Wall Street has witnessed an explosive resurgence in technology stocks over the past week. The S&P 500 tech sector surged 11.4 per cent in five days, a significant jump not often seen. Nvidia shares climbed 16 per cent in a week, sitting 7 per cent below their record. Investors purchased a record 4 million call options, and hedge funds reported their second-biggest stock buying week since 2008, indicating bullish sentiment.
This fervour was largely driven by a robust June quarterly earnings season, where major tech players, particularly Microsoft, showcased promising returns from AI investments. Microsoft Corporation is a multinational technology company providing software, consumer electronics, and related services. It is also a leading provider of cloud computing solutions through its Azure platform. The company’s stock jumped almost 25 per cent after its June quarter results, propelled by 43 per cent growth in its Azure cloud computing division, with revenue surpassing US$100 billion. This performance seemingly alleviated concerns about AI tech spending.
However, closer analysis suggests Microsoft’s impressive AI growth may not be as broadly distributed. According to Bloomberg, up to 70 per cent of its AI revenue stemmed from a single customer: OpenAI. Microsoft, an early investor, disclosed OpenAI was responsible for US$24.1 billion of its revenue in the June quarter. This reliance raises questions, given OpenAI’s current business model, reportedly burning tens of billions annually, far from profitability, and facing intense competition. This concentrated demand is not unique, as estimates project OpenAI and Anthropic will constitute significant AI revenues for other tech giants including Amazon and Google. Investors must acknowledge this substantial reliance on companies whose sustainable models are yet to be proven.
