Tech stocks: Mag 7 rides the AI wave

The largest tech stocks, including Microsoft, Apple, and Google, aim to profit from AI growth.

Feb 3, 2024 - 20:30

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Big Tech isn't just big anymore. It's massive.

The market's six biggest tech companies, all of which have reported December quarter earnings over the past two weeks, are now valued at just over $11.3 trillion.

Throw in Nvidia (NVDA) - Get Free Report, which hit a record high on Friday reports later this month, and the tally rises to just a shade under $13 trillion.

That's around 31.3% of the entire $41.128 trillion that investors are collectively valuing the S&P 500, the broadest measure of U.S. blue chip companies

That makes the seven largest tech stocks worth around half of the collective value of the remaining 493 stocks on what is effectively the world's equity benchmark.

It's a common error to compare market values, which represent a measure of wealth, to the GDP of a country, which represents the flow of economic gains, so that parallel that won't be made here.

But it's not beyond the realm of economics to compare the collective revenue generated by the Super Six tech giants, which topped $500 billion last quarter, to a country's GDP.

That tally would compare closely to Thailand, which had a nominal GDP value of around $495 billion last year. Add in Nvidia and you're getting closer to Israel, at $522 billion.

Big Tech CEOs are spending big money to make sure they dominate the AI market.
Getty Images/ TheStreet

Bigger than Canada?

Extrapolate the fourth quarter gains to an annual run-rate, and you're looking at something closer to Canada, which was last pegged at $2.14 trillion.

The Super Six, the group that's reported fourth quarter earnings so far, are also wringing an impressive amount of profit from those eye-watering revenues.

Microsoft, Alphabet, Amazon, Meta Platforms, Apple, and Tesla (TSLA) - Get Free Report generated around $110 billion in net income over the December quarter, topped by the iPhone maker's $34 billion.

AI might actually make those number even bigger.

"AI is going to make all of the products and services that we use and make better," Meta Platforms (META) - Get Free Report founder and CEO Mark Zuckerberg told investors after the group's blowout fourth quarter earnings, which triggered the biggest single-day gain in stock market history.

"A major goal will be building the most popular and most advanced AI products and services," he added. "And if we succeed, everyone who uses our services will have a world-class AI assistant to help get things done, every creator will have an AI that their community can engage with, every business will have an AI that their customers can interact with to buy goods and get support, and every developer will have a state-of-the-art open source model to build with."

That's a lot of "every ones," for sure, but it certainly illustrates the level of conviction that company bosses have for a technology, only two years ago, could barely be described in functional terms.

“Investors are excited by the promises and possibilities of artificial intelligence services," said Nigel Green, CEO of London's deVere Group. "Companies like Microsoft, Alphabet, and Nvidia have been leading the charge in AI innovation (and are) looking for clues on the companies that will benefit the most from the possibilities."

What's a few billion among friends?

Those companies, in turn are spending billions – hundreds of billions, in fact – to ensure they deliver.

Meta sees expenses rising to between $94 billion and $99 billion this year, while Amazon said its 2024 capex would rise from last year's $48.4 billion tally "primarily driven by increased infrastructure capex, support growth of our AWS business, including additional investments in generative AI and large language models."

Google parent Alphabet (GOOGL) - Get Free Report, meanwhile, which saw capital spending surge 45% from a year ago over the fourth quarter to $11 billion, said that figure would rise "notably" in the coming year.

CFO Ruth Porat said the "sharp step-up" was a reflection of "our outlook for the extraordinary applications of AI to deliver for users, advertisers, developers, cloud enterprise customers, and governments globally and the long-term growth opportunities that offers."

You get the picture.

Even Apple (AAPL) - Get Free Report, which has heretofore been happy to build in incremental (and, it must be said, not terribly exciting) improvements in the iPhone that translate into faster growth rates for its services division, has caught the AI bug.

Apple CEO Tim Cook told investors that generative AI technologies remain a "huge opportunity" for Apple and talked about "a lot of work going on internally" in the earnings conference call late Thursday.

"Our 'MO', if you will, has always been to do work and then talk about work and not to get out in front of ourselves. And so, we're going to hold that to this as well," Cook said. "But we've got some things that we are incredibly excited about that we'll be talking about later this year."

It costs to get a seat at the AI leaders' table

Microsoft (MSFT) - Get Free Report CEO Satya Nadella put it best: "we're moving from talking about AI to applying AI at scale," he told investors last week as they balked at the group's spending pace, which rose 4% to $16 billion last quarter with "material" increases to come.

Microsoft itself justified some of its early AI spending by noting that AI infusions added around 6 percentage points to the revenue growth of Azure, its flagship cloud product, over the three months ended in December.

That's more than double the impact over the September quarter and helped Azure grow revenue by around 30%, which in turn powered a better-than-expected top line for the group's Intelligent Cloud unit of $25.9 billion.

"We believe this is the start of a multi-year initiative aimed at generating significant AI use cases for customers across the enterprise landscape to gain further efficiencies while accelerating profitable growth with Redmond leading the charge in this potential $1 trillion opportunity." said Wedbush analyst Dan Ives.

At the rate the Magnificent 7 are growing, a trillion dollars might not buy you a seat at the table.