Big tech is back with a vengeance, with Alphabet, Meta, and Microsoft reporting excellent second-quarter results and generating $106 billion in operating profits, an increase of $9 billion from the same period last year.
The surge in Meta, Amazon, Apple, Alphabet, and Microsoft’s stocks is partly due to their cost-cutting efforts paying off, especially in the case of Meta, whose stock has risen by a phenomenal 150% since January.
Then, amidst the impact of cost-cutting efforts, AI entered the ring, empowering new products and fueling sales across core business offerings, such as cloud computing.
Big tech is digging into its pockets to stock up on AI-related hardware and services as the technology becomes further embedded in both business activities and the public consciousness.
1 in 3 adults has tried generative AI already, and ChatGPT became the fastest app ever to reach 100mn users.
However, these digital behemoths must grapple with the challenge of becoming so large that the limiting factor to their growth is their very size.
Big tech is the lobster of the business world – it doesn’t stop growing, but eventually, its shell becomes too confining.
Some lobsters outgrow their shells hundreds of times throughout their lifetime, but shedding an old shell and growing a new one takes enormous energy, and the lobster eventually grows too large to accomplish the task successfully. If lobsters were blessed with unlimited energy, they might just live forever.
Can big tech continually shed its shell and expand into new markets to sustain its growth? Or will it eventually become confined by its own enormity?
Can big tech get bigger?
Alphabet, Amazon, Apple, Meta, and Microsoft dominate the S&P 500 index, accounting for 9% of its sales, 16% of its net profits, and 22% of its market cap.
However, what truly belies orthodox market dynamics is big tech’s continual rapid growth, with annual average revenue increasing by approximately 13% to 16% for a decade or longer.
For instance, Alphabet has an annual average sales growth of a remarkable 28%, meaning they must add $86bn in 2024 to sustain that, then $111bn in 2025, and so on. It’s a relentless cycle.
Big tech has a number of strategies available to sustain such growth, including:
Big tech’s 2023 rally is partly attributed to the impact of the pandemic and post-pandemic cost-cutting efforts, including scaling back poor-performing projects, mass lay-offs, and shrinking departments.
Meta, Alphabet, Amazon, and Microsoft cut some 70,000 employees this year alone. AI has been a boon here, as the hardware and expertise used to build one model are easily adapted to another.
Expansion of core business operations means tech giants are encroaching on each other’s territories, with their share of sales in overlapping areas doubling since 2015 to 40%. Microsoft’s AI-powered Bing browser seized search engine share from Google, which shows even something as ubiquitous as the Google search engine isn’t totally immune to new products.
AI means big tech can also access a new market for their hardware and cloud computing resources. Microsoft invested in OpenAI while enabling them to run their models off the Azure cloud platform, the perfect blend of OpenAI’s emergent AI expertise and Microsoft’s established tech infrastructure.
Exploring new markets
There are many examples of big tech extending into other markets, from healthcare to finance and manufacturing. For example, Google has invested heavily in appropriating its products for the healthcare industry, whereas others are expanding into IoT and edge computing.
However, all of these strategies are exposed to risks, and whether or not AI itself can sustain surging investor interest remains somewhat of an unknown.
Analysts confident but cautious
A recent survey found that as many as 77% of investors were maintaining or increasing their exposure to AI stocks, and just 10% believed it to be a bubble ready to burst in the near future.
However, others are cautious about whether AI will help create a new tech bull market and highlight that the NASDAQ index was in ruin in 2022, with about 10 years of growth wiped out that year alone. Moreover, external social and economic forces might yet play their part in constricting AI’s fuelling of growth, especially as regulation looms in the distance.
Chris Haverland, global equity strategist at Wells Fargo Investment Institute, told the Wall Street Journal in June, “While some are calling this a new bull market, we would caution investors that bear markets have rarely ended prior to economic recessions or while the Fed is still tightening monetary policy.”
Big tech looks set to grow into its new shell, partly forged by AI and partly by business strategies paying off. Whether or not there’s a ceiling to that growth will remain a matter of great speculation.