Latest tech stocks’ results – what are the key takeaways for investors?

US earnings season is starting to wind down. We’ve had results from some of the big names in tech and, performance was mostly positive (table below shows results vs analyst expectations).

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Cloud computing is back

Total spending on cloud services topped $76bn in the first quarter of 2024, up around 21% on last year. That’s the fastest step up in cloud spending since the third quarter of 2022.

The three big providers (Amazon’s AWS, Microsoft Azure, and Google Cloud) are still dominating the market, capturing two-thirds of all global cloud spending.

Amazon’s the biggest player in the cloud space with almost a third of the market. The recent talk that AWS was trailing its peers in the new artificial intelligence (AI) era has been a concern for investors.

But for now, first-quarter results have calmed those worries, with AWS revenue growth reaccelerating, up 17% to over $25bn. This means AWS has stolen some ground on Azure and Google Cloud on a 12-month basis.

We think AWS’ competitive position and prospects are strong. Revenue looks set to continue its upward trend, with markets forecasting a further step up in revenue growth to over 20% next quarter.

Microsoft is still hot on the heels in the number two spot, holding around a quarter of the market. The group is now far more about cloud computing and AI than it is Excel and Word. AI can be integrated into the majority of the group’s existing products, significantly raising the revenue and profitability ceilings in these areas.

Its cloud revenue rose 23% to $35.1bn in the first quarter, with demand outstripping capacity. While that’s currently holding back growth, we’re not overly concerned right now – it’s a good problem to have. Markets are expecting some of these issues to get ironed out and revenue to continue accelerating next quarter.

Alphabet (Google’s parent company) delivered a strong set of results, which were broadly ahead of market expectations. Google Cloud saw the fastest rate of growth out of the big three, with revenue in this division jumping 29% to $9.6bn.

This potentially marks a turning point in conversations around Google’s position, which is generally viewed as weaker than the other two major cloud players.

Management made a powerful case that AI was an opportunity, not a threat. It has the potential to help generate more personalised and powerful ads, ultimately attracting and keeping more advertising dollars, which is the group’s bread and butter.

Results vs expectations

If we ever needed a reminder that markets are forward, and not backward, looking, then the difference in sentiment following results from Meta and Tesla is a perfect example.

Meta’s results were better than markets had expected. Revenue is up 27%, driven by its core advertising streams. Daily users are also up, and free cash flow looks impressive. But the market reaction was negative.

This was mainly because of the forward-looking statements.

Revenue guidance wasn’t bad, but investors had been hoping to see some additional revenue streams unlocked through new, AI-led customer experiences. But Mark Zuckerberg’s comments that material revenue from these initiatives is still a few years away were a little disappointing.

This leads us to the real bugbear – financial discipline. Meta’s meteoric valuation recovery since the start of 2023 can, partly be put down to belt-tightening. But news that AI projects will need more cash funnelled their way wasn’t what investors were hoping to hear.

Tesla on the other hand, has been on a hot run lately.

First-quarter results were pretty much disappointing across the board. Deliveries were down, and both revenue and profit came in lower than expected. And yet, the market reaction to the results was overwhelmingly positive.

Unlike Zuckerberg, Elon Musk was able to deliver a big dose of optimism in his forward-looking statements.

News that Tesla plans to accelerate production of new car models was the real driver – most important of which is the planned affordable offering, or the Model 2 as people are calling it.

There had been rumours that Tesla was scrapping these plans, so news it’s going ahead faster than first thought was lapped up.

We also heard that the full self-driving (FSD) rollout was ramping up. And some nuggets about what a robot-taxi operation might look like in practice – though we still think real monetisation of these initiatives is a long way off.

One of the author’s holds shares in Tesla.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Investments rise and fall in value so investors could make a loss.

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