Meta and Microsoft each reported earnings yesterday, and both crushed it. It turns out that the businesses of selling advertisements and licensing software remain incredibly lucrative and powerfully profitable businesses.
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While we were all panicking about AI advancing to superhuman intelligence levels and becoming our evil overlords, it turns out the real problem is AI chatbots are too nice! OpenAI is rolling back a recent update that made responses from its GPT-4o model "overly supportive but disingenuous," which goes against one of its 50 Laws of Robotics: don't be sycophantic. I don't know about you, but I prefer a little insincere flattery to AI models breaking most of the other 50 rules!
US stocks staged a Herculean comeback to finish positive yesterday. After starting the session battered by a double whammy of negative economic news and concerns about AI demand, the S&P 500 and Nasdaq 100 were each down more than 2% at their lows. But stocks managed to hurdle those challenges over the course of the day and accelerated into the close, perhaps buoyed by month-end rebalancing activity.
When the dust settled, the S&P 500 and Nasdaq 100 ended in positive territory, while the Russell 2000 had a 0.6% decline. It's the biggest intraday loss the benchmark US stock index has erased to finish positive since October 13, 2022. That's the day the bull market began.
Meta and Microsoft each reported earnings yesterday, and both crushed it. It turns out that the businesses of selling advertisements and licensing software remain incredibly lucrative and powerfully profitable businesses.
Microsoft made $70.1 billion in revenue, with most of that coming fromits two meat-and-potatoes businesses: the Azure cloud business ($26.8 billion) and its Microsoft 365, LinkedIn, and Dynamics segment ($29.9 billion).
Meanwhile, all the way down the Pacific coast in Menlo Park, Meta delivered $42.3 billion in revenue in the first quarter and earnings per share of $6.43, well above the FactSet consensus estimate of $41.3 billion in revenue and EPS of $5.23.
Back to Redmond, Washington, for a moment: while the cloud business had the biggest growth (up 21% year over year), the bucket of the business that includes Windows, Xbox, and Bing was still bringing in $13.4 billion.
All in all, these were two extremely successful money machines continuing to do exactly what it says they do on the box — turning advertising and software subscriptions into big, chunky earnings per share. If that were the end of the story, it'd be a pretty boring evening, but it wasn't and the reverberation was felt across tech all night.
So, what's there to worry about? More on that after the jump…
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But of course, both Meta and Microsoft have ambitions beyond hawking loud, autoplaying brand videos on Reels and Microsoft Office license keys. They want to be technologists, and to that effect are both spending oodles of money and throwing armies of engineers at generative-AI efforts under each company's corporate umbrella.
Meta had full-year capex estimates cranked up from an already robust $60 billion to $65 billion all the way to a frankly eye-watering $64 billion to $72 billion.
That's based on, in the words of the company, "additional data center investments to support our artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware."
Up in Washington, capital expenditures for the quarter were $16.7 billion, up 52% year on year. Those chatbots are pricey!
So, a great quarter, but these firms are pot committed to a lot more chips (literally) going onto the table. Guess who's the big winner there?
THE TAKEAWAY
Turns out the cutting edge is considered to be one of the more painful parts of the blade, and the frontier of computing is some of the most expensive real estate on the market.
On the last day of April, it looked like traders were selling after a report showed first-quarter GDP contracted by 0.3%. But what if the sell-off was also related to investors getting ahead of the old adage that advises Wall Street to basically take the summer off and come back sometime in the fall?
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