Big tech companies are getting in line to boost their efficiency as economic worries come to a head in 2023. Artificial intelligence (AI), it seems, is the key. Human workers are out of favor and the AI bots are in as computing technology eyes the next wave of growth.
In the interim, though, 2023 is going to be a rough year for company earnings. Nevertheless, if you think the beginnings of a bull market -- driven by an AI-powered economy -- are being laid for later this year and beyond, big tech stocks could be a fantastic place to stash some cash. Three Fool.com investors like Microsoft (MSFT -0.82%), Alphabet (GOOGL -1.37%) (GOOG -1.34%), and Meta Platforms (META -1.39%) right now. Here's why.
Microsoft is the safest way to play the AI revolution
Billy Duberstein (Microsoft): Sure, it's not exactly a novel pick, but Microsoft proved again why it continues to gain such respect from the market after its fiscal third-quarter earnings conference call took place last Tuesday.
Revenue and earnings per share both beat analyst estimates. Yet perhaps more importantly, the company also gave a Q4 outlook that defied the market's skittishness over IT spending. Management said it expects its productivity and business processes software segment to grow 10% to 12% year over year, and the intelligent cloud segment to grow 15% to 16%, buoyed by Azure cloud growth of 26% to 27%. That's really impressive in this environment. While the more personal computing segment is projected to fall year over year, as the consumer-facing division deals with the worst PC declines in recent history, management projected sequential gains over the prior quarter.
A lot of this resilience can be attributed to Microsoft's "early lead," as CEO Satya Nadella put it, in artificial intelligence. In recent months, Microsoft has made a large investment in OpenAI, the parent company of the ChatGPT chatbot released last November.
But Microsoft's solid results weren't just in selling specific AI products to customers, but rather that AI helps propel a lot of Microsoft's existing businesses.
For instance, Nadella said that OpenAI Azure customers were up over 10 times in just one quarter, reaching 2,500. He also noted customers' use of the OpenAI API had spurred conversations for Azure cloud usage that Microsoft had never had before, leading to market share gains. In fact, management noted market share gains not only in Azure, but also Dynamics, Teams, Security, Edge, and Bing, all of which have been infused with OpenAI's technology. Management also credited AI-powered Github CoPilot, which helps developers write code, with reaching 10,000 businesses last quarter. And the AI capabilities infused into Microsoft's Power Platform for low-code app deployment was credited with growing Power users by 50% over the prior year.
Some may have questioned Microsoft investing $10 billion into OpenAI back in January, especially as OpenAI has a unique "capped profit" structure that would ultimately limit Microsoft's returns.
However, Microsoft is uniquely positioned to especially benefit from OpenAI's proprietary AI tech. This is because Microsoft already has a "full stack" of products, from cloud, to data analytics, to enterprise software and backend platforms, to cybersecurity, and the GitHub developer platforms. AI can greatly improve all of these products, which should allow Microsoft to gain share and charge more for the greater value it provides to businesses large and small. That should lead to profitable growth over a multi-year period.
So, Microsoft has the ability to improve its entire suite of widely distributed enterprise products with the capabilities of AI. From the looks of the most recent quarter's earnings, the benefits are already starting to show up.
Alphabet's undervalued upside
Anders Bylund (Alphabet): I can't get over how great of an idea Alphabet stock looks like right now. Wall Street isn't giving this tech giant the credit it deserves.
First off, Alphabet's first-quarter results were impressive where it counts. Google Cloud revenue jumped 28% higher year over year, landing at $7.5 billion. In the process, Alphabet's cloud computing services showed a positive operating profit for the first time ever. The growth may not stay profitable in the next few quarters, as Alphabet is ready to absorb some more cloud computing losses while boosting the top-line growth even further with costly infrastructure expansion and marketing campaigns. That's perfectly fine in my view. Alphabet is tapping into the lucrative cloud computing market with the right mindset, building a wide and deep revenue stream before worrying too much about bottom-line profits.
Moreover, Alphabet's pivot toward AI development in response to competition from OpenAI's ChatGPT demonstrates the company's adaptability and commitment to innovation. This strategic move puts Alphabet in a strong position to lead the emerging AI field, further strengthening its long-term prospects.
Now, it's true that Alphabet still relies heavily on advertising revenue, which accounted for 78% of its total sales in the first quarter. Advertising can be volatile, especially during economic downturns, and that's certainly true in the current economy. Ad buyers of every stripe are holding back their marketing budgets until consumers and corporations are ready to actually buy the stuff they're trying to promote. On the upside, there will probably be an uncommonly intense surge when that pent-up demand for digital ads is released. And in the long run, Alphabet's diversification into AI and cloud computing should help it weather any future storms.
Given Alphabet's mixed but robust Q1 results, its strategic pivot toward AI, its cloud computing growth, and the strong performance of its powerhouse brands, Alphabet is a no-brainer buy right now. I mean, feel free to double-check my analysis with your own financial homework, but you'll most likely walk away from your desk with the same conclusion.
At the threshold between April and May, I highly recommend that you seize this opportunity and invest in an undervalued tech giant with a bright future.
The market smells a return to growth cooking in the AI department
Nicholas Rossolillo (Meta Platforms): Let's be crystal clear up front, Meta (parent company to Facebook, Instagram, and WhatsApp) didn't have a wonderful Q1. But the market cheered anyway, as it has been since Meta stock reached dismal multiyear lows late last year. Share prices have rocketed some 172% from lows in early November 2022, even as revenue continues to stagnate and profit margin falls. What gives?
Well, clearly CEO Mark Zuckerberg's "year of efficiency" isn't yielding results -- at least not in the financial department, yet. Revenue was up a meager 3% year over year to $28.6 billion. Excluding negative currency exchange rates, revenue would have been up 6%. The nasty exchange rate problem took a toll on earnings, too. Earnings per share fell 19% from a year ago, and free cash flow fell 17% to $7.16 billion.
These metrics can be noisy from one quarter to the next, though. Thanks to sweeping structural changes and a renewed focus on efficient operations (with a little help from behind-the-scenes AI), Meta said full-year total expenses should be in a range of $86 billion to $90 billion. That's down from guidance for expenses to be $89 billion to $95 billion provided a few months ago.
For reference, full-year 2022 expenses were $87.7 billion, so it appears the company is getting costs under control. With profit margins possibly poised to make a comeback, investors were mighty happy.
Additionally, Zuckerberg and company highlighted how AI is helping Meta's social media ads return to growth. Reels, in particular, are getting viewed and re-shared far more frequently these days, thanks to AI recommender system improvements. Reels ad monetization on Instagram and Facebook were up 30% and 40%, respectively, from the previous quarter alone. And generative AI is also being worked on to build future services, a stepping stone to Meta's ultra-long-term goal to build a robust metaverse business.
I'm happy to still have Meta in my portfolio. Riding out 2022 is beginning to pay off. There's still a long way to go before the stock reaches all-time highs again, but with revenue growth starting to make a comeback and expenses in check, Meta looks like it's in a far better place than it was just a couple of quarters ago.
