Are the glory days over for Big Tech stocks?

THE fourth-quarter earnings season is underway, and tech giants Alphabet, Microsoft, Amazon, Apple and Meta have all reported their earnings. While the majority of them exceeded both revenue and earnings expectations, their solid financial performance was not enough to satisfy investors’ lofty expectations.

Most of these companies are currently trailing the S&P 500’s 4.29 per cent year-to-date performance; only Meta’s impressive 22.93 per cent gain was a notable exception.

Earnings good, but not good enough

Alphabet shares plunged 7.29 per cent after missing revenue expectations, as the company’s cloud revenue growth decelerated to 30 per cent year on year, down from 35 per cent in the previous quarter.

Microsoft shares similarly tumbled 6.18 per cent as the company reported a growth slowdown in Azure and other cloud services. Its year-on-year revenue growth slipped to 31 per cent from 33 per cent in the prior quarter. The company provided weak revenue guidance for the current quarter.

Amazon was not spared either; its revenue outlook for the current quarter fell well below expectations. The revenue of its cloud unit, Amazon Web Services, also slightly missed analysts’ estimates (US$28.8 billion versus US$28.9 billion). As a result, its share price fell by 4.05 per cent.

Apple stock closed 0.69 per cent lower. iPhone sales fell short of estimates, and China remained a growth headwind, with quarterly revenue from the country declining 11 per cent year on year.

The shares of Meta, the outlier, rose 1.55 per cent post-earnings, as blowout results and reassuring comments from its chief executive officer Mark Zuckerberg on AI overshadowed a soft revenue forecast for the current quarter. He expects 2025 to be “the year when a highly intelligent and personalised AI assistant reaches more than a billion people”. He expects Meta AI to be “that leading AI assistant”.

Comparing share-price reactions to earnings, we observed a pattern. Cloud service providers were harder hit than their non-cloud peers. Could this signal the end of cloud computing’s high-growth era?

Cloud computing’s long-term growth potential

We see the sell-off in Alphabet, Microsoft and Amazon shares as an overreaction, as the slowdown in cloud growth was primarily due to capacity constraints rather than a lack of demand. As more chips and data centres become available, cloud growth should reaccelerate.

After all, the long-term drivers of cloud computing remain intact. More and more companies are migrating their workloads to the public cloud, and enterprises are adopting cloud solutions to develop their own AI applications. Market-research company Mordor Intelligence projects that the cloud computing market will reach US$0.79 trillion in 2025 and grow to US$1.69 trillion by 2030, representing a compounded annual growth rate of 16.4 per cent.

To increase cloud capacity, Alphabet, Microsoft and Amazon have projected high capital expenditures of US$75 billion, US$80 billion and US$100 billion, respectively. While DeepSeek’s efficiency breakthrough has challenged the necessity of such investments, we believe continued spending on AI remains essential for Big Tech companies to maintain a competitive edge over their Chinese counterparts, even as they seek to incorporate some of DeepSeek’s algorithmic advancements into their own models.

As the cost of AI training and inference continue to fall, we expect wider adoption of AI and consequently, greater overall demand for cloud solutions.

Understandably, there are concerns that Big Tech companies are overspending on AI, and that they would be unable to translate that spending into meaningful returns for shareholders. However, we believe that the AI boom is just getting started. Many companies have yet to adopt AI in a large way, and its use is still confined to specific business functions.

Moreover, while AI chatbots like the widely popular ChatGPT have captured public attention, they represent only a fraction of AI’s true potential. Tech companies are already working towards more advanced forms of AI, including agentic AI and Artificial General Intelligence. In the future, we could see humanoid robots replacing cleaners and self-driving cars that rival even the most seasoned drivers.

Additionally, it is important to note that Big Tech companies are leading this AI revolution. They are highly profitable companies with relatively low debt and core businesses that generate consistent, strong cash flows.

Therefore, even if the anticipated benefits of AI take longer than expected to materialise – or, in the worst case, fall short – we believe these companies have the financial strength to absorb potential losses.

Opportunity in Big Tech’s underperformance

Taking a page from Spider-Man: With great spending comes great expectations. So far, investors have not been too impressed with the pace at which spending is being translated into returns. Unlike during the dotcom boom, when investors paid ridiculous prices for any stock related to the Internet, investors today are more rational and tech earnings have come under great scrutiny.

We see this as a positive sign for the health of the stock market. We also view the current selloff as a good opportunity for investors to increase their exposure to the tech sector.

Yes, tech stocks will remain volatile, and the sector’s growth will continue to be questioned. But for long-term investors, this presents a chance to pick up shares of fundamentally strong companies at reasonable valuations.

The writer is a research analyst with the research and portfolio management team of FSMOne Singapore, the B2C division of iFAST Financial.