News: “Overall, the investment logic of the market has undergone fundamental changes. Investment is in an era of high growth and high returns. It’s over, and that includes the tech industry.”
The “Aftershocks” Of Giant Layoffs Continue
While technology companies are increasing their investment in artificial intelligence, they are also trying to do more with less cost. The most direct consequence of this is the reduction of employees.
Data from the Layoffs.fyi website shows that so far in January this year, approximately 24,000 workers at U.S. technology companies have been laid off, involving 85 technology companies.
Microsoft announced last week that it would cut 1,900 jobs in its gaming division, and eBay announced 1,000 layoffs. Earlier this month, Google also laid off hundreds of jobs internally, Amazon laid off hundreds of jobs in departments such as Prime Video, MGM Pictures, Twitch and Audible, and the gaming company Unity even laid off 25% of its employees on a large scale, providing Discord, the gaming messaging service, has announced that it will lay off 17% of its employees.
Google CEO Sundar Pichai told employees in a work memo on “2024 Priorities and the Year Ahead” at the beginning of this year that this year will invest in major priorities such as AI and focus on more investment, for which companies have to make difficult choices.
Businesses’ pursuit and hype of artificial intelligence has also triggered broader economic concerns. As technology becomes smarter, the need for labor continues to decrease. But it has a more direct impact on the workforce. The demand for artificial intelligence is so great that some technology companies are cutting headcount in some operations and increasing investment in artificial intelligence product development.
This trend is also spreading to European companies. German software company SAP announced a 2 billion euro restructuring plan last week that will optimize more than 8,000 positions to better focus on artificial intelligence-driven business growth.
SAP expects generative AI to fundamentally change its business. The company also said that the restructuring plan will be implemented mainly through a voluntary furlough scheme and internal retraining measures, and it is expected that by the end of 2024, the company’s headcount will be similar to current levels. SAP currently has more than 105,000 employees.
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