Big Tech’s Cost-Cutting Frenzy Faces the AI Test: Will Profits Deliver?
As the first quarter of 2023 comes to a close, the tech giants of the US are bracing for a crucial moment of truth. After months of record layoffs and cost-cutting measures, investors are eager to see if these measures have translated into improved profitability. Against this backdrop, artificial intelligence (AI) emerges as a central theme, with companies highlighting their AI advancements as the key to future growth. This week, Microsoft, Alphabet (Google’s parent company), Meta Platforms (owner of Instagram), and Amazon.com are scheduled to report their quarterly results, a collective event that will send shockwaves through the financial world given their combined market capitalization of over $5 trillion – exceeding 14 percent of the S&P 500 index’s value.
A Balancing Act: Cost-Cutting and AI Ambition
The focus on cost efficiency is undeniable. Between November and March, these four tech behemoths collectively announced the elimination of 70,000 jobs, with Meta alone enacting two rounds of layoffs. This wave of job cuts followed a period of rapid expansion fueled by the pandemic, a strategy that is now being reversed in the face of a weakening economy.
Analysts anticipate a mixed bag of results. While Meta is predicted to see the most significant jump in profits (11.8 percent) compared to the previous quarter, overall profit growth for these companies is expected to be modest, with an average increase of 4.5 percent. Year-on-year, the picture is even less optimistic, with an anticipated average profit decline of nearly 16 percent. Microsoft is seen as the most resilient, with a projected 0.5 percent drop in profits. Amazon.com, which faced a significant fourth-quarter profit dip due to valuation losses on its investment in electric vehicle maker Rivian Automotive, is expected to deliver a dramatic eightfold increase in first-quarter profits compared to the previous quarter. YipitData, a research firm, predicts that Amazon’s North American sales will exceed Wall Street expectations for the first quarter.
AI as a Lifeline: The Next Chapter for Big Tech
Amidst these pronouncements on cost efficiency, the companies are poised to highlight the transformative potential of AI. This shift in focus has been evident since the last earnings season, with CEOs frequently emphasizing the strategic importance of the technology.
Microsoft has integrated OpenAI’s ChatGPT technology into its search engine Bing, creating a direct challenge to the dominant Google search. Google has started the public release of its chatbot, Bard, while Amazon Web Services (AWS) – Amazon’s cloud division and the world’s largest – has unveiled a suite of AI-powered tools designed to assist other companies in building their own chatbots. Meta has released an AI model capable of identifying individual objects within images.
Andrew Lipsman, an analyst at Insider Intelligence, observes, "If last quarter’s message from Big Tech was all about efficiency and bottom line improvement, this quarter’s message is likely to be more forward-looking around the massive potential of artificial intelligence."
Double-Edged Sword: Balancing Efficiency and AI Investment
However, this reliance on AI as a growth driver carries a unique set of challenges. Thiago Kapulskis, an analyst at Itau BBA, points to the inherent complexity: "It’s sort of a double-edged sword because there is also pressure for these companies to improve cash flow in an economy that is decelerating. There are expectations that companies could create or do even more with AI…every tech investor is expecting those companies to be in the frontier."
This sentiment is further underlined by the relative stability of the cloud businesses of Amazon, Google, and Microsoft. These divisions, less susceptible to economic fluctuations, provide a cushion against potential headwinds.
Stock Performances: A Mixed Bag
The stock market reflects a degree of optimism for the tech giants. Microsoft and Alphabet shares have both climbed by 19 percent since the beginning of the year. Apple and Amazon have experienced even greater increases, with gains of 28 percent and 23 percent, respectively. Meta has witnessed the most significant gains, with its stock soaring by nearly 77 percent.
Apple’s Uncertain Future: Slowing Demand for Hardware
The largest company in the world, Apple, is scheduled to report its earnings on May 4. The company is facing headwinds, however. The slowing global economy has led to a decline in demand for iPhones and MacBooks, forcing Apple to navigate a complex landscape as consumers tighten their belts.
Conclusion: AI, the Future of Big Tech?
As Big Tech prepares to unveil its latest earnings reports, the spotlight shines brightly on AI. Whether this technology truly delivers on its transformative potential remains to be seen. While investors are keen to see the impact of cost-cutting measures on profitability, the focus is shifting towards the future, where AI is poised to play a crucial role in shaping the next chapter for these tech titans. The coming weeks will be pivotal as these companies reveal their strategies for navigating the evolving economic landscape and harnessing the power of AI to drive future growth.
