Reviewing the second-quarter report of Mag 7, has the bull market in technology ended?

In July, the market value of the tech giant Mag 7 in the US stock market dropped by $1.27 trillion. Even though Mag 7 released better-than-expected financial reports, they were still heavily sold off by the market, raising doubts among investors about the AI boom.

According to BlackRock's analysis, the reasons for the stock market volatility are not just financial reports; global central bank policy expectations, stock rotation, and exchange rate fluctuations are the main driving factors.

Last week's "Black Monday" intensified investors' concerns. Japan's interest rate hike and the soft US employment report prompted investors to shift from overvalued tech giants to small-cap and cyclical stocks. In addition, doubts about the profitability of artificial intelligence are increasing, leading to a significant sell-off of Mag 7. The slowing growth of tech giants, coupled with a large amount of investment in AI failing to generate corresponding returns, has weakened their market attractiveness.

How did Mag 7 perform in this round of financial reports?

Meta

Despite the soaring costs of artificial intelligence, Meta's performance exceeded expectations:

In the second quarter of 2024, achieved a net profit of $13.5 billion, a year-on-year increase of approximately 73.1%.

Revenue increased by 22% year-on-year to $39.1 billion. Advertising revenue contributed 98% of total revenue, and it is expected that revenue in the third quarter will reach $38.5 billion to $41 billion.

Despite the impressive data, the Reality Labs division responsible for producing Quest and Ray-Ban Meta smart glasses at Meta is still in a loss-making state, with a quarterly operating loss of up to $4.5 billion. In addition, Meta's investments in the field of artificial intelligence continue to increase, leading the company to revise its minimum capital expenditure forecast for 2024 to $37 billion, with an upper limit of $40 billion. Capital expenditures for this quarter were $8.47 billion, a year-on-year increase of 33.4%.

In the field of artificial intelligence, Meta has launched a new large language model, Llama 3.1, and plans to invest $10 billion in infrastructure to support its AI development. Driven by the AI boom over the past year, Meta's stock price has risen by nearly 50%.

Microsoft

Microsoft's latest financial report for the fourth quarter of the 2024 fiscal year is also impressive:

Revenue increased by 15% year-on-year to $64.7 billion, and net profit increased by 10% year-on-year to $22 billion, mainly due to significant progress in the cloud services and gaming sectors, especially Azure and Xbox.

Microsoft's operating income for the fiscal year also reached a record $109 billion.

Although Azure cloud services grew by 29% overall, slightly below the expected 30.6%, this is the first time in nearly two years that it has fallen below Wall Street's expectations. The slowdown in growth of Microsoft's cloud business indicates that the time for AI to bring returns may be longer than initially expected.

While investors' enthusiasm for artificial intelligence has driven Microsoft's stock price up by nearly 25% in the past 12 months, disappointment over the slowing growth of Azure led to a 7% drop in Microsoft's stock price after the financial report was released, mainly due to concerns about AI infrastructure spending In terms of artificial intelligence investment, Microsoft's capital expenditure this quarter, including cash outflows and financing leases for equipment purchases, reached a staggering $19 billion, equivalent to Microsoft's full-year expenditure in 2019. This massive expenditure is not surprising, as since last year, Microsoft and other large tech companies have publicly stated their commitment to investing heavily in generative artificial intelligence.

Microsoft's Chief Financial Officer Amy Hood emphasized that a significant portion of the capital expenditure will be specifically used for artificial intelligence, especially in the construction of data centers.

Apple

Apple's recently released third-quarter financial report shows:

Revenue reached $85.78 billion, a 5% year-on-year increase, exceeding expectations; among which iPhone revenue reached $38.3 billion, a 1% year-on-year decrease.

Gross margin was 46.3%, slightly higher than the expected 46.1%;

Net profit was $21.45 billion, a 7.9% year-on-year increase.

Regarding the highly anticipated Apple artificial intelligence, Apple's management has not yet revealed specific details. The market's fascination with Apple's artificial intelligence is closely related to its unique artificial intelligence strategy, including cooperation with OpenAI to develop an intelligent ecosystem and prioritizing convenience for users.

At the WWDC developer conference, Apple revealed that its artificial intelligence will run on the iPhone 15 Pro and Pro Max, which could drive upgrade cycles and increase Apple's revenue. However, the latest news indicates that Apple's artificial intelligence will not be pre-installed on the iPhone 16, and the impact of artificial intelligence on Apple's revenue remains to be determined.

Amazon

Last Thursday, Amazon released its second-quarter financial report:

Revenue was $147.98 billion, a 10.1% year-on-year increase, but below market expectations. Among which, AWS cloud service revenue reached $26.3 billion, slightly higher than expected, with a 19% year-on-year growth.

Net profit was $13.485 billion, compared to $6.75 billion in the same period last year, a significant 100% year-on-year increase.

Moreover, compared to the cloud revenue growth rates of Microsoft (29%) and Google (28.8%), Amazon's cloud service growth has been relatively lackluster.

Amazon's Chief Financial Officer Brian Olsavsky pointed out that the growth in North American revenue was also lower than expected, as North American consumers are increasingly opting for cheaper goods, reflecting a trend of consumer downgrading.

Regarding artificial intelligence expenditure, Amazon reported a capital expenditure of $30.5 billion in the first half of the year, and it is expected to continue to increase in the second half to support AWS infrastructure and artificial intelligence services.

NVIDIA

Despite a recent pullback in NVIDIA's stock price, its cumulative increase since the beginning of the year remains as high as 142.3%, making it one of the main driving forces behind the S&P 500 index.

NVIDIA plans to release its quarterly financial report at the end of August, and given NVIDIA's better-than-expected performance in its past year's financial reports, Wall Street analysts are generally optimistic about its upcoming report In the short term, although NVIDIA has exceeded expectations in the past four quarters' financial reports, the degree of outperformance is narrowing. Looking at the long term, due to the dominant position of the CUDA platform, NVIDIA maintains a lasting competitive advantage in the GPU and AI accelerator markets.

Tesla

At the end of July, Tesla released its second-quarter financial report, with the following data:

Revenue for the second quarter was $25.5 billion, a 2% year-on-year increase, exceeding market expectations and achieving a record quarterly revenue;

Net profit was $1.494 billion, a significant decrease compared to the net profit of $2.614 billion in the same period last year.

Tesla's profitability was significantly impacted by the price reduction of its core models, leading to a substantial decrease in profit. However, Tesla's cash flow has improved, with operating cash flow reaching $3.6 billion, of which $2.27 billion was used for capital expenditures, including investments in artificial intelligence and autonomous driving research and development.

Google

Google's latest financial report shows:

Revenue in the second quarter increased by 14% year-on-year, reaching $84.7 billion.

Net profit was $23.619 billion, a 28.59% year-on-year increase;

However, due to investors' concerns about Google's massive investments in the field of artificial intelligence, Google's stock price fell by 8% after the financial report was released. In the previous quarter, Google's capital expenditures surged to $13.2 billion, a 91% year-on-year increase, with most of the investment going towards technology infrastructure such as servers, network equipment, and data center construction to support the demand for artificial intelligence.

Furthermore, Google has increased the proportion of operating cash flow allocated to capital expenditures from 24% to 49%, with nearly half of its business revenue currently being used to build artificial intelligence data centers. Analysts at BCA Research pointed out that despite Google's revenue and profit growth, the market remains cautious, uncertain about to what extent the 14% revenue growth can be attributed to artificial intelligence.

Valuation of Tech Stocks and Long-Term Prospects for AI Investment

Despite the recent decline in tech stocks, their valuations remain relatively high. Tesla's forward P/E ratio is 82.8, while NVIDIA's is 34.9. The high valuations of tech stocks may make small-cap stocks more attractive.

Looking ahead, artificial intelligence will undoubtedly bring substantial returns, but realizing these returns will take time. The recent adjustment in tech stocks may be a healthy signal, providing an opportunity for rational investment choices and pursuing long-term returns