The tech industry will be just fine, even after a few lackluster earnings reports last week and some lagging stocks, because of the coming AI boom.
AI “is the biggest transformational tech trend, which is why I believe we’re in the early stages of the next tech bull market,” Wedbush Securities managing director Dan Ives told Bloomberg TV on Monday. “That’s going to send the bears back into their caves in hibernation mode.”
Ives went on to call AI the biggest technology development since the internet. What made him particularly eager to sing AI’s praises was his argument that tech companies were starting to finally reap real revenue from their AI businesses. Microsoft, in particular, he said had proven as much in its earnings last week.
Ives was unbothered by companies like Meta and Alphabet, whose stocks dipped last week after their disappointing earnings that he attributed mostly to economic factors like the rise of the 10-year Fed rate.
“Big Tech was an A- this week in terms of the actual fundamentals,” Ives said. “The stocks reacted C+.”
Meta’s stock tumbled 3% following its third-quarter earnings after executives said the Middle East crisis made for an uncertain ad market that could affect the company’s revenue for the remainder of the year.
Alphabet has fallen 10.3% since its high on Tuesday after its cloud division missed analyst expectations for revenue. Last week, after the stock dropped, Ives said the selloff was overblown and that owning Alphabet stock for its cloud business, instead of its extremely lucrative ad business, was like “rooting for Michael Jordan to play baseball.”
On Monday, he added that the “Alphabet selloff was just a massive head scratcher.”
Third-quarter ad revenue across Alphabet, which owns Google and YouTube, was $59.7 billion, up 9.5% from the same period last year and above analyst expectations. Overall, Alphabet had $76.7 billion in revenue, an 11% increase in compared to the third quarter of 2022. Even though the cloud division disappointed investors, it still grew 22% compared to last year. All of that led to the worst day for Google’s stock since the COVID-19 pandemic started in March 2020.
The miss on cloud revenue sent Alphabet’s stock tumbling because analysts likely view its cloud business as a proxy for the company’s ability to make money from AI. Even though some analysts were underwhelmed about Alphabet’s performance, Ives said his firm was using the selloff as a chance to “pound the table on names we love,” meaning buying tech stocks on the dip. He did agree, though, that AI is critical to the tech industry’s future, citing it as one of the main reasons he was so confident in the industry moving forward.
Another reason Alphabet’s stock may have dropped so sharply is the contrast of its cloud division’s performance with Microsoft’s, which posted exceptionally strong numbers. Microsoft’s cloud unit grew 19.4% last quarter compared to the year before, bringing its total revenue to $24.3 billion from $20.3 billion. Unlike Alphabet, Microsoft’s cloud business accounts for a huge portion of its revenues—around 43% versus roughly 11% for Alphabet. Ives said Microsoft was in a league of its own when it comes to making money from AI.
Microsoft CEO Satya Nadella “has a glass of champagne with his feet up on the table because if you look at AI it’s Microsoft’s world and everyone else is paying rent,” Ives said.
Much of Microsoft’s dominant position in AI can be attributed to its roughly $13 billion investments in OpenAI, the company that makes ChatGPT. During its earnings call last week Microsoft said about 3% of the growth in its Azure cloud division could be attributed to AI, higher than the 2% originally forecasted. While that pointed to a successful push to get corporations to adopt AI, the closing of Microsoft’s $69 billion Activision-Blizzard merger would strengthen its position with consumer-facing AI, according to Ives. (He called the deal’s closing a “black eye” for Federal Trade Commissioner Lina Khan, whose agency sued to stop the merger.)
Ives said the AI boom would extend beyond the U.S. to China. Despite some growing split between the two economies—which both country’s governments have said they want to avoid—Chinese companies like Baidu, Tencent, and JD would be able to profit from their underlying AI technologies. “When you look at the revolution that’s happened in terms of AI, it's going to benefit Chinese players as well as U.S. tech,” Ives said.
