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How long can Wall Street’s artificial intelligence-fuelled rally continue without clear evidence that generative AI is giving a meaningful lift to business?
That question will hang over the tech sector next week as some of the biggest companies report their latest quarterly earnings. The industry’s big claims for the technology behind ChatGPT have spurred massive spending on the infrastructure required to generate text, images or video. But there is not likely to be much in the numbers yet to show that the ultimate customers for the technology — companies applying it in their operations or people using it in their daily lives — are ready to pay up.
For better or worse, Microsoft — which reports earnings next Thursday — has become something of a bellwether for the entire industry. Its close alliance with OpenAI and early moves to embed the technology in all its software have given it a clear head start.
Three months ago, Microsoft said that extra demand from AI had added six percentage points of growth to its Azure cloud platform, as customers started to test the technology. That probably translates to nearly $3bn of extra revenue a year (it recently leaked out that Azure sales reached $34bn back in 2022, when it was a smaller business than it is now). The number sounds impressive, but it is still little more than 1 per cent of the total revenue Microsoft is expected to report this year.
The other leg of Microsoft’s generative AI story — its Copilot feature, which acts as an intelligent guide to users of its software — is at an earlier stage of adoption and the company has so far shied away from predicting its impact on revenue. If Microsoft isn’t ready to predict the pay-off from its big AI investments, other companies are even further behind.
There will no doubt be plenty of talk from tech executives in coming days of promising tests and hopeful signs as customers start to grapple with generative AI. Yet the rate of adoption is hard to predict. This is a technology unlike any other: its well-known weaknesses, like the tendency to deliver false results — known as “hallucinations” — pose a unique challenge. It’s not clear how it will fit into today’s business processes, or how readily people will adapt to using it.
The uncertain take-up of generative AI stands in stark contrast to the money being poured into the tech infrastructure needed to support it. Nvidia has been the most visible beneficiary: sales of its data-centre chips tripled to $47bn last year. This year, Wall Street is expecting those sales to roughly double again, to nearly $100bn.
The likely message from the tech companies is: be patient. The uptake of generative AI and impact on sales should start to become apparent later this year or in 2025. But after the huge rise in capital spending caused by the AI race, any delays could lead to a massive hangover for the hardware industry.
If the potential pay-off from AI dominates talk on tech earnings calls in the coming days, the big tech companies should at least deliver enough other good news from their existing businesses to please investors.
A year ago, an expected economic downturn in the US hung over the sector, which was already grappling with a post-pandemic slip in demand for digital services. Instead, the combined revenue of the five biggest tech platform companies (Alphabet, Amazon, Apple, Meta and Microsoft) is projected to have jumped 9 per cent in the first three months of this year — a slowdown from the 12 per cent of the preceding quarter, but not bad for a group of companies expected to register combined quarterly revenue of more than $400bn.
Profits are doing even better. After-tax earnings for the five are forecast to have risen by 27 per cent to nearly $85bn, reflecting a convergence of positive trends.
Shares in Amazon, a chronic lossmaker for much of its 30-year life, hit a record high last week on hopes that it is entering a new era of higher profitability, lifted by stronger retail margins and a reacceleration of growth at its biggest moneymaker, Amazon Web Services. Meta, after dialling back the high spending on the metaverse that had antagonised Wall Street, is experiencing an earnings surge. And Google and Microsoft have registered steadily rising margins, thanks in part to better control of costs. Only Apple, facing a mature smartphone market and questions about iPhone sales in China, has hit a lull.
This should provide a solid backdrop for earnings reports in the coming days. But the questions about AI are only getting louder.
richard.waters@ft.com
