A Look At Mag 7 Earnings
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Several of the Mag 7 reported earnings last week, giving us insight into the AI investment cycle. Let’s start with the good news first.
Microsoft (MSFT) delivered excellent cloud growth, the fastest growth since 2022. This is expected to accelerate as demand outstrips supply; a great read-through for the rest of the AI complex. Despite higher capital investment, they expect to remain cash-flow positive — meaning they don’t need debt or equity to finance projects. Music to investors’ ears.
Investors were also delighted to hear that users of Copilot (Microsoft’s AI model) are willing to pay for it. There was previously doubts that enterprise clients would expand or renew licenses after initial trial pilots. Microsoft is even adding usage-based billing for heavy agentic tasks. What this means is that AI providers are capturing more of the economics from customers deploying highly productive AI.
MSFT stock was up nearly 20% on the week. This just goes to show that the hyperscalers have a pathway to higher stock prices if they can demonstrate good return on investment (ROI) to validate the massive infrastructure spend.
Amazon (AMZN) also reported excellent cloud revenue growth, the fastest clip since 2021. More cloud usage means clients are happy with their AI offerings — a sign that their capital investment is well placed. Management explicitly stated that demand outstrips supply, with capacity reserved through 2027 and into 2028.
Profit margins actually expanded despite the massive spending increase, thanks to their in-house-made chips. This was a major strategic decision they made eight years ago that is now paying off.
Investors were even willing to look past Amazon’s increased capital spending and negative cash flow. The stock is up 16% on the day. Same story: spending is rewarded if it promotes profits.
Now for the bad news
Meta, the parent company of Facebook/Instagram/WhatsApp, gave an underwhelming revenue outlook and forecasted higher capital spending. Profit margins plummeted and cash flows plunged.
Unlike Microsoft and Amazon, which monetize AI directly, Meta’s AI primarily targets ads. Without a clear monetization path, it feels like Meta is throwing cash into a speculative “money pit”.
As a stark reminder, its failed Metaverse division, Reality Labs, still hemorrhages billions of dollars every year while generating minimal revenue and taking up valuable resources. Meta is known to have money pits. Is this one of those times?
Couple takeaways from these earnings reports. Industry capacity continues to remain tight, with demand outstripping supply at least through 2027. The industry has under-built for the wave of AI adoption. This is primarily what differentiates the current AI bubble from the 2000s dot-com bubble.
The Mag 7 selloff seems overblown now. They continue their capital spending plans validated by revenue growth and profit expansion. As a group, Mag 7 are rebounding from their June lows and reclaiming the 200-day moving average. Lifting up the broader indexes as well.
