This week, tech giants Microsoft, Alphabet (parent company of Google), Meta (parent company of Facebook), Instagram, and WhatsApp, and Amazon are reporting their earnings. These five tech companies have contributed to two-thirds of the S&P 500's gains this year, making investors watch their earnings reports closely. Despite the rise in the cost of capital over the last year, tech and other growth sectors have shared in the broader stock market gains since the start of the year, surprising many market analysts.
One possible explanation for this resilience is the large cash reserves that the largest US tech stocks hold. These cash piles reduce their need to borrow money to fund investment and growth. Additionally, falls in bond yields over the last six weeks, triggered by the Silicon Valley Bank crisis, have helped reduce funding costs for smaller growth companies. Lastly, investors may be searching for - and willing to pay a premium for - sectors that will show earnings growth, given weaker long-term GDP growth.
Despite share price falls last year, investor confidence in the tech sector remains strong. The trailing price-earnings ratio on the NASDAQ index of US tech stocks is currently 25 times, down from the pandemic-era peak of 29 at the end of 2021, but still well above the 21 times at the end of March 2020. The total market cap of the top six tech companies in the US is estimated to be $7 trillion.
Revenue growth for cloud-computing giants slowed in the first quarter, but companies like Microsoft and Alphabet are focused on new services tied to artificial intelligence software and generative AI to re-accelerate sales growth. The technology giants attribute slowing cloud-computing growth to companies rethinking how to most efficiently utilize cloud services instead of running up big bills.
Therefore, the tech titans are focused on driving customers to spend more on cloud services, and artificial intelligence software could help cloud customers innovate and develop new products.
Microsoft reported on the 25th that Azure cloud-computing revenue in its fiscal third quarter rose 31% to $14.52 billion, slowing from 46% growth in the year-earlier period. However, Microsoft forecast cloud growth in a range of 26% to 27% for the June quarter, including 1% of revenue from new artificial intelligence services. It's also the first time Microsoft has broken out AI revenue in the cloud business. Microsoft said it had 2,500 customers for its OpenAI Azure cloud service as of the March quarter, up 10 times from the December quarter.
Google's cloud-computing revenue rose 28% to $7.45 billion in the March quarter, slightly missing estimates of $7.46 billion. Google's cloud business posted revenue growth of 44% in the year-earlier period.
Amazon's earnings are being reported on the afternoon of the 27th. Amazon Web Services, its cloud business, reported 37% revenue growth in the first quarter of 2022. AWS revenue is projected to grow by about 15% for the March quarter of 2023.
While revenue growth for cloud-computing giants has slowed, Microsoft and Alphabet are focused on new services tied to artificial intelligence (AI) software and generative AI to re-accelerate sales growth. These companies believe that AI technology could unlock new potential cloud workflows and drive greater revenue to the cloud as IT spending on innovation projects resumes and ramps up. AI will also help cloud customers innovate and develop new products, creating more revenue opportunities.
