The second-quarter reporting season for major US technology companies concluded last week, revealing robust earnings growth. This performance is reflected in market returns, with the Nasdaq composite index up nearly 15 per cent year-to-date. Revenue growth for the big-three cloud companies – Microsoft Azure, Amazon Web Services and Google Cloud Platform – was approximately 25 per cent higher than the previous year, primarily driven by the increasing monetisation of Artificial Intelligence (AI).
Two key catalysts are driving AI adoption. First, adoption rates are accelerating across industries. The US Census Bureau reports that 9 per cent of all industries in the US now utilise AI, a significant increase from near zero adoption three years ago. This rapid adoption is further exemplified by tech companies charging for AI-powered personalisation tools and subscription fees for AI-enhanced tools, as well as using AI to improve worker productivity. Major tech companies like Meta, Alphabet, Microsoft and Amazon have also increased their spending on AI initiatives, indicating a strong commitment to the technology.
Oracle, a supplier of cloud infrastructure and software, has emerged as a significant beneficiary of this increased AI spending. The company saw a 1529 per cent increase in revenues from overflow business from the big-three cloud providers. Oracle also reported a 359 per cent increase in its backlog of business for the quarter. The company supplies cloud infrastructure and software to businesses and also receives overflow business from the big-three cloud providers.
Despite the positive outlook, investors should be aware of potential risks. Margins for big tech may moderate as AI expenditures are depreciated. Additionally, valuations for technology stocks are stretched, with the Nasdaq’s price-to-earnings ratio at a high percentile. Diversifying AI exposures across the value chain and considering ancillary sectors like power and pharmaceuticals is advised. Investors are reminded to seek appropriate financial advice before making any portfolio changes.
