Brightwave Insights: Magnificent Seven Stocks Deliver Mixed Earnings Results, Massive Investments in AI

The past few weeks have brought fiscal Q2 earnings for most of the U.S. stock market’s tech darlings, including a group of official “it stocks” known as the Magnificent Seven. 

Comprised of Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META, owner of Facebook), Tesla (TSLA), Amazon (AMZN), Microsoft (MSFT) and NVIDIA (NVDA), these seven stocks are all among the 12 largest companies on the planet as measured by market capitalization. 

Many of these companies are key players in the AI space and have all played pivotal roles in creating, adopting or implementing artificial intelligence solutions and platforms. Together, they also make up nearly 30% of the total value of the S&P 500 index, the largest investable stock index in the world, affecting portfolio returns across many investing types and strategies. 

Nearly every major company in the world has arrived at the realization that generative AI through large language models and machine learning will transform every sector of the global economy in the years to come. Many investors who want to take advantage of these tailwinds are seeking out the Magnificent Seven stocks as the first movers in the space, as they are the ones creating solutions and products at the largest scale. 

We asked Brightwave’s advanced analysis engine to go through the 150+ pages of the most recent earnings calls for six Magnificent Seven companies that have reported earnings thus far. Below are the consolidated insights from the senior management of all these tech titans, with a particular focus on the capital spending plans and strategies they are implementing to bring the most important technology advancement of the century into mainstream adoption. 

Meta Reports Strong Revenue, Significant Capital Spending Plans

Meta Platforms' Q2 2024 revenue hit $39.1 billion, up 22% year over year. This strong revenue growth was driven by a combination of factors, including a substantial rise in ad revenue and higher ad impressions served across its platforms. The Facebook operator has projected capital expenditures for 2024 to be $37 – $40 billion, with a significant portion of this investment directed toward AI and large language models (LLMs).

Meta is heavily investing in infrastructure to support its AI initiatives, including the development of its Llama family of foundation models. Meta's CEO, Mark Zuckerberg, highlighted that the compute capacity required to train the next generation of Llama models, such as Llama 4, will be almost 10x more than what was used for Llama 3. This need for more machine-learning horsepower is excellent news for NVIDIA Corp ($NVDA), which supplies critical chipsets required for machine learning and implementing new generative AI models. 

The capex plans are among the highest spending amounts any company has ever undertaken, underscoring just how important AI is at Meta. But as we’ll see with all of these companies, the payoff of these investments will take some time. Meta’s CFO, Susan Li, noted that while the company is poised to significantly increase capital expenditures over the next two years — primarily driven by investments in AI and LLM technologies — these investments are not expected to be a meaningful revenue driver in 2024. 

This time lag between expenditure and revenue realization could strain financial performance in the short term, potentially impacting investor confidence and stock performance, especially if there are delays in fully implementing functional AI solutions. 

Alphabet Scaling Up AI Rollouts Amid Solid Revenue & Profit Growth

For fiscal Q2, Alphabet reported $84.7 billion in revenue, up 14% from 2023’s Q2 and slightly exceeding analyst expectations of $84.2 billion. The core ad business continues to grow, with $64.6 billion in revenue in the 2nd quarter. Key growth initiatives performed well, as the company's Google Cloud segment reported a significant revenue increase to $10.3 billion, marking a 29% rise from the previous quarter. This growth is primarily attributed to the strong performance of the Google Cloud Platform (GCP), which has outpaced the overall cloud segment's growth due to its heavy integration of AI technologies.

Alphabet's commitment to AI is further underscored by its substantial capital expenditures amounting to $13 billion in Q2 2024, predominantly allocated towards enhancing its technical infrastructure. More than 2 million developers are utilizing AI Infrastructure and Generative AI Solutions for Cloud, indicating widespread adoption and integration across multiple industries. 

Alphabet is also competing with NVIDIA in the AI/machine-learning chip space, with their new AI accelerator, Trillium, achieving a significant milestone in energy efficiency. Trillium, the sixth generation of Alphabet's custom AI accelerator, has demonstrated a 67% improvement in energy efficiency compared to its predecessor, TPU (tensor processing unit) v5e. 

While most of the Magnificent Seven stocks are heavy purchasers of NVIDIA GPU chips, Apple is notably using Alphabet’s TPU chips instead of NVIDIA’s to supplement its proprietary silicon platform as it rolls out Apple Intelligence features across its devices and platforms. 

Tesla Growth Stalls, Profits Crunched Amid Heavy AI Solutions Investment

Despite price cuts and higher financing incentives, Tesla’s Q2 revenues rose only 2% year over year to $25.5 billion, slightly beating Wall Street estimates of $24.8 billion expected. Earnings per share missed, coming in at 52 cents adjusted vs. 62 cents expected. Net profits took a big hit, falling 45% from 2023 levels, reflecting higher operating costs and lower unit sales of its core electric vehicles. 

CEO Elon Musk has been adamant that Tesla is more than just an automaker; it is also a leader in autonomous vehicles, robotics and artificial intelligence. The company has set aggressive targets for its autonomous vehicle technology, with a particular focus on achieving regulatory approval for its Full Self-Driving (FSD) technology in Europe, China and other regions by the end of 2024. These approvals would enhance Tesla's market penetration globally and solidify its leadership in autonomous driving.

Tesla has been ramping up capex to support this vision, with more than $10 billion allocated for capital expenditures in 2024. This includes a substantial investment in a 50,000 NVIDIA GPU cluster to enhance FSD capabilities and other AI initiatives. During the most recent conference call, Musk highlighted that Tesla's stock value is overwhelmingly tied to its autonomy capabilities, suggesting that those who do not believe in Tesla's ability to solve vehicle autonomy should not hold Tesla stock.

Microsoft Powers Ahead with Broad Operating Segment Gains, Heavy Focus on AI Implementation

Microsoft's Q4 2024 revenue of $64.7 billion was a strong 15% YoY increase, driven primarily by the robust performance of Microsoft Cloud and advancements in AI solutions and integrations. The Microsoft Cloud segment generated $36.8 billion in revenue, growing 21% from the same quarter in 2023. 

The company's gross margins also improved, increasing by $25.0 billion (+17% YoY), driven by growth across all segments. Despite a slight decrease in Microsoft Cloud's gross margin performance to 71%, improvements in Azure and Office 365 Commercial, inclusive of AI infrastructure scaling, contributed positively. Operating income surged by $20.9 billion (+24% YoY), giving investors a peek at just how transformative widespread AI rollouts can be to a mature company with billions of software installations worldwide. 

Microsoft is targeting $19 billion in capital expenditures for 2024, with this investment primarily directed toward expanding Azure AI capabilities and integrating AI across various services to maintain its market leadership. The company's approach involves a global expansion of its data center footprint, with investments announced across four continents to drive growth for the next decade and beyond. This capital investment strategy is designed to address the increasing demand for AI services, as evidenced by the fact that Azure demand has consistently outpaced available capacity.

Amazon’s Core Business Grows, Sees AI Spending as Essential to Future Growth

Amazon reported Q2 revenue of $148 billion, an 11% increase YoY, and continues to invest heavily in AI through its Amazon Web Services (AWS) cloud segment. The company's AI initiatives mainly focus on custom silicon solutions like Trainium and Inferentia and comprehensive AI services like Amazon SageMaker. Amazon spent $16.4 billion on AWS infrastructure in Q2 alone, helping to accelerate revenue growth to 18.8% within AWS in Q2.

This significant capital allocation is part of a broader strategy to bolster AWS's infrastructure, which has grown substantially but is still outstripped by rampant customer demand. AWS now boasts an annualized revenue run rate exceeding $105 billion. The heavy capex investment in AI is not just about expanding cloud capacity but also enhancing the capabilities of AWS's AI offerings. Over the past 18 months, AWS has launched more than twice as many machine learning and generative AI features into general availability than all other major cloud providers combined, demonstrating a robust commitment to staying ahead in the AI-driven cloud services race — especially against Microsoft. 

Apple Hits New Sales Record Driven By Services, Announces Major AI Push Across All Segments

Thanks to a 14% year-over-year jump in revenue for the Services segment (which includes app platforms, advertising, cloud and payment services) to $24.2 billion, Apple turned in a record quarter in Q2 with $85.8 billion in total revenue. Additionally, the number of paid subscriptions reached an all-time high, with more than 1 billion paid subscriptions across all services on Apple's platform — exceeding double the number from four years ago.

The introduction of Apple Intelligence at 2024’s Worldwide Developers Conference marks a demonstrative strategy push to implement AI solutions across all the company’s products and services. While Apple is known primarily as a hardware company, with its ubiquitous phones, computers, headphones and accessories leading revenue growth, its proprietary software and operating systems are where AI implementations can become a competitive differentiator from its peers. 

Partnering with OpenAI, Apple is seeking to integrate advanced AI capabilities such as ChatGPT into Apple's ecosystem. If the ChatGPT integration goes smoothly, it may accelerate a significant iPhone upgrade cycle. Introducing new AI features and capabilities aimed at enhancing the overall user experience while highlighting other Apple services positions Apple to potentially drive higher hardware sales volumes as users upgrade to compatible models. 

Given that the lion’s share of company revenue comes from hardware products, this could lead to a stock multiple expansion in the years ahead — something investors have desperately hoped to see. 

Luca Maestri, Apple's CFO, detailed the company's enviable cash position, with an operating cash flow of $28.9 billion and $153 billion in cash and marketable securities. This gives Apple the freedom to work on its own AI chips instead of relying on NVIDIA ($NVDA) GPUs, which have been in short supply for the past few quarters. 

NVIDIA Expected to Deliver Another Massive Quarter, But China Concerns Loom

NVIDIA Corporation is poised for a significant earnings report on August 27th, with analysts projecting robust growth driven by its AI and GPU segments. The company is expected to report revenue of $28.54 billion for Q2 2024, marking a 111% increase year over year. NVIDIA is the 800-pound gorilla of the AI hardware space, controlling between 70% and 95% of the market and boasting a gross margin of 78% in Q1 FY 2025, significantly higher than competitors. 

Analysts' aggressive growth projections for NVIDIA create high market expectations, potentially leading to significant market volatility. Analysts have forecasted more than 230% revenue growth for the calendar third quarter and an estimated $2 billion sequential growth each quarter of FY 2024.

NVIDIA's market expansion is facing significant risks due to geopolitical tensions and U.S. government-imposed export restrictions, particularly affecting sales to China. These restrictions, which began in September 2023, have prevented NVIDIA from selling its high-performance GPUs and AI chips to Chinese customers. There’s no telling just how long these restrictions will remain in place, but putting up sales zeroes in a market as big as China will continue to be a drag on NVDA’s stock performance. 

A Forest-Level View of the Magnificent Seven’s Outlook

Investors saw this most recent round of quarterly updates from the Magnificent Seven stocks as a mixed bag. Overall, revenue, operating margins, and profits are trending well for the group, outpacing the broader market despite hiccups (such as Tesla’s EPS miss). Most importantly, to stock investors — who care deeply about future earnings potential — these tech titans have made historically large investments in artificial intelligence hardware, software, and solutions.

However, investors also recognize several risks that could impact future sales and profit expectations. The stocks of these companies had all been trading at or near all-time highs leading up to these earnings reports, and much of the group has sold off in recent weeks, albeit against the backdrop of a broad pullback across market indices. 

The most significant risk related to the heavy AI investments and the rollouts of new services and products is regulatory risk. In key markets like the European Union and China, there are high hurdles to meet constantly evolving, region-specific regulatory frameworks. In the United States, multiple pieces of proposed legislation at the federal and state levels could limit access to AI end markets for all Magnificent Seven companies. The goalposts keep moving as this revolutionary but unpredictable technology weaves its way into every industry group in the world — while inevitably hitting regulatory roadblocks and delays along the way.

Stock investors know they are paying record-high equity valuations for the Magnificent Seven stocks. AI expectations are already baked into future earnings potential, while any misstep could be met with a steeper decline in these tickers than for the median S&P 500 stock. The runway for these companies is massive, but investors should be wary of constantly-changing competitive advantages and uncertain macro themes that could significantly impact growth trajectories.

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