Earnings preview of 3 AI key players: MSFT, AMD and INTC

This week, several big tech and semiconductor giants, including Alphabet, Meta Platforms, Microsoft, Amazon, Apple, AMD, and Intel, are set to release their earnings reports. Their profitability and revenue growth will serve as the next major test for the U.S. stock market. Some of them are closely tied to AI, such as Microsoft on the software side and AMD and Intel on the hardware side. As AI stands as the hottest investment theme of the year, the earnings performance of these companies will impact investors' ongoing confidence. Will they continue to drive AI advancements or will they cause a divergence in market confidence? What key aspects of their earnings reports should investors pay attention to?

Microsoft's position as a leader in AI software is both a strength and a challenge. The company's collaboration with OpenAI and its integration of AI capabilities into products like Microsoft 365 and Azure illustrate its commitment to embedding AI across its offerings. The Copilot AI platform, in particular, aims to revolutionize productivity software by integrating AI-driven insights and automation.

Microsoft's substantial R&D and CAPEX investments reflect its ambition to build a robust AI infrastructure. This includes the development of data centers powered by sustainable energy sources, such as its recent agreement with Constellation Energy to utilize nuclear power. This move highlights Microsoft's foresight in addressing the growing energy demands of AI operations. The company also launched a $30 billion fund to invest in AI infrastructure to build data centers and energy projects with BlackRock and NVIDIA.

However, the high capital expenditure associated with AI infrastructure raises concerns about profitability and return on investment. Oppenheimer analyst has downgraded Microsoft from outperform to perfrom 3 weeks ago. In the report, he noted that market expectations for Microsoft's revenue and EPS in the recent quarter might be overly optimistic. Increased R&D and CAPEX to support AI could put pressure on profit margins. The growing losses associated with their partnership with OpenAI are their primary concern.

Microsoft reported strong earnings for its fiscal first quarter, with revenue of $65.59 billion and earnings per share of $3.30, both surpassing analyst expectations. Revenue grew 16% year-over-year, driven largely by a 33% increase in Azure and other cloud services, with AI contributing significantly—12 percentage points to Azure's growth.

However, despite these positive results, Microsoft’s stock fell 4% in after-hours trading due to weaker-than-expected guidance for the upcoming quarter. The company projected revenue between $68.1 billion and $69.1 billion, falling short of analyst expectations of $69.83 billion. CFO Amy Hood indicated that delays in data center infrastructure would limit growth in Azure, which is crucial for supporting AI services.

Microsoft's investments in AI remain a focus, with expectations that AI-related revenue could exceed $10 billion within the next year. The company is ramping up capital expenditures, which rose 50% to $14.92 billion, as it builds out its data center capabilities to meet the increasing demand for AI services.

As one of the few companies capable of challenging NVIDIA's dominance, AMD's strategic focus will be on its AI chip sales growth and server processors' performance in the cloud market. The release of the MI300 accelerator is a critical moment for AMD, as its success or failure could significantly influence the company's stock price. Even though AMD's latest AI product lineup, which includes the Turin EPYC CPUs and Instinct MI325x AI accelerator, has been met with a mild response, the upcoming earnings announcement is still crucial.

Market expectations are high for AMD's Q3 results, particularly regarding AI applications' expanding demand. The MI300 accelerator is seen as a potential game-changer against NVIDIA, and any positive sales momentum could drive AMD's revenue growth. However, challenges remain, such as inventory management and competition from NVIDIA's advanced offerings. The company's ability to manage these issues will be closely watched by investors during its earnings call.

Looking ahead, the continued growth in AI demand and cloud services will be key drivers for AMD's expansion. AMD's growth will depend on its ability to expand in the AI and server markets, especially through its support for cloud giants like Microsoft and Amazon. These partnerships not only validate AMD's technological capabilities but also expand its market reach. The company's focus on expanding its server and AI offerings is evident in its efforts to address inventory challenges and optimize supply chain dynamics, which remain critical for maintaining competitive pricing and margins. As the global economy gradually stabilizes, there remains potential for increased demand for high-performance computing. Moreover, AMD's strategic alliances with major cloud providers are crucial.

AMD reported its 24Q3 results with EPS of $0.92 and revenue of $6.82 billion, slightly beating revenue expectations. The data center business was a major contributor, with sales up 122% year-over-year to $3.5 billion, driven by strong demand for its Instinct-branded GPUs for AI. Despite the positive data center performance, AMD's shares fell over 7% in after-hours trading, with revenue guidance for the Q4 in line with consensus expectations. AMD's gaming and embedded businesses saw declines, with gaming sales dropping 68% and embedded sales falling 25% year-over-year. The company continues to gain traction in the AI market, reporting increased sales expectations for its AI chips and announcing the new MI235X chip, reflecting growing competition with Nvidia in the AI GPU market.

Intel's recent years have been marked by strategic shifts and missed opportunities in the AI chip segment. Despite some progress in its process node roadmap, Intel faces margin pressures and significant competitive headwinds. The company's Data Center and AI unit continues to struggle due to delays in product launches and intense competition from NVIDIA and AMD.

In recent moves, Intel has partnered with IBM to deploy Gaudi 3 AI accelerators in IBM Cloud, marking the first deployment of Gaudi 3 across hybrid and on-premise environments. This collaboration aims to enhance enterprise AI workloads by optimizing performance, security, and scalability while controlling costs effectively. Additionally, Intel is extending its AI capabilities to edge devices and PCs with its Core Ultra processors, marking a significant leap in x86 processor technology with enhanced graphics, security, and AI computing capabilities. Furthermore, Intel's expanded collaboration with Amazon Web Services (AWS) involves co-investment in custom chip designs, leveraging its advanced Intel 18A process node. This partnership is expected to contribute to incremental revenues. Intel also faces intensified competition in the server and networking markets from AMD and NVIDIA, which could adversely affect its financial performance. Despite these challenges, Intel's innovative AI solutions, such as the Gaudi and Core Ultra platforms, aim to foster a more open and scalable AI ecosystem, driving down costs and boosting performance.

Looking ahead, Intel's strategy encompasses not only hardware but also software and tools, fostering a broad AI ecosystem with diverse partners. This approach is designed to cater to enterprise GenAI needs, promoting innovation and interoperability. However, given the recent product launches, Intel's efforts may be perceived as "too little, too late." With declining earnings estimates and underwhelming stock performance relative to peers, investor sentiment remains cautious.

Intel's shares rose over 7% in extended trading following its release of Q3 results that surpassed analysts' expectations, despite reporting a significant net loss due to restructuring and impairment charges. The company posted an adjusted earnings per share of 17 cents, contrasting with an anticipated loss of 2 cents, and achieved a revenue of $13.28 billion, exceeding the expected $13.02 billion. As part of its significant restructuring efforts, Intel incurred $2.8 billion in restructuring charges and $15.9 billion in impairment charges, while announcing plans to reduce its workforce by 16,500 employees and streamline its operations. The Client Computing Group's revenue declined by 7% to $7.33 billion, whereas the Data Center and AI segment saw a 9% increase to $3.35 billion, surpassing expectations. Intel provided a positive fourth-quarter outlook, forecasting revenue between $13.3 billion and $14.3 billion, with a midpoint exceeding analysts' average estimates, and emphasized ongoing efforts to boost profitability amidst competitive pressures in the AI and PC markets.