Big Tech’s earnings get ever bigger, and ever less useful

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Nothing presents a middle finger to investors and stock analysts like four of the world’s biggest companies — arch-rivals, at that — reporting their earnings on the same day, within minutes of each other. Amazon, Microsoft, Meta Platforms and Alphabet did that on Wednesday. It’s not like they had bad news to bury: the foursome collectively reported earnings growth of 60 per cent compared with a year earlier.

This high-tech pile-up marks a moment, of sorts. Last time it happened, in October 2020, the Silicon Valley supergroup had a combined market capitalisation of about $5tn. Since then their aggregate value has more than doubled. Amazingly, considering their sheer size, all four are growing like companies a fraction of their size: Meta’s revenue increased by 33 per cent, the others by roughly 20 per cent.

It goes without saying that AI is now the story. Nobody was watching Big Tech’s capital expenditure five years ago. Now, such investment — dominated by building AI data centres — moves share prices, and not always predictably. Meta and Alphabet boosted their colossal investment plans for the year to a potential $145bn and $190bn respectively on Wednesday. Meta’s stock fell after the market closed; Alphabet’s rose.

All four are at pains to show that their spending is pushing up revenue. At Alphabet, Google AI-enhanced queries helped send search-ad sales up 19 per cent year on year. Microsoft’s AI-related revenue more than doubled year on year, at about 10 per cent of its total top line. Meta managed to raise prices for ads on platforms such as Facebook and Instagram by 12 per cent, year on year.

The more AI matters to these companies, the less today’s financial results do. All four are firmly focused on goals that sit much further out. Meta’s Mark Zuckerberg and Alphabet’s Sundar Pichai are both chasing AI with superhuman intellect. Microsoft runs the cloud on which much of it will sit. Amazon is launching satellites into orbit, while its chip business, which powers AI workloads, is growing at a triple-digit percentage rate.

Delayed gratification is an ever-greater feature of the wider market too. Goldman Sachs analysts estimate that three quarters of the S&P 500’s value now comes from cash flows more than 10 years in the future. While it’s not unusual for “terminal value” to make up the majority of a company’s worth, the level is near its highest in 25 years. For high-growth stocks it is 84 per cent.

That makes long-term questions like “who will win the AI war” much more important than “what happened to last quarter’s earnings”. But it may not make stocks any less volatile. Goldman shows that for a tech-style company, a 1 percentage point change in long-term growth rates implies a 29 per cent fall in a group’s enterprise value. Vague indications of potential supremacy — or the loss of it — matter more and more.

It may soon get easier for companies to turn the volume down on short-term earnings movements. The US Securities and Exchange Commission hopes to drop the requirement for quarterly reporting, egged on by President Donald Trump. That’s a missed opportunity, since AI should make financial reporting much easier. Investors will have to focus more on who wins in the long term, even as they get fewer clues about the answer.

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