Big tech earnings this week to determine future of AI investment

Alphabet, Microsoft, and Amazon are set to release earnings reports this week that could serve as a turning point for semiconductor stocks. Market volatility has increased due to doubts over AI investment sustainability and the financial health of Neo-cloud companies like CoreWeave and Nebius.

The focus of global financial markets this week is centered on the monetary policy direction of the Federal Reserve System and the earnings reports of big tech companies, which will determine the trajectory of the artificial intelligence (AI) industry. This is because doubts regarding the sustainability of AI investment and the financial health of new cloud providers are increasing volatility in semiconductor stock prices.

During the "Morning Economy Plus" broadcast on the 26th, Woori Bank Equity Strategist Park Seok-hyeon identified the Federal Open Market Committee (FOMC) meeting and the earnings announcements of big tech companies as the core variables for the market this week. Park recalled that between mid-June and late July, the KOSPI plummeted by approximately 40%, but the market rebounded after the earnings reports of four major big tech companies leading AI investment confirmed investment continuity and profitability. The earnings to be released this week are expected to serve as a turning point to confirm the market bottom once again.

Background of Big 3 earnings reports and falling semiconductor valuations

The protagonists of the market this week are the so-called "Big 3" big tech companies: Alphabet, Microsoft, and Amazon. These companies are "hyperscalers" leading AI investment, and their scale of capital expenditure and profitability are directly linked to the earnings outlooks of semiconductor companies. While the companies leading AI investment are sometimes classified as the "Big 5" when including Meta and Oracle, Alphabet, Microsoft, and Amazon, whose earnings are scheduled for this week, play the most central role in terms of investment scale. The aggressive expansion of investment and the resulting cash flow burden seen in Meta's earnings report last week were among the major concerns for the market.

The recent plunge in semiconductor stock prices is interpreted not as a result of declining corporate profit forecasts, but as a reflection of market doubts regarding the continuity of AI investment being priced in. "Even though profit forecasts have not yet been adjusted downward, the doubt over whether actual profits can be achieved caused stock prices to plunge first," Park analyzed. In this process, the price-to-earnings ratios (PER) of Samsung Electronics and SK hynix fell to historically low levels, while the US-based Micron Technology dropped to 5 times. NVIDIA also fell from a recent level of 20 times to 15.4 times, which is its lowest level when measured against the period after the company began full-scale growth.

Neo-cloud credit risk: A crisis for the entire AI industry?

Another recent source of anxiety in the market is the credit issues of "Neo-cloud" companies. Neo-cloud refers to companies that have newly entered the cloud business to match the expansion of the AI industry, rather than being existing big tech firms. Representative examples include CoreWeave, Nebius, and Iland. These companies operate under a subcontracting structure, attracting investment from or being delegated tasks by hyperscalers. Hyperscalers are connected to Neo-cloud companies by providing capital investments or paying fees to use their services, and NVIDIA is also participating in this process.

The problem is that these Neo-cloud companies have continued to grow by relying on external financing without a sufficient process of capital accumulation. As the high-interest rate environment persists and the cost of external financing rises, red lights have been lit on their financial health. Concerns are emerging in the market that if the credit problems of Neo-cloud companies worsen, it could lead to a decrease in sales for the semiconductor companies that supply them with equipment.

However, Park diagnosed that it may be excessive to view these concerns as spreading into a fundamental crisis for the entire AI industry. He explained, "The main players in AI investment are still the hyperscaler companies, and the proportion handled by Neo-cloud companies is relatively small." He added, "If the basic framework of AI demand remains solid, the problems of Neo-cloud companies may remain temporary factors, and there is a strong possibility that other companies will replace the parts where problems occur."

Big tech cash flow and future response strategies

An optimistic outlook was presented regarding the sluggish cash flow caused by the massive AI investments of big tech companies. It was noted that while free cash flow (FCF, cash flow excluding capital expenditure) may temporarily record negative values due to aggressive capital expenditure, this is a fact already known to the market. Park analyzed, "As cash flow from operating activities is expected to increase significantly through 2028, the temporary sluggishness in free cash flow can be sufficiently offset."

The major schedule that will determine the market direction this week includes the earnings reports of Alphabet and Microsoft scheduled for Thursday morning (Korean time), and the earnings report of Amazon on Friday morning. Additionally, attention is focused on whether the Federal Reserve System will freeze interest rates and how the hawkish tendencies shown by Fed officials, such as Jerome Powell, will affect expectations for interest rate hikes at the end of the year. Park advised, "The turning point for the market flow this week is likely to be the big tech earnings reports in the latter half of the week," adding, "It is advisable to respond to the market flow in accordance with the earnings results in the latter half of the week."

Source: original video (YouTube)