The most recent earnings season among hyperscaler tech companies has amplified market unease: investors can point to evidence supporting both optimistic and pessimistic views. The tech-heavy Nasdaq briefly entered correction territory in October, falling 10% from its prior peak and wiping out roughly $1.2 trillion in market value for the month, after a series of earnings reports highlighted risks tied to AI.
Why this matters
The market’s obsession with AI is showing a Jekyll-and-Hyde dynamic: some metrics underline the short- and long-term rewards of AI investment, while others indicate the technology may undermine core revenue streams.
Three contradictory signals from Big Tech earnings
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Google
- The scary part: AI-driven outputs are partly cannibalizing Google’s core business—search ad revenue. Although search query volume is up, AI-mode results can carry lower margins. After its earnings, Google has lost more than $500 billion in market value, dragging the broader tech sector down as well.
- The positive part: Google Cloud is accelerating and closing in on Microsoft’s Azure revenue, a notable shift given Google’s lesser role in the cloud market only a few years ago. Much of the cloud momentum is tied to demand for Google’s TPU chips, which analysts expect to see substantial growth in coming quarters.
- Takeaway: Google exemplifies a common dilemma for tech giants: AI threatens a major cash cow while opening new opportunities if the company can pivot quickly enough.
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Microsoft and Amazon
- The positive side: Both firms reported strong cloud growth. Microsoft emphasized the benefits of its OpenAI investment, and Amazon highlighted its stake in Anthropic, though some investors expected even stronger results from Amazon.
- The uneasy side: Those private AI investments can help or hurt reported profits. Amazon’s net income declined despite rising operating profits because it did not repeat a pretax gain tied to its Anthropic investment that had boosted results a year earlier. Microsoft’s stake in OpenAI modestly increased its net income, supporting profit growth.
- Takeaway: Look beneath headline numbers: is earnings growth being driven by core business momentum or by private-investment accounting effects?
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Free cash flow
- The good: Several asset-light tech companies have allowed free cash flow to turn negative while they pour resources into AI infrastructure; managements argue this is because demand is outstripping supply and capacity investment is necessary to convert demand into revenue.
- The bad: If demand weakens after these companies have spent trillions expanding supply, that could create a bubble-like risk.
- Takeaway: Watch the demand trajectory. Jeetu Patel, President and Chief Product Officer at Cisco, is bullish, but told Axios that a major cyber event hitting the core of AI demand would be a downside risk.
Bottom line
Tech stocks broadly feel the pressure after these results. Gene Munster, partner at DeepWater, says the Street is waking up to the risks of an agentic AI world: How will Google monetize without search ad revenue? How will Amazon make money if shoppers use bots? For now, though, these existential questions have not halted the current AI capital expenditure spree.
Data: FactSet, company filings. Chart: Axios/Matt Phillips.
