As U.S. big tech companies prepare to announce their earnings, market attention is shifting from earnings per share (EPS) to the tangible results of artificial intelligence (AI) investments.
On July 20, Danish investment bank Saxo Bank highlighted five key indicators for investors to watch as Alphabet, Microsoft, Meta, Apple, and Amazon prepare to report their earnings this week: revenue growth, capital investment, profit margins, free cash flow, and future earnings outlook.
Alphabet is set to release its earnings on July 22, followed by Microsoft and Meta on July 29, and Apple and Amazon on July 30.
Saxo Bank noted that simply exceeding market expectations for EPS may not be sufficient for a positive assessment. Even if net income surpasses forecasts, a decline in cash flow, lower profit margins, or an increase in capital investment plans could lead to negative market reactions.
The bank emphasized the need to first confirm whether AI demand is translating into actual revenue growth. Key metrics include the growth rates of Microsoft’s Azure, Amazon Web Services (AWS), and Google Cloud. For Meta, the focus is on the increase in advertising revenue, while Apple’s performance will hinge on whether AI can boost device sales and service revenue.
In terms of capital investment, Saxo Bank advised that the focus should not solely be on the scale of investment but rather on the rate of spending increases compared to actual demand and revenue growth. If companies raise capital investment plans without increasing revenue forecasts, concerns about investment burdens may grow.
Profit margins and free cash flow were also highlighted as critical indicators. It is essential to assess whether companies can maintain profit margins amid rising costs in semiconductors, memory, data centers, and depreciation. The stability of free cash flow, which reflects the cash remaining after AI infrastructure investments, is also crucial.
Saxo Bank pointed out that while big tech has been viewed as companies with low asset burdens and high cash generation, the expansion of AI investments is gradually making their business structures more capital-intensive. Therefore, even if accounting profits increase, a continued decline in free cash flow could highlight investment burdens.
Looking ahead, Saxo Bank stressed the importance of demonstrating whether the number of paying customers for AI products is increasing, whether infrastructure shortages in data centers are easing, and whether the pace of investment growth is slowing or efficiency is improving.
The bank concluded that big tech could receive positive evaluations this earnings season if they can prove improvements in revenue, profit margins, and cash flow, regardless of whether they reduce AI investments. The focus will be on how effectively they can leverage their established AI infrastructure to generate stable profits.
* This article has been translated by AI.
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