Mon, Aug 05, 2024 page12

• Investors entering ‘show me’ phase of AI

  HYPE VERSUS REALITY: Amazon and Microsoft shares slid after their earnings reports because of fears that their big AI investments are not paying off for them

  • Bloomberg
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  After a jam-packed week of earnings reports from megacap technology companies, one thing is clear: As profits slow, investors are not impressed by artificial intelligence (AI) promises anymore. They want to see results.

  With six companies inside a group known as the “Magnificent Seven” already having reported, year-on-year earnings growth has slowed to nearly 30 percent in the second quarter, down from 50 percent in the previous period.

  Analysts said they expect that rate to decelerate further, to about 17 percent for those companies in the third quarter.

  

  A Copilot+ PC is displayed at the Microsoft Corp campus in Redmond, Washington, on May 20.

  Photo: Bloomberg

  Results from Microsoft Corp, Meta Platforms Inc, Amazon.com Inc and Apple Inc last week signaled that the biggest companies in the world are still heavily investing in AI.

  However, shares of Microsoft and Amazon slid after their reports because of fears that those AI investments are not paying off for them — at least not yet — echoing the slip in Alphabet Inc’s stock a week earlier.

  “Investors are entering a ‘show me’ phase, seeking concrete evidence of AI’s impact on revenue and productivity,” 50 Park Investments founder and CEO Adam Sarhan said. “This is causing some skepticism and volatility.”

  Tesla Inc’s July 24 report also disappointed investors, while Nvidia Corp is due to release results later this month. The latest prints and commentary this week added to existing volatility.

  Investors had already been shifting from large, trusted stocks into smaller, riskier parts of the market to lessen exposure to Big Tech.

  The earnings results, combined with the US Federal Reserve signaling that a September rate cut might be on the table and a weaker-than-expected jobs report sent the NASDAQ 100 Index spiraling.

  On Friday, the tech-heavy index closed down 11 percent from its peak last month, entering a correction. Investors fled AI stocks and bid up bonds, sending US Treasury yields lower.

  The bond market is “telling us we’re going to have to bring this sucker down real fast, and that’s kind of worrying everybody,” Bokeh Capital Partners LLC chief investment officer Kim Forrest said. “Lower interest rates work for equities, except when it’s being done in a hurry because things are bad.”

  Amazon’s results, alongside reports from consumer names such as McDonald’s Corp and Starbucks Corp signaled a weakening US consumer, adding to concerns about a weaker macroeconomic backdrop, she said.

  Investors were already concerned about hype versus reality in the tech sector, which contributed to sharp reactions when major companies underperformed, NFJ Investment Group LLC managing director Burns McKinney said.

  “Some of the earnings results that have come in over the last couple of weeks have reminded investors that there’s a lot of really high expectations baked into these valuations,” he said.

  There were some bright spots last week that signaled the AI trade is not completely dead.

  Investors cheered Meta’s results, including comments from chief executive officer Mark Zuckerberg that signaled investments in AI helped drive targeted ad sales. Advanced Micro Devices Inc spurred a rally in chip stocks on Wednesday last week after it gave a rosy revenue forecast.

  “Essentially what companies are saying is that they have to do this and if they don’t, they could risk being irrelevant in the future,” Deepwater Asset Management LLC managing partner Gene Munster said of the increased capital expenditures on AI.

  The sharp market reaction does not necessarily mean the AI trade is over, Sarhan said.

  “Instead, it suggests a recalibration of expectations,” he said. “We’re seeing a shift from pure hype to a demand for tangible results.”
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