Alphabet is one of the biggest movers in the pre-market on Wednesday. Its share price is higher by 5.7%, after it released a strong Q3 earnings report. The company reported Q3 revenues of $74.5bn, higher than the $72.8bn expected. Net income was $26.3bn, higher than the $24.5bn expected. Earnings per share were $2.12, smashing expectations of $1.97, which highlights how profitable the tech giants are when they are firing on all cylinders.
Alphabet’s share price has already surpassed the average 1-day move after earnings releases, which is 5.12%. Thus, if the stock can continue to extend gains during the US session, it could be an historic move for Alphabet. Investors have welcomed Alphabet’s results with open arms as the revenue and profit beat suggests that their pricy bet on AI is starting to pay off.
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Revenue was higher by 16% YoY, even though Google is moving away from its traditional search engine business. Revenue from its cloud computing business rose 35% YoY. This suggests that although Google had a slow start when it came to growing sales in its cloud computing business, it is now ripe to play catch up with its rivals Amazon and Microsoft. Not only is Google selling AI enhanced products, but AI is also helping to boost Google’s productivity. The company reported that 25% of the company’s code is now written by AI.
The other positive from these results is that Google’s well known legal woes with the US regulators are not impacting its profitability or its ability to generate revenue, which is positive for the stock.
AI moves to its next growth phase
However, Google’s results are also significant for the broader AI industry, and it can tell us where it is in its evolution.
Why AMD and Nvidia could see growth slow
AMD, the producer of chips and processors that power AI, also reported results on Tuesday. Their results were mostly inline, revenues were $6.81bn for last quarter, vs. expectations for $6.71bn, while net income was $1.5bn, vs. $1.51bn expected. EPS was in line at $0.92. However, AMD’s share price is down more than 8% in the pre -market, and it is one of the weakest performers on Wednesday. This is the worst performance for AMD’s shares after an earnings report in more than 8 quarters. The average 1-day move after its earnings report is 6.8%.
Although AMD revenue was higher by 18% last quarter, its growth outlook for Q4 was slightly lower than expected, which is fueling fears about future growth prospects. The brutal sell off on the back of this earnings report is a sign that investors are using AMD results to tell a bigger story about AI. AMD sells the hardware that is needed to power AI. This has been a massive growth area in recent years as companies such as Microsoft, Meta and Google try and ramp up their AI capabilities. However, could AI be moving to its next stage of evolution? If so, then hardware demand may have passed its peak, and the new phase could be implementation, which is better for companies that sell AI-enhanced products to consumers like Google and Microsoft.
What’s next for Nvidia?
This has ramifications for investors. Nvidia is the world’s biggest AI chip maker, and its share price is second best performer on the S&P 500 so far this year, rising 185% YTD. It is also the best performer within the Magnificent 7 group of mega cap US tech stocks, as you can see in the chart below. However, if the AI industry is moving to its new phase of growth, then it could allow Google to play catch up, the purple line in the chart below.
Chart 1: Magnificent 7 US tech stocks, normalized to show how they move together.
Source: XTB and Bloomberg
Nvidia’s share price is lower today by 0.7% in the pre-market. This suggests that fears about demand for AI hardware growth slowing down could weigh on one of the biggest stocks in the S&P 500. This could allow a broadening out of the tech trade in the US as the AI theme evolves. It may also lead to increased volatility in Nvidia’s share price as we wait for its next earnings report that is due on 21st November.
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