Shanghai, August 7th (Xinhua) -- Recently, technology giants have successively released new quarterly financial reports, and the volatility of the US stock market has been amplified. The large-scale reduction of Apple's holdings by "stock god" Buffett has added fuel to the volatility of technology stocks.
Throughout the years, tech giants with abundant cash flow have been able to maintain long-term high capital expenditures. However, in the context of slowing revenue growth, whether the massive AI investments of tech companies will become a successful "future investment" or just a "bill" for shareholders has become a focus of market debate.
AI invests heavily or harms shareholder returns
Berkshire Hathaway's Q2 financial report shows that the company has significantly reduced its stake in Apple by nearly 50%. As of the end of the second quarter, its holdings of Apple shares were worth $84.2 billion, with the number of shares held decreasing from 790 million to 400 million.
Berkshire Hathaway's reduction in holdings of Apple has caused a huge uproar on Wall Street. Analysts generally believe that Buffett tends to invest in companies with strong cash flow, which can maintain stable returns in different market environments. However, as Apple continues to invest in AI, its shareholder returns may decline, which is also one of the reasons why Buffett chose to reduce his holdings of Apple at this time.
Generally speaking, when a company earns profits, they are mainly used in two ways: retaining profits for reinvestment and giving back to shareholders through dividend buybacks. This means that there is a "seesaw" effect between dividend buybacks and capital expenditures.
And technology giants continue to invest heavily in AI and participate in dividend buybacks simultaneously, which has the impact of consuming historical retained cash.
According to the latest quarterly report, Apple, Meta, Microsoft, and Tesla have all experienced a decline in cash reserves. Among them, Microsoft and Meta, which are the most active in AI investment, have experienced the most significant decline, which is clearly different from the trend of continuous cash reserve growth of technology giants in the past few years.
Barclays analysts pointed out in their report that capital expenditures in the AI field are expected to accumulate to $167 billion from 2023 to 2026.
Tech giants have recognized the risks of investing heavily in AI, but still expressed their determination to firmly invest in AI in this financial report. Sundar Pichai, CEO of Alphabet, the parent company of Google, stated that for Google, the risk of underinvestment far outweighs the risk of overinvestment.
Amazon CFO Brian Olsavsky said, "This is a high-risk business. It's a revolutionary shift in many industries. We believe we can participate in it in a very high-end way with our existing position in the cloud computing field
Meta CEO Mark Zuckerberg also said, "I would rather take the risk of perfecting AI capabilities before the market really needs them, than it's too late, because launching new inference projects requires a long preparation time
Barclays' research report refers to this arms race style investment as' FOMO (fear of missing out) '. If all competitors have upgraded their business base to "computers" while you are still using "primitive computing tools", this may not be a missed issue, but simply disappear. For example, cloud customers will directly choose cloud service providers that can provide generative AI capabilities.
Can AI bring revenue growth to tech giants?
Among the seven giants of US technology stocks, only Nvidia has not yet released its Q2 2024 financial report, while the financial reports of the other giants show mixed signs. The AI stories about cloud services, advertising, autonomous driving, and edge to edge intelligence have also led investors to gradually question them.
Google's core advertising revenue in the second quarter increased by 11% year-on-year, lower than the 13% in the previous quarter, and the growth rate slowed down after five consecutive quarters of rebound.
Microsoft's smart cloud revenue growth rate dropped to 19% in the second quarter, and increased by 21% year-on-year in the first quarter. Among them, Azure and other cloud service revenue increased by 29% year-on-year, lower than the previous two quarters.
Meta's core advertising business grew by 21.7% year-on-year to $38.33 billion in the second quarter, exceeding market expectations of $37.57 billion, but with a growth rate weaker than the nearly 27% in the first quarter. Its proportion in total revenue remained at about 98%.
Amazon's Q2 revenue increased by 10% year-on-year, lower than market expectations, and it is expected that Q3 revenue will be between $154 billion and $158.5 billion, with a median of $156.25 billion, lower than market expectations of $158.24 billion, indicating that the company's high capital expenditures may lower profits.
Although Apple's revenue growth has turned from negative to positive, its sales prospects are facing challenges. From the perspective of the market sales rate (PS) index, under the AI belief, Apple's PS has exceeded the peak in the period of COVID-19 epidemic in 2020, where the internal structure of sales has deteriorated, Apple is facing downward pressure on iPhone prices, and its profitability is also declining.
In 2016, when Berkshire Hathaway opened a position in Apple, the company's price to earnings ratio (PE) was around 15 times. Now, Apple's PE is around 30 times, which includes market expectations for the company's AI terminal and software monetization capabilities to improve. Wall Street investment bank Bernstein stated in a report that looking back at Buffett's investment style, he has always been quite sensitive to valuations, with valuations exceeding 30 times being too high.
Renowned hedge fund firm Elliott Management recently expressed concerns to investors about the current valuation of US technology stocks. Elliott Management believes that the market speculation on artificial intelligence technology has exceeded its actual application value, leading to inflated stock prices.
Investors have been questioning how such an "unprecedented massive investment" can yield returns, but the aforementioned American tech giants have all stated that "investing over $100 billion is just the beginning, and will further increase investment in artificial intelligence in the next 18 months.
Therefore, some opinions suggest that the huge investments made by tech giants are for future infrastructure, rather than for disruptive innovative applications facing users. It is still unknown when these huge investments will bring revenue growth.