The AI trade's trick-or-treat earnings season

The latest earnings from tech giants are causing jitters on Wall Street. Analysts and skeptics alike have reasons to support both hopeful predictions and dire warnings. The AI hype has entered a dual nature phase, with tech companies reporting mixed signals about the AI boom's impact. The tech-heavy Nasdaq briefly entered correction territory, losing $1.2 trillion in value for October after earnings pointed to AI's risks.

However, there were glimmers of hope within the earnings statements. Here are three examples of the AI trade's contradictions revealed in the latest earnings releases and calls from the tech industry giants.

Google's AI overviews are eroding its core ad revenue from search. Though search queries are up, the results generated by AI mode bring lower margins. The company has shed more than $500 billion in market value since the earnings report, dragging the broader tech sector down with it. On the brighter side, Google Cloud is catching up to Microsoft's Azure cloud revenue, a remarkable turnaround considering Google was once a also-ran in cloud computing.

The company's success is fueled by demand for its Tensor Processing Units (TPU) chips, which analysts anticipate will see significant growth in the coming quarters. The lesson here is that Google's struggles are emblematic of many tech giants' predicament - AI poses a threat to their core business but also offers new opportunities if they act swiftly.

Microsoft and Amazon both reported robust growth in their cloud businesses. Microsoft highlighted its investment in OpenAI, while Amazon showcased its Anthropic holdings. However, the market was less impressed with Amazon's cloud growth compared to expectations. Amazon's net income declined, despite soaring operating profits, as it did not replicate the pretax gain from its Anthropic investment from the previous year.

Microsoft's OpenAI investment marginally boosted its net income, resulting in improved profit growth. The key takeaway is to investigate the source of each hyperscaler's earnings growth. Is it coming from private investments in AI labs or from their underlying business?

The free cash flow situation is mixed. While some of the most asset-light tech companies have turned negative due to funding their AI ambitions, they argue that this is because demand is outpacing supply. They aim to keep investing in infrastructure to meet this demand and convert it into revenue. Conversely, if there's a drop in demand and these companies have poured trillions into creating more supply, it could lead to a bubble burst.

Watch the demand picture closely. Jeetu Patel, President and Chief Product Officer at Cisco, remains optimistic about AI's future, but he warns that a major cyber event hitting the core of AI demand could pose a downside risk.

In conclusion, tech stocks are under pressure following these results. Industry expert Gene Munster suggests the market is realizing the risks of an AI-driven world: How will Google make money without ad revenue from search? How can Amazon make money if shoppers are using bots? However, these existential questions are not deterring the AI capex spending spree, at least for now.