Big Tech’s Meltdown

Google HQ. Photo: Spvvkr

Wednesday, Oct. 25, was supposed to be a celebration for tech investors — the earnings report of two of the largest tech companies in the world exceeded expectations in both revenue and profit. Alphabet beat earnings estimates by $0.09 per share, and surpassed revenue estimates by $600 million. Microsoft exceeded expectations by an even wider margin, beating earnings estimates by $0.34 per share and beating revenue estimates by more than $2 billion.

But the celebration did not happen. The stock market fell significantly, with the S&P 500 falling below 4,200 for the first time since late May and dropping below the 200-day moving average. The Nasdaq has also come dangerously close to dropping below its 200-day moving average, and has entered correction territory as it fell more than 1,600 points from its previous high of more than 14,400.

The meltdown on Wednesday was a result of troubles in Google’s cloud computing arm, which saw its revenue grow by 22.5% in its third quarter, its slowest-growing quarter since the first quarter of 2021. Overall, its revenue ended up missing estimates by $210 million, or by 2.4 percent.

This reflects a concern that Google’s cloud computing business, which is used to power AI initiatives, is being outshined by Microsoft — which surged on Wednesday after its strong report. 

The meltdown continued on Thursday, with Meta’s earnings call raising concerns about the environment in the ad industry. The Nasdaq index fell another 200 points on Thursday, putting the index firmly within correction territory.

Traders at the New York Stock Exchange. Source: AP Photo/Richard Drew

The turmoil has resulted in a loss of $386 billion over the past two days, with Alphabet alone losing $180 billion. Companies like Microsoft and Meta have been the story of the year in the stock market, as enthusiasm in artificial intelligence (AI) has spurred interest in major tech companies and culminated in a major rally that lasted throughout the summer. Currently, the enthusiasm appears to be fading as multiple risk factors emerge — such as rising bond yields, persistently high inflation, and more recently, the Israel-Hamas war in the Middle East.

Though both the S&P and Nasdaq are in correction territory, it is possible that the worst may be yet to come. The Nasdaq remains more than 20% higher for the year, and the S&P remains 7% higher. 

One of the few bright spots emerged for the tech industry on Friday, as Amazon surged by more than 6% following an impressive earnings report, beating earnings estimates with a $0.94 per share compared to an estimate of a $0.58 per share, and revenues of $143.08 billion compared to a $141.56 billion estimate. However, all three major indices remain poised to finish lower for the week. 

Amazon’s success, contrasted by the massacre that other tech stocks have seen, reflects the emphasis that investors put on cloud computing. As mentioned earlier, cloud computing technologies are used to power AI because of the cloud’s ability to automate data management processes. According to a study by Deloitte, 70% of companies get their AI capabilities through cloud-based software. Amidst broad uncertainty in the tech industry, Amazon’s continued edge in cloud computing is why investors are flocking to the company.