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Microsoft, Alphabet, Amazon and Meta – tech earnings takeaways

We look at the latest tech results and share the most important investor takeaways.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Sophie Lund-Yates
Lead Equity Analyst

Published on 5 May 2023

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

The latest round of tech results were widely expected to make for tough reading. However, things don’t seem as bad as feared and, as ever, there are some important takeaways for investors.

Investing in an individual company isn’t right for everyone. If that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice. Investments will rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future.

Artificial Intelligence (AI), nothing fake about this opportunity

Everyone came out singing about AI this quarter. But the leader in this space seems to be Microsoft at the moment. AI tools can be integrated into lots of its existing apps – and Microsoft’s major holding of Chat GPT owner, OpenAI, gives it extra exposure to the field. It also stands to benefit from companies looking to bolster their defences against AI attacks, which has benefits for Microsoft’s cloud platform, Azure.

Google owner Alphabet also saw demand for its cloud computing products skyrocket, meaning the division exited loss-making territory for the first time. From early signs, Alphabet looks to be leading on the innovation side of AI rather than the app function.

AWS – Amazon’s cloud business looks well positioned to help companies implement infrastructure needed for AI development. Of all the cloud-biggies, Amazon was the one to signal a potential slowdown in demand for its products as companies rein in spending on tech. This has the potential to upset the applecart in the short term, but doesn’t undermine the longer-term opportunity in our opinion.

As with any major technology overhaul, this situation will evolve quickly, and competition dynamics will be hard to fully map. We think some big names have real potential in the AI space, not least because only very few companies can afford a seat at the table. But we’re mindful things could change at short notice, and investors should look for companies with stable core businesses that supplement this new technology and its products.

Because of how these shares are listed, if you want to buy any of them, you’ll need to complete and return a US government W-8BEN form.

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Advertising is back

Lots of names in big tech rely on advertising revenue. In recent quarters, performance on that front has been disappointing, reflecting a pullback in advertising spending because of an uncertain economic outlook.

The slew of results from the likes of Alphabet and Facebook owner, Meta, have shown that ads seem to be in recovery mode. Meta’s struggled more than others recently, so the market was especially relieved by the group’s 4% uplift in ad revenues.

These positive developments have an important read-across for the wider economy. It suggests consumer behaviour might not be dialling down quite as abruptly as previously thought, giving marketing teams the confidence to spend once more.

That said, growth is still in the single digits for Meta, which is a lot less frothy than it has been. We’re seeing concerted efforts by companies to diversify their income streams, whether that be from AI or Meta’s metaverse.

These ambitions are all well and good, but the market will be expecting to see ad revenues gain even more resilience as the year progresses. There’ll likely be market movements if this uptick doesn’t materialise.

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Margins make markets happy

High-growth stocks like the famous tech names never used to be under a cost microscope. But a nervous investor-base means the tables have turned.

Part of Meta’s recent rebound has reflected relief at plans to rein in spending and come good on its so-called ‘year of efficiency'. That’s more a slogan you’d expect from a steady-eddie conglomerate, not a silicon-valley darling. Amazon, Microsoft and Alphabet have all announced sweeping job cuts too as they try to keep a grip on margins during tough times.

While we expect the market to continue rewarding cost-saving efforts, this earnings season has left some questions unanswered. Many of the big hitters have pledged to reduce costs while simultaneously investing in exciting new projects, like AI. We’ll be monitoring the mood music to get a better understanding of how companies expect to walk this very fine line. We can’t rule out volatility.

Things to remember

AI is a very exciting prospect, with a huge addressable market, but the tech giants’ exposure isn’t equal. It’s a complicated landscape and different parts of the AI ecosystem come with their own risks and opportunities. Investors should understand these before making any decisions.

Advertising revenue is crucial to most tech names, but it’s cyclical, meaning it tracks the performance of the wider economy. A failure to accelerate growth here could see some short-term market moves arise.

There’s a bit of a disconnect going on between the market’s hopes for efficiency and investment needed for long-term growth. This increases the risks of ups and downs in our opinion, and corporate strategies will be under the microscope more so than usual.

Estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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