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Wednesday 24 July 2024

Week in Tech: Alphabet’s earnings set the stage for tech’s AI question

Wednesday, Jul 24

Welcome to Yahoo Finance's This Week in Tech. The week got off to a rough start as businesses around the world continue to recover from Friday's global IT outage. But the tech industry continues to power on as earnings season kicks into high gear.

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Google parent Alphabet was first out of the gate on Tuesday, giving Wall Street a look at whether AI is making an impact on companies' bottom lines, not to mention a better look at the digital advertising market. And despite beating on the top and bottom lines, investors weren't exactly enthusiastic about Alphabet's results. But before we get to that, here are a few other tech stories making waves this week.

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📉 Tesla stock sinks: In addition to Alphabet, Tesla also reported its earnings on Tuesday with mixed results. While the company beat on revenue expectations, it fell short on earnings estimates. And as Yahoo Finance's Pras Subramanian points out, the company indicated slower growth this year than last year, which sent shares tumbling as much as 10% on Wednesday. On the flip side, the automaker set a new date for its big robotaxi event, which is now scheduled for Oct. 10.

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🔥 Meta's reality check: Meta is pouring billions of dollars into its Reality Labs business with the hopes that it will lead to a future where consumers and enterprise customers alike interact with the world through mixed reality glasses. The company already offers its Meta Quest AR/VR headset and Ray-Ban smart glasses, but it's still years away from combining the technologies into one lightweight system. And the revolving door of executives isn't helping Meta reach its ultimate goal of ubiquitous augmented reality glasses any faster.

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🎶 Spotify customers want more — and will pay: It's hard to imagine customers asking to pay more for a service, but Spotify CEO Daniel Ek seems to believe that's exactly what his users are looking for: a more expensive, premium service. Ek more or less telegraphed the company's plans to unveil a new subscription tier with higher-quality audio that would cost as much as $5 more than the current highest-tier plan. That would mean users would pay upwards of $18 per month. We'll have to wait to see if the new plan includes any additional features before we determine if it's worth the price.

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🎮 Games industry 'poised for upswing' after stinging declines: The video game industry is set for a big comeback after suffering declines following the boom at the start of the pandemic. According to former Nintendo of America president Reggie Fils-Aimé, the games market should begin to pick up speed toward the end of the year and into 2025 as more big-name titles begin to hit store shelves, including Take-Two's upcoming "Grand Theft Auto VI" in late 2025 and Nintendo's successor to its popular Switch console. Now, if only I had time to play anything.

Alphabet's earnings set the stage for tech's AI question

Google parent Alphabet kicked off Big Tech's earnings season on Tuesday, giving Wall Street its first look at digital ad and cloud spending in the quarter. The company reported better-than-expected earnings and revenue, on the strength of Search ads and continued cloud growth, but fell short on YouTube ad sales.

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Alphabet also continues to spend billions building out its AI infrastructure. Outgoing CFO Ruth Porat told analysts during the company's earnings call that capital expenditures in the second quarter topped out at $13 billion, up from $12 billion in Q1. And the vast majority of that is going toward servers and data centers for AI capabilities.

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The report sets the tone for the rest of the tech industry as it prepares to provide Wall Street with the latest on not just AI spending, but also how much that spending is paying off in actual revenue.

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So far, Alphabet says it's seeing an uptick in cloud revenue, with some of that coming from interest in AI products. But CEO Sundar Pichai sidestepped a more direct question about when analysts can expect to start seeing a return on capital investments related to AI, saying that the spending is necessary for a long-term bet like AI and adding that in situations like this it's better to overinvest rather than underinvest and fall behind.

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UBS's Stephen Ju wrote in an investor note following Google's earnings call that it still isn't entirely clear when Google will start to reap the benefits of its AI investments.

"The benefits [Google] is seeing in [Google Cloud Platform] on AI productization still seems difficult to discern, as is the full payoff that Google should see (we do not think potential revenue benefits will arrive until [the first half of 2025] at the earliest)," Ju wrote.

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"So as far as we are concerned, the [return on invested capital] debate remains only partially resolved, especially as we are now contemplating what is a higher [capital expenditure] estimate for 2025 and 2026," he added.

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Other analysts were more upbeat on Google's AI efforts, with William Blair's Ralph Schackart pointing to Pichai's comment that some 2 billion users are accessing its Gemini AI model and that the company is building the model into its own products.

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Wedbush analyst Scott Devitt, meanwhile, pointed to Google's AI Overview for search helping to drive better customer engagement and creating more monetization opportunities as a positive in the company's report.

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Still, the one thing missing from all of this is a definitive number pointing to how much Google's AI investments are actually helping its bottom line. Pichai says investments will make a difference, but when exactly is still rather vague.

Alphabet is just the first of the Big Tech names set to report their earnings this quarter, and you can all but guarantee investors will be searching for clues as to how those other companies' AI moves are paying off as well.

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Microsoft, Amazon, Meta, Intel, AMD, and Apple are slapping AI features onto their various products and services. Now we just have to see if they'll give any more insight than Alphabet had to offer.