Preview – Amid market turmoil, tech giants' earnings reports become a touchstone for testing the AI frenzy

Update: Added Amazon's report date in paragraph 10

Aditya Soni

Reuters, October 27 - Wall Street expects Amazon AMZN.O, Microsoft MSFT.O, and Alphabet GOOGL.O to report accelerated growth in their cloud businesses this week, but turbulent market selloffs and concerns about rising financing costs for artificial intelligence are dampening this optimism.

Investors are eagerly seeking evidence that the AI craze can deliver quick returns, justifying its lofty valuations. Rising bond yields of AI cloud service providers such as CoreWeave CRWV.O, together with Meta Platforms META.O setting a record high for debt insurance costs, have intensified concerns about funding sources for large-scale AI infrastructure builds, especially as U.S. interest rates are set to rise soon.

Market volatility has reignited warnings about an AI bubble—including from Citadel hedge fund founder Ken Griffin—and has forced many companies to postpone their IPO plans (link). The anticipated comprehensive win by Democrats in the U.S. midterms could spell more trouble for data centers, which have already become targets for protests due to their impacts on power grids, electricity bills, and the environment.

This week’s tech giant earnings reports will serve as a litmus test for the viability and economic sustainability of AI applications. These three firms—which hold unfinished orders totaling nearly $1.7 trillion—plan to invest up to $600 billion this year.

Meta’s earnings release last week showed just how stringent the market’s evaluation of performance has become. Better-than-expected revenue growth and upbeat outlooks were overshadowed by ongoing spending plans, resulting in the company’s shares sliding nearly 7% the following day. Its stock is down more than 4% so far this year.

“In terms of capital expenditure requirements, the growth rate is slowing rapidly,” said Brian Mulberry, Chief Market Strategist at Zacks Investment Management.

“In particular, for Amazon, Google, and Microsoft, cloud business growth is a very important financial metric, signaling whether there is room for further capex growth without the risk of further free cash flow deterioration.”

Although these three companies’ share prices have outperformed ad-heavy Meta’s this year (posting gains of 1.2% to 10.1%), they still lag behind the S&P 500’s nearly 12% increase.

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According to LSEG data, Google Cloud is expected to again lead the trio for the September quarter, with revenue soaring 95.1% to $29.57 billion, surpassing last quarter’s 81.8% growth.

Visible Alpha data shows Amazon Web Services (AWS), the cloud services market leader, is expected to report on Thursday a 38.2% year-over-year revenue increase, up from 36.8% in the previous quarter. Microsoft Azure is expected to grow by 47.7%, up from 42% three months prior.

Alphabet and Amazon are expected to see cash burn for the second and third consecutive quarters, respectively, while Microsoft is on track to generate over $8 billion in cash flow.

Google Cloud Shines, Search Business Raises Concerns

Amid concerns that Google’s AI models are lagging behind OpenAI and Anthropic, Alphabet’s cloud business and in-house chips have become highlights of its AI strategy progress. However, competition from personal AI assistants like Meta’s Muse and chatbots such as ChatGPT has raised market concerns over Google’s search business, which has long underpinned the company’s profitability.

Google’s search revenue growth is expected to slow from 16.8% last quarter to 14.7%, even as total revenue is forecast to rise at a slightly faster 25.2% year-over-year to $128.18 billion.

“This quarter, we think management’s commentary will be as important as the quantitative results, as competition in search heats up anew with the rise of intelligent agents, while AI capex ROI becomes an increasing market worry,” said Citizens analyst Andrew Boone.

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Microsoft Restructures Financial Reporting Segments

Microsoft will, for the first time, report earnings under a new structure on Wednesday, combining cloud, AI, and enterprise software into a segment called “Agents and Infrastructure,” while Windows, gaming, and ad sales will make up a new “Devices and Consumer” segment.

A notable change is the disclosure of Azure’s quarterly revenue, which will address previous investor frustration over Microsoft revealing only growth rates without absolute numbers.

Analysts expect Azure’s revenue to reach $33.06 billion this quarter, driving a 16.7% increase in Microsoft’s total revenue to $90.66 billion, a slight slowdown from the previous quarter’s pace.

Amazon’s overall revenue growth is forecast to slow from 19.6% last quarter to 12.3% this quarter.

(To facilitate non-native English speakers, Reuters provides this report through automated translation into several other languages. Due to potential errors or lack of required context in automated translation, Reuters does not guarantee the accuracy of translated texts; they are provided solely for readers’ convenience. Reuters accepts no liability for any damage or loss caused by use of the automated translation function.)