Big Tech earnings, including from Microsoft, Google parent Alphabet and Amazon, underscore a key point about AI stocks. The AI craze is going strong, but the road ahead may be a bit bumpy for some industry players, such as AMD Palantir.
The three cloud giants each posted results that beat Wall Street estimates, citing AI as the key growth driver. The tech behemoths said they plan to spend big time to support that growth.
"The bottom line is the megacaps showed that you needed AI," Ray Wang, CEO and principal analyst at Constellation Research, told Investor's Business Daily. "You needed double digit growth, and you needed to have compute power in order to play in this game. That's what we saw."
But broad market jitters, combined with overheated projections about AI-powered growth are rattling some investors who expect blockbuster numbers from any player in the AI bonanza. That was evident in Palantir's post-earnings stock slide, which was triggered by slowing U.S. commercial growth and a weaker-than-expected full-year outlook.
"The market expected higher guidance based on exponential growth in AI," Wang said.
AI Stocks: An Emerging Ecosystem
Still, IDC President Crawford Del Prete said the Big Tech earnings highlight the way AI is reshaping the tech industry.
"Based on what I saw, it's clear that the power of these respective ecosystems is enormous," he told IBD. "They generate tremendous amounts of cash, and represent a large part of the structure of modern computing."
On the Google call with analysts, CEO Sundar Pichai called the "AI transition" a "once in a generation kind of an opportunity."
"We have been through technology shifts before, to the web, to mobile, and even to voice technology," Pichai told analysts. "Each shift expanded what people can do with search and led to new growth. We are seeing a similar shift happening now with generative AI."
AI Stocks: Vast Opportunities
In fact, the opportunities go well beyond search and generative AI.
The AI frenzy triggered a race to come up with AI-powered tools that would transform businesses, especially enterprises, into faster-moving and more efficient organizations.
"The question really is: customers have to figure out how to do four things. Either augment humans with AI, accelerate their business where they automate their business, or use it to do analysis, find things that they wouldn't have known," Wang said. "And most companies are still struggling to figure out which use case makes sense for them."
Meanwhile, tech giants, led by cloud computing's Big Three, Microsoft, Amazon and Google, are racing to build the infrastructure to support the massive computing needs of this quest for ways to use AI.
Nvidia And AMD
That trend has turbocharged Nvidia sales. The chipmaker, which dominates the AI chip market, reports later this month.
AMD, considered Nvidia's chief rival on the AI chip front, posted in-line results last week. That wasn't enough for many investors who sold off the stock. Nvidia stock also took a hit on worries that the AI market is starting to overheat. Both AMD and Nvidia shares have recovered, joining a broader rally.
"In the context of expectations (and stock prices) that have been falling somewhat in recent weeks and months, we didn't think the results (while likely to be viewed as somewhat disappointing) were structurally all that bad," Bernstein Research analyst Stacy Rasgon told clients in a note after AMD's report.
Expecting A 'Massive' Buildout
Rasgon says he understands the concern about a bubble, which he views mainly through Nvidia's performance.
"The numbers have gotten so big so quickly, people just worry about sustainability. I get it," he told IBD in an April interview.
But the AI infrastructure buildout, with Nvidia playing a central role, is real — and it will likely continue.
"I think over the long term, it's massive," Rasgon said. "I'm still convinced that in five years or 10 years, we will be talking about numbers that are materially higher than what we're talking about today. … I'm not really worried about air pockets this year. I'm not really worried about air pockets next year. 2026? I don't know. We'll see."
Tim Bajarin, chairman of Creative Strategies, says AI will be surely be a key focus for most tech companies in the coming years. "It is clear that AI will be a major profit engine over time and how each company innovates in AI will be key to future earnings," he told IBD. "I believe there is still a lot of room for AI innovations that could impact current major players in the next three years."
Del Prete of IDC said: "This all happened in a relatively short period of time. We are seeing another ecosystem emerge, which is based around Nvidia and AI workloads. We are in the early innings, but it's emerging as a big part of IT's next chapter."
