Financial Results

EXCLUSIVE: AI, Hyperscalers, Flat Fast Food: What We Learned From US Earning Season 

Gerrit Smit June 21, 2024

EXCLUSIVE: AI, Hyperscalers, Flat Fast Food: What We Learned From US Earning Season 

Amid the eye-popping results of some firms in the US, there are also wide disparities in results from the first-quarter US corporate earnings' season. A Stonehage Fleming manager reflects on the lessons and what may come next.

The following article is from, Gerrit Smit, who manages the Stonehage Fleming Global Best Ideas Equity fund at UK-headquartered multi-family office Stonehage Fleming. These comments are timely, given the recent slew of results and the eye-catching metrics of firms such as advanced chipmaker NVIDIA. 

As with all guest articles, editorial caveats apply (see a further disclaimer below). We invite readers who want to respond to do so. They can email The editors value this article’s contribution to debate.

The US reporting season is close to completion, and certain highlights have become clear. Generally, shareholders can be comfortable with overall positive top and bottom-line results, both better than expectations with improving profitability.

The main highlight is that AI is already being monetized by the largest cloud infrastructure providers. Amazon’s AWS, Microsoft’s Azure and Google Cloud all delivered a sequential improvement in their revenue growth in the first quarter. AWS saw an acceleration in revenue growth of 17 per cent and has hit a colossal $100 billion annual revenue run-rate. Azure and Google Cloud reported strong growth rates of 31 per cent and 28 per cent, respectively. 

Amazon’s CEO, Andy Jassy, commented that the lion’s share of enterprises “optimizing” their cloud spend is now “largely completed.” He sees a large opportunity remaining ahead, citing 85 per cent or more of the global IT spend currently still remaining on-premises. Part of the opportunity is enhancing cloud offerings with integrated AI. Google cited growing demand among cloud customers for its AI services. This trend also showed at Microsoft, with the contribution of AI services to Azure cloud growth rising from 6 per cent to 7 per cent. 

The combined capex budgets of the four main “hyperscale” companies in this context (Alphabet, Amazon, Microsoft and Meta) are now expected to exceed $190 billion in 2024, collectively up over a third. NVIDIA will undoubtedly capture a large share of the necessary chip capacity, although all hyperscalers are working on their own custom silicon. 

Not all good news
Another highlight is the divergence of lower and upper-end consumption expenditure. Low-income consumers are clearly feeling the pinch, as reflected in the results of everyday restaurants such as McDonald’s, KFC and Starbucks, where value menu offerings were not enough to increase growth in traffic. The price increases of recent years have clearly now reached the limit of consumer acceptability.

Retailers Amazon and CostCo outperformed, maximizing their scale advantages to deliver lower pricing and superior service. Less efficient peers with higher costs and prices, such as Macy’s, continued their decline.   

At the other end of the retail universe, the best-in-class luxury brands Hermes and Ferrari delivered excellent results with demand for their most sought-after products still handsomely outstripping supply. Respectively, their revenue in the quarter grew 13 per cent and 11 per cent, whilst their profit margins remain the envy for their peers. Quite clearly, the wealthiest consumers are least affected by the uncertain economic conditions.

Not all luxury is excelling though, and brands that are more dependent on younger, fashion-focused consumers, such as Gucci, Balenciaga (part of Kering Group) and Burberry, reported continued sales weakness with customers clearly being more selective in their spending.  

Alphabet the biggest winner
In terms of individual company performances, Alphabet was a particular highlight, reporting strong results with its annual revenue growth accelerating sequentially to 16 per cent on broad-based strength across all of Search, YouTube and Cloud. Aided by a 5 per cent reduction in the employee base, operating and net income rose meaningfully faster than sales. 

The delivery of 14 per cent revenue growth by the core search business demonstrates that, despite many expectations, AI chatbots like ChatGPT did not materially impact the position of Google’s search engine. The YouTube ads business saw even faster revenue growth of 21 per cent, backed by rising popularity of YouTube Shorts. Demand for paid YouTube subscriptions also remained strong. The cloud business not only delivered a sequential improvement in revenue growth of 28 per cent, but it also realized better profitability. CEO Sundar Pichai suggests that YouTube and Google Cloud Services may exit 2024 with combined annualized revenue of over $100 billion, reaching roughly 30 per cent of sales mix. 

Alphabet not only announced a new buyback authorization of $70 billion but also, unexpectedly, a maiden quarterly dividend. The new dividend underlines Alphabet’s strong balance sheet and cash flow, despite higher levels of capital expenditure and R&D to support greater AI investment.  

The bottom line
Even with the uncertain economic outlook, it is encouraging to see many companies stepping up their investments meaningfully in AI, as shown by the accelerating cloud revenue growth and the substantial capex they are committed to. This confirms the accelerating structural AI growth theme with much more to come.

Overall, most investors are likely to consider Q1 earnings as supportive of the market, even though perceptions are likely to remain of very divergent performances across sectors and companies. While technology continues to carry much of the earnings' growth for the wider market, it is also pleasing to see that it broadening to, amongst others, some healthcare and industrial companies. Earnings declined in the more cyclical energy and materials sectors, whilst growth in consumer staples remained anemic. These divergent sector performances and the disparity of company performances in the consumer discretionary space highlight the importance of quality research and the need to be very selective.

For professional investors only: Any information which could be construed as investment research has not been prepared in accordance with legal requirements designed to promote the independence of investment research.

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