Amazon, Microsoft and Alphabet are expected to report accelerating cloud growth this week, but turbulence in global markets and mounting concerns over the cost of financing AI investments are clouding the outlook.
Investors are pressing for evidence that the AI boom can deliver swift returns to justify its enormous price tag. Rising bond yields at AI cloud providers such as CoreWeave and record costs to insure Meta Platform’s debt have amplified concerns about how the massive AI infrastructure buildout is being funded, particularly as higher US interest rates loom.
Market turmoil has rekindled warnings of an AI bubble from investors, including hedge fund Citadel’s founder Ken Griffin, and pushed companies to delay their IPOs. An expected Democratic sweep of the US midterm elections could spell more trouble for data centers that are already a target of protests over their impact on power grids, electricity bills and the environment.
China’s tech-stock boom has unravelled, wiping out about $480 billion in market value in less than four months as concerns over AI demand and spending and Chinese export curbs deflate lofty valuations. The rout could be a warning for global markets.
Big Tech’s results this week will be a litmus test for AI adoption and economic viability. These three companies — with nearly $1.7 trillion in combined backlog — plan to spend as much as $600 billion this year.
Meta’s results last week showed just how unforgiving the calculus has become. Better-than-expected revenue growth and an upbeat outlook were overshadowed by increased spending plans, sending its shares down nearly 7% the following day. They are now down more than 4% this year.
“The appetite for capital expenditure alone is slowing rapidly,” said Brian Mulberry, chief market strategist at Zacks Investment Management.
“For Amazon, Google and Microsoft specifically the growth in their cloud companies is a very important line item that will signal if further growth in capital expenditure can be funded without further risks of contracting free cash flow.”
While the trio’s stocks have outperformed ad-driven Meta this year, with gains ranging from 1.2% to 10.1%, they continue to lag behind the S&P 500’s near 12% rise.
Google Cloud is expected to again lead the three major players in the September quarter, with revenue surging 95.1% to $29.57 billion, according to LSEG data. That would be faster than the 81.8% growth in the previous quarter.
Amazon Web Services, the market leader in cloud, is expected to post 38.2% revenue growth on Thursday, up from 36.8% in the previous quarter. Microsoft Azure is expected to expand 47.7%, accelerating from 42% three months earlier, according to Visible Alpha data.
Alphabet and Amazon are expected to burn cash for the second and third consecutive quarters, respectively, while Microsoft will likely generate more than $8 billion in cash flow.
GOOGLE CLOUD SUCCESS, SEARCH CONCERNS
Alphabet’s cloud business and in-house chips have emerged as a bright spot in its AI push amid concerns Google’s models are falling behind those of OpenAI and Anthropic. But competition from personal AI agents such as Meta’s Muse as well as chatbots such as ChatGPT has raised concerns about the search business that has long powered its earnings.
Google search revenue growth is expected to slow to 14.7% from 16.8% in the previous quarter, even as total revenue is expected to rise at a slightly faster pace of 25.2% to $128.18 billion.
“This quarter, we believe commentary is equally important to quantitative results as competition for search is growing again with agents while there is increased consternation around the payback of AI capital expenditure,” Citizens analyst Andrew Boone said.
MICROSOFT CHANGES REPORTING SEGMENTS
Microsoft will report under a revamped structure for the first time on Wednesday, combining cloud, AI and business software into a division called “Agents and Infra”, and Windows, gaming and ad sales into another dubbed “Devices and Consumer”.
A notable change will be the disclosure of Azure’s quarterly revenue, resolving investor frustration over its previous focus on growth rates without absolute figures.
Analysts expect Azure to post sales of $33.06 billion in the quarter, powering a 16.7% rise in Microsoft’s total revenue to $90.66 billion, slightly slower growth than the previous period.
Amazon’s overall revenue growth is expected to slow to 12.3% from 19.6% in the previous quarter.
(Reporting by Aditya Soni in Bengaluru; Editing by Sayantani Ghosh)
