AI Hype Faces Reality Check: Tech Stocks Stumble as Earnings Disappoint
The tech sector’s recent rally, fueled by the hype surrounding artificial intelligence (AI), has hit a speed bump, according to Dan Niles, founder and portfolio manager of Niles Investment Management. Niles, who appeared on the "Overtime" show, expressed growing caution about the sector, highlighting the disappointing performance of several tech giants during the recent earnings season.
"We put out a post on July 11th saying be careful of earnings season," Niles said, noting the disconnect between the hype surrounding AI spending and the actual revenue growth. "What you saw during earnings season was that other than Apple, which isn’t an AI play right now, the other hyperscalers – Meta, Microsoft, Amazon, and Google – all saw their numbers go down."
This trend, Niles argued, is a fundamental issue, not a temporary blip. The four giants, all major players in the AI space, reported declining numbers, indicating a potential disconnect between aggressive investment in AI and its tangible impact on revenue. "You got to think about how much you want to play this going forward because they went down for fundamental reasons," he stressed.
This cautionary note extends to the upcoming Nvidia earnings, a key player in the AI chip market. While Niles admits owning Nvidia stock, he believes the company’s performance will depend on analysts’ expectations and the market’s reaction to the latest chip release, Blackwell. "If analysts are universally bullish and think that spending on AI will lead to constant growth, that’s a problem," he said.
Niles also expressed concerns about Alphabet, Google’s parent company, pointing to the potential threat posed by the rise of AI-powered alternatives. "You have to ask yourself one simple question," he said. "Do you think all this money spent on AI by Microsoft and OpenAI will affect Google’s over 90% share in search? If your answer to that is yes, then Google has an issue from a longer term perspective."
He highlighted Google’s recent struggles with YouTube as a red flag, contrasting it with Meta’s success in leveraging AI to enhance its platforms. "I don’t like Google," he admitted, disclosing that his firm is shorting the stock. "I like Meta better because they are using AI effectively to help recommend videos and show engaging ads, and they are doing fine."
Niles’ comments highlight the growing disconnect between the fervent enthusiasm surrounding AI and the realities of its immediate impact on the bottom line for many tech giants. The coming weeks will be crucial for determining whether the AI hype can be sustained or if the recent stumble marks a new chapter of caution and reevaluation within the sector.
AI Hype vs. Reality: Tech Rally Under Scrutiny as Earnings Disappoint
The recent tech rally, fueled by AI hype, is facing growing skepticism as earnings season reveals a mismatch between investment and revenue growth. While the market has seen a rebound from last Monday’s slump, concerns remain about the sustainability of the rally in light of sluggish results from major tech players. Dan Niles, founder and portfolio manager of Niles Investment Management, cautions investors against getting carried away by the AI narrative, highlighting the need to focus on fundamentals. He believes the rally may be driven by short-term sentiment rather than long-term growth prospects.
Key Takeaways:
- Earnings season reveals mixed results for tech giants: While Apple bucked the trend with strong performance, other AI-focused companies like Microsoft, Amazon, Google, and Tesla saw disappointing numbers, with each reporting lower-than-expected earnings and continued heavy spending.
- AI spending may not translate to immediate revenue growth: Companies are pouring resources into AI development, but the impact on their bottom line remains unclear.
- Focus on fundamentals is crucial: While AI is a powerful force, its impact on stock prices ultimately depends on tangible results, not just hype.
- Nvidia’s upcoming earnings report is a key indicator: The semiconductor giant’s performance could provide insights into the health of the AI sector.
- Alphabet’s recent Google event raises concerns about its dominant position: Despite the launch of AI-powered features, Google’s search dominance may be at risk from competitors like Microsoft and OpenAI.
AI Spending: A Double-Edged Sword?
Dan Niles highlights the discrepancy between the high level of AI investment and the lackluster earnings results reported by major tech companies. "You’ve had all this spending on AI, but people now want to start to see some revenues," he says. "What you saw during earnings season was that other than Apple, which isn’t an AI play right now, the other hyperscalers – Meta, which also isn’t an AI play right now – they use AI internally, but if you look at the other four that reported, Microsoft, Amazon, Google, Tesla, all the revenue numbers went down."
He emphasizes the need to consider the impact of this trend moving forward: "When you’ve got four out of the seven Magnificent Seven that are reported so far taking down numbers, and they’re in the AI space, you got to think about that as how much do you want to play this going forward because they went down for fundamental reasons, not because of a Y carry trade."
Nvidia: A Key Test for the AI Sector
Dan Niles acknowledges the importance of Nvidia’s upcoming earnings report, given its key role in the AI landscape. "Nvidia is a tricky one because we own it; it’s one of our bigger positions along with Apple and Meta." However, he cautions that the company’s performance will greatly depend on the sentiment surrounding AI. "If analysts are universally bullish and think that, oh, you know with all of this spending, the numbers are up and to the right forever, that’s a problem."
Niles believes a more nuanced and realistic approach is needed: "We have over the last few days seen some analysts push out numbers because of the delays in their newest chip called Blackwell. Some are thinking through what we’ve seen with some of the hyperscalers and what they’ve talked about. Because anytime I hear a company say, well, the biggest risk is underinvestigated AI and ChatGPT, and investors just, you know, obviously, you don’t want to spoil a good story right? Media stocks done great with generative AI."
Alphabet: A Rising Threat?
While Alphabet held its recent Google event, highlighting its AI-powered features, Dan Niles expresses concerns about the company’s long-term strategy. "You have to ask yourself one simple question: do you think all this money spent on AI by the likes of Microsoft and OpenAI will affect Google’s over 90% share in search? If your answer to that is yes, then from a longer-term perspective, Google’s got an issue."
Niles points to the company’s recent struggles with its YouTube platform as a potential red flag: "It was troubling to me that they had a problem with their YouTube business and Meta was absolutely fine. So I don’t like Google. We’re short it, in full disclosure. And I like that match versus a Meta, where Meta is using AI to help recommend videos that you want to watch and then using AI to help show the ads that are engaging, and they didn’t have any problems whatsoever."
The Future of AI: Hype vs. Reality
The AI landscape is evolving rapidly, creating both opportunity and uncertainty. While the potential of AI is undeniable, investors must exercise caution and prioritize fundamental analysis. As Dan Niles emphasizes, "Fundamentals drive stock prices." A focus on tangible results, rather than simply riding the wave of AI hype, will be crucial for navigating the future of this transformative technology.
