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AI sweeps the market off its feet

US technology companies continue to dominate the benchmark MSCI All Country World Index, boosted by prospects for artificial intelligence.

| 6 min read

The digital revolution sweeps on in our lives. Businesses are driven by computer technology and respond to smartphone requests. Individuals live their lives around digital transactions, online activities and social media. Many have an Apple iPhone or iPad. Most depend on Microsoft software, find things out from Google, store photos and data through Amazon Web Services, and communicate through Meta apps such as WhatsApp, Facebook and Instagram.

These companies have grown mightily. They are all American, they all get revenue from a mixture of direct subscriptions, payments, advertising and sponsorships and they all have global reach. They have become an important part of the World share index. China has its own technology giants which do similar things for the large Chinese market.

As a result, the MSCI All Country World Index is led by the following top names showing their share of the total value of quoted world shares on 18 June 2024:

There have been various concentrations of top shares over the years, and the winners come and go as fashions change and economies grow. Indeed, just after this snapshot was taken Nvidia sold off and returned to second place. What is unusual is that all the top seven come from the US and are all in the same broad sector.

These shares have performed well

These shares have risen strongly since the market lows in October 2022. Nvidia has risen from $121 a share in October 2022 to around $1,300 (adjusted for stock split). Nvidia is not a great consumer brand, because it supplies the technology giants who need Nvidia chips to build their data centres and artificial intelligence (AI) processors.

Amazon is up 120% from $84 in December 2022 to $185 in recent days. Apple has risen from $129 in January 2023 to $207. Meta has soared by 450% from $90 in November 2022 to near $500 a share. Microsoft has doubled from $221 in November 2022. Alphabet has doubled from $88 in January 2023. Broadcom has soared to $1,658 from $427 in October 2022.

Can these companies sustain the growth of profits and cashflow to maintain and extend high share prices?

When AI first became more widely talked about as 2023 dawned there were sceptics. They argued that it would take time to find commercial applications. There were suggestions that launching it first with free services, it would prove difficult to migrate it to charging people. Maybe it would need the advertising model which was already being used to pay for basic services from the likes of Alphabet and Meta. AI would just stretch the ad revenue over a wider base of free services.

Eighteen months on, there have been successful launches of services including the launch of paying for premium services which people want. The tec giants to date have found several ways to charge and to generate substantial cash. They charge for adverts and have taken much of the advertising market revenues for their access to the audience. They get up-front payments when people buy appliances and software packages. They have service contracts with regular payments. They charge business for their services whilst offering “free service” to individuals that use their apps. They allow businesses and people access to their platforms, charging them as contractors for their use.

In people’s personal lives AI can help choose restaurants, plays, travel routes and the other diversions of life.

What does AI bring to the party? In one sense it is a much-improved search system. You can ask AI a question and it will give you an answer. In another sense it is enhanced data processing, where the extra storage and speed of handling opens better possibilities to yield good business information.

In people’s personal lives AI can help choose restaurants, plays, travel routes and the other diversions of life. The more you tell it about your preferences the more likely it is to be useful in finding the right hotel or the right flight. It can help businesses draft materials, process information and keep records.

Markets will continue to like these great businesses all the time they deliver such growth of revenue and profits and find more ways to get us to depend upon them.

Results so far this year

All the main companies produced excellent growth with the exception of Apple. First-quarter Apple figures saw revenue down 4% on the first quarter of 2023, and earnings also down. This led to underperformance as some questioned Apple’s growth.

More recently, Apple has announced it is developing its own AI and AI service offering, which has put some life back into the shares, with expectations of more appliances being bought as people modernise, along with more services revenue.

At the other extreme was Nvidia, producing gains of 262% on year ago revenues and 629% on earnings per share. This supercharged growth will slow as higher figures from the base for comparison, but Nvidia has an overfull order book and strong margins. The company reported bullishly on how the “next industrial revolution has begun”

Alphabet heralded its “leadership in AI and research” It delivered 15% revenue growth and an impressive 57% increase in net income.

Amazon drew attention to its AI capabilities driving fast growth in Amazon Web Services, now at $100bn of annual revenue. Net income surged by 225% on the same quarter last year with overall revenue growth of 15%

Meta Platforms stressed its strong advertising growth with total revenue up 27% and net income up by 117%. Microsoft produced a good 17% revenue gain and 20% increase in net income.

It was these good numbers allied to optimistic statements and a sense that AI would fuel super growth that has powered these shares higher. They will need to sustain these good figures to retain their star qualities.

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AI sweeps the market off its feet

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