Outside the Box

Opinion: These tech stocks scored this earnings season even as AI hype slowed — and the winner may surprise you

Microsoft proves its strength; Qualcomm may have turned a corner

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The hype around artificial intelligence was taken down a notch in the third quarter, as Big Tech companies came under pressure to show results in what has become the largest technological shift since the creation of the internet. 

The upshot of last quarter’s earnings reports was that there’s steady and significant spending on AI, even as there are signs the U.S. economy is slowing amid high interest rates. Companies with the most exposure to AI are catching a tailwind that I expect will last for years, perhaps even for well over a decade.

Microsoft MSFT, +2.49% proved it’s the strongest of the group, with better-than-expected revenue, higher margins and a reacceleration in its Azure cloud unit. On the other side of the spectrum, a beleaguered Qualcomm QCOM, +3.42% emerged from a difficult year and raised its guidance, suggesting the maker of chips for handsets and PCs has turned the corner. 

AI stories are everywhere, especially at semiconductor companies that are powering this new computing revolution. But a good read on the adoption of the technology can be seen in less visible companies, including IBM IBM, +1.64% and ServiceNow NOW, +2.42%. Both are gaining momentum, ensuring ever-stronger competition in Big Tech.

Microsoft is the biggest company investor in OpenAI, the creator of ChatGPT.

Here’s my Big Tech review for the companies above as well as for Meta Platforms META, +2.56%, Amazon.com AMZN AMZN, +2.11%, Intel INTC, +2.80% and Apple AAPL, +2.32%.

Microsoft: Microsoft is the clear frontrunner in AI-focused Big Tech, driven by its strong monetization and adoption narrative. In the third quarter, it showcased robust results across many metrics, and strong performance was fueled by AI and cloud services. Microsoft is the biggest company investor in OpenAI, the creator of ChatGPT.

Total revenue rose 13% to $56.5 billion from a year earlier, almost $2 billion more than expected by analysts. Azure, Microsoft’s enterprise cloud unit, posted an acceleration in revenue growth, to 29%, compared with 26% in the previous quarter, allaying concerns companies are moderating spending. 

Microsoft, despite its $2.6 trillion market value, is still growing quickly for a company this big. What’s more, it’s getting more profitable. Gross margins widened to 71%, up 2 percentage points. And operating margins jumped by 5 percentage points to 48%. 

Qualcomm: The chip designer exceeded expectations in the third quarter and raised its guidance, indicating momentum in China and strength in most sectors except internet of things (IoT). The new forecast is for revenue of as high as $9.9 billion in the current quarter. 

In a recent conversation with CEO Cristiano Amon, he expressed confidence in Qualcomm’s strength, highlighting positive revenue growth from Chinese manufacturers and significant growth in the automotive business. He said smartphone makers have worked through most of their inventory and are starting to place orders again. Boosting investor confidence, Qualcomm signed a new supply agreement with Apple in September.

While Amon is cautious, the overall sentiment surrounding Qualcomm is brightening, with Qualcomm entering recovery mode. This is one to watch.

Read: Qualcomm’s newest laptop chips hit Intel, AMD and Apple with a powerful punch

IBM: IBM, steady under CEO Arvind Krishna, posted revenue of $14.75 billion in the third quarter, up 4.6% and beating estimates. 

The company’s focus on AI was evident, with notable software and consulting wins. Revenue in the software segment, which includes AI, rose 7.8% to $6.3 billion. Customers are increasingly opting for the Watson X AI platform, the CEO said on a conference call with analysts. 

The company also confirmed its previous full-year guidance for revenue and cash flow growth. Speaking with CFO Jim Kavanaugh, it was evident that the overall, IBM performance was marked by operational efficiency and margin expansion, but also confidence that the company’s AI and hybrid cloud strategies are meeting the company’s revenue and margin expectations, indicating the company’s strategic approach in navigating the evolving tech landscape is working. 

ServiceNow: ServiceNow showcased consistent growth in simplifying complex software environments with its AI-powered Now platform. The company is operating at a $10 billion annual rate, a milestone, having posted accelerating revenue growth for the third straight quarter.  

I spoke to CEO Bill McDermott on earnings day. Beyond the results, he emphasized efficiency gains, significant customer wins and a positive reception for the company’s Vancouver platform, which embeds generative AI across all workflows. 

McDermott said in an interview with MarketWatch’s sister publication Barron’s that he expects increases in spending on IT to double to 7% as companies fear being left behind. They will make cuts elsewhere to pay for AI software, he said.

Meta Platforms: Meta is spending heavily on AI and mixed reality. CFO Susan Li said in the third-quarter report that she expects operating losses to rise meaningfully at Reality Labs, a research unit that works on AI, machine learning, neural control interface and full body tracking. 

On the bright side, the number of daily and monthly active users in various categories all rose during the quarter, by up to 7%. Advertising revenue jumped 24% to $33.6 billion, more than twice the pace of rival Alphabet GOOG, +1.80%. Amazon’s ad revenue increased slightly faster, by 26%, though the total amount in dollar terms is almost one-third that of Meta.  

Meta’s investments in AI are aimed at giving retailers improved targeted ads. CEO Mark Zuckerberg said increases in time spent on Facebook and Instagram are a result of “our recommendation improvements.”  

Amazon: Amazon delivered a mixed performance in the third quarter. Revenue at the closely watched AWS cloud unit climbed 12%, slightly below expectations. In contrast, growth at Microsoft’s competing business, Azure, was 29%, and it was 22% at Google Cloud. Still, AWS is materially larger than its chief rivals.

A closely watched gauge at Amazon is profit margins, which widened for the third consecutive quarter as CEO Andy Jassy’s austerity program pays off. Operating margins came in at 7.8%, the highest in more than two years. They had fallen to as low as 1.8% in the fourth quarter of 2022.  

Jassy cited AWS’s innovation in generative AI, emphasizing momentum with notable clients including Adidas, Booking.com and Merck.

Intel: Intel exhibited overall strength in the third quarter, surpassing expectations despite tough macro conditions and competition from chip powerhouse Nvidia NVDA, +2.95% (Nvidia is slated to release quarterly earnings on Nov. 21.) and AMD AMD, +4.49%, which recently forecasted a mega data-center AI number despite coming out with conservative guidance, which led to a mixed market response. 

While year-over-year growth in core businesses didn’t meet ideal levels, Intel demonstrated improvement and CEO Pat Gelsinger expressed optimism about the company’s progress. 

Intel’s focus on AI-powered PCs and datacenter AI, coupled with outsized growth in the foundry segment, positions the company well for future opportunities. Still, datacenter AI needs to produce faster growth. In a conversation I had with Gelsinger, we discussed the critical importance of the AI opportunity and I sense he sees a tangible opportunity that should materialize for Intel as AI shifts to inference, where CPUs and accelerators will be more prevalent, playing to Intel’s strengths. Let’s say this: Intel still has some work to do.

Apple: The headlines on Apple earnings are dominated by the fact that the company has posted four straight quarterly declines in revenue. That, no doubt, is important. Having said that, Apple could teach master classes in managing its sprawling operations. Operating margins climbed two percentage points to 30% in a slowing economy. Plus, revenue came in as expected, and earnings were better than expected. 

The new iPhone cycle hasn’t been all that exciting, and the new M3 chip isn’t as compelling as one thought it might be. And while declines in revenue may make some say this wasn’t a good quarter, I’ll argue that these results coupled with strong services growth — up 16% — makes for an overall decent report. We all knew the hardware party wouldn’t last forever — this temporary downturn in devices is pushing Apple to innovate on services and drive-up margins, which will be good for the company and its investors long term. 

Daniel Newman is the principal analyst at Futurum Research, which provides or has provided research, analysis, advising or consulting to Nvidia, Meta Platforms and dozens of other technology companies. Neither he nor his firm holds equity positions in companies cited. Follow him on Twitter @danielnewmanUV.

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