AI, Cloud, and Cost Discipline: Key Themes from This Quarter’s Mega-Cap Earnings

Earnings season hit full swing last week, with mega-cap stocks taking center stage. Across the board, earnings showed resilience, driven by a ongoing commitment to AI, cloud expansion, and rigorous cost discipline. Alphabet, Amazon, Microsoft, and Meta each demonstrated strength in their core business areas, with several reporting standout operating margin gains.

GOOG 0.00%↑

Alphabet’s results were impressive, with topline growth of 15%, reaching $88.3 billion. Operating margins expanded 450 basis points to 32.3%, showcasing the company’s focus on expense control and operational focus under CFO Ashkenazi, particularly in high-growth segments like Cloud. Alphabet’s Cloud revenue growth accelerated to 35% year-over-year, and its operating margin reached 17%, signaling that it’s closing in on major competitors like AWS and Azure.

AI is no longer a feature; it’s Alphabet’s main product. The company has leaned heavily into expanding its AI-driven functionalities, especially within Google Search and its broader ecosystem. The rollout of AI Overviews to 1 billion users across 100+ countries has added a new layer to search, letting users ask longer, more complex questions. Engagement levels are reportedly increasing as users see Google handling more sophisticated queries—a win for retention and ad impressions. More importantly, ads in AI Overviews are performing at a level similar to traditional search ads, alleviating fears that an AI shift might undercut monetization​. Visual search is booming, with Google Lens processing 20 billion visual searches monthly. A quarter of these have commercial intent, making Lens a quiet growth engine for Alphabet’s ads business. Circle to Search, a more recent feature, has hit over 150 million Android devices and is seeing weekly engagement among users under 24. Gemini, Alphabet’s in-house AI model, is now 2x the size of its previous iteration and costs 90% less per query to operate, thanks to hardware and engineering optimizations. This efficiency is key as Alphabet builds out an AI stack to handle the rapidly growing demand for generative AI across its products.

YouTube’s ad revenue growth of 13.5% YoY isn’t setting the industry on fire, but it’s a stable contributor. Shorts, Google’s response to TikTok, continues narrowing its monetization gap with long-form videos, now supporting a broader ad mix that includes Shorts. Importantly, YouTube TV and Music subscriptions are pushing YouTube’s ad and subscription revenue past the $50 billion TTM milestone—a sign that Alphabet is succeeding in keeping YouTube as an engagement and revenue powerhouse​. Waymo continues to make significant strides in autonomous driving. Waymo's autonomous vehicles have achieved over 25 million miles driven and are now providing more than 100,000 customer trips weekly. They continue to scale Waymo in existing cities and using that experience to expand to new cities, including Austin and Atlanta. In October 2024, Waymo secured a $5.6 billion funding round, its largest to date, led by Alphabet and including investors like Andreessen Horowitz and Fidelity, bringing Waymo's total capital raised to $11.1 billion, and a valuation of almost $50B.

Among the mega-cap tech stocks, Alphabet has faced some of the toughest sentiment, with investors questioning its terminal value due to heavy reliance on Search as a profit engine. Yet, Q3 results should start to dispel these concerns. Alphabet showed not only that it remains firmly in control of Search but also that it’s executing well in its AI-driven transformation. While fears of Search disruption have softened, they aren’t completely off the table. The competitive pressure is real, especially with new players like OpenAI and Perplexity releasing their own AI-enabled search tools. And although Google has demonstrated that its AI-powered search engages users, it still has to prove that this transition can be as profitable as the current model. That said, Alphabet has multiple ways to win, with innovations spanning AI, Cloud, autonomous driving through Waymo, and new ad channels across its platforms. Until there’s more conclusive evidence of disruption impacting Google’s profitability, I’ll maintain confidence in their ability to monetize AI effectively and protect their Search dominance. After buying shares around $150, I intend to hold given the positive trajectory, barring any major shifts.

META 0.00%↑

META also reported a very solid quarter with revenue up 19% at $40.6B and operating income of $17.4 billion, with an impressive 43% operating margin—reflecting disciplined expense management even as investments in AI and Reality Labs continue. FoA is obviously the financial cornerstone, generating operating income of $21.8 billion on revenues of $40.3 billion, resulting in an operating margin of approximately 54%. Between Q3 23 and Q3 24, the segment's revenue increased by $6.2 billion, and operating income rose by $4.3 billion, suggesting an incremental operating margin of approximately 69%, showing that each additional dollar of revenue contains incredibly high incremental margins. Ad revenue, which comprises 98% of the segment's income, saw growth across all major geographies, with particular strength in Europe (up 21%) and North America (up 16%)​. Meta achieved a 7% increase in ad impressions and an 11% rise in average ad pricing, largely attributed to increased demand and improved ad targeting using Meta’s generative AI. DAP reached 3.29 billion, a 5% year-over-year increase, indicating sustained user engagement across platforms with users spending more time on the platform, particularly on video content which attracts higher ad spend.

WhatsApp coninues to perform well with revenue up 48%, bolstered by its recent focus on commerce integration for SMBs. The user base surpassed 2.7 billion, with projections aiming for 3.14 billion by 2025. This extensive reach provides a substantial foundation for monetization efforts. The platform's ARPU was estimated at $0.25 globally in 2023, indicating a long runway for revenue growth as ARPU continues to increase. India has over 530M users and offers significant opportunity for growth given the attractive demographics and move towards the middle class that will underpin Indias economic growth for decades to come. They continue to develope new business features that will allow businesses to showcase products, accept payments, and provide customer support directly within the app.

Another bullish area is their AI development, and they not only embraced AI but positioned itself uniquely with an open-source approach, carving a niche that could propel it as one of the best-positioned companies for AI tailwinds after NVIDIA. Zuckerberg has emphasized that Llama, Meta’s AI model series, is central to this vision, and the latest earnings call made clear that Meta’s commitment to democratizing AI, coupled with Zuckerberg’s long-term vision, will place Meta in a winning position. The open-source nature of Llama is a deliberate choice, a “counterintuitive” move that Meta believes will establish Llama as the industry standard. Zuckerberg emphasized that by sharing Llama’s architecture, Meta benefits from broader collaboration and innovations brought in by external developers. This open approach attracts independent developers and enterprises, and Meta sees direct benefits—efficiency improvements and cost savings—from optimizations made on Llama that are later incorporated back into Meta's ecosystem. Zuckerberg argues that open source will be “the most cost-effective, customizable, trustworthy, performant, and easiest-to-use option” for developers. By positioning Llama as a flexible, open solution, Meta attracts a range of users—from businesses creating customer service AI agents to government and public sector applications in the U.S. This diverse adoption strengthens Llama’s standing and Meta’s influence in the AI landscape.

Llama series isn’t just standalone, it’s deeply integrated across Meta’s platforms. Meta AI, used by 500 million monthly active users, leverages Llama’s capabilities to power AI-driven feeds, ad targeting, and content recommendations. These integrations translate to tangible engagement gains—time spent on Facebook is up 8%, and Instagram up 6% this year. These metrics underscore how Llama drives Meta’s core revenue streams, offering a blueprint for AI-led monetization​. At just 40 years old, Zuckerberg has already established himself as one of the most forward-thinking CEOs. His dual focus on optimizing Meta’s current ad-based revenue streams while laying down investments for the future—AI and mixed reality—signals his commitment to long-term growth. Zuckerberg’s youth gives Meta an additional strategic edge, allowing him decades to steer the company’s growth with consistency and continuity. His proven adaptability, from pivoting Meta to mobile-first in its early years to rebranding and adopting an AI-first approach today, supports the case for Zuckerberg as one of the greatest tech CEOs, with the vision to maintain Meta’s relevance and dominance.

Meta’s a bit of a sore spot for me—one of those rare cases where I made nearly a 200% return but wish I still owned it. I sold in the mid-$300s, and while that was a solid gain, I underestimated Zuckerberg’s vision and the potential for Meta to become the world’s most valuable company. At just 40, Zuckerberg has a long runway to lead the company, and his pivot to AI and open-source innovation with Llama could position Meta as a powerhouse well beyond just social media. While I think there’s a strong possibility that he’ll steer Meta into that top spot, but I won’t be chasing it at a $1.5T. valuation.

MSFT 0.00%↑

Microsoft delivered a very solid quarter with revenue reaching $65.6 billion, a 16% increase driven by robust growth in its Intelligent Cloud segment, which houses its flagship cloud platform, Azure. The Intelligent Cloud segment experienced the most significant increase, with revenue rising by $4.1 billion or 20%, and within the Intelligent Cloud segment, Azure and other cloud services were the primary drivers of this growth, increasing by 34%, including a 12-point contribution from AI service. Unfortunately they do not break out growth between OpenAI and external demand. Similar to other CSPs MSFT continues to see demand outpace supply and MSFT anticipates a slight slowdown to 31-32% cc growth in Q2 due to these constraints and the non-recurrence of in-period revenue recognition that benefited Q1.

The company's AI business is on track to exceed a $10 billion annual revenue run rate in Q2, making it the fastest-growing segment in Microsoft's history. Cash capex came in at 14.9B and was $20B when including finance leases. Roughly 50% of the capital expenditure was allocated to long-lived assets, such as buildings and land, designed to support the growth of its cloud and AI offerings. These assets are expected to contribute to revenue generation for the next 15 years and beyond, indicating a long-term strategic commitment to these areas. The remaining 50% of capital expenditure primarily focused on acquiring servers, including both CPUs and GPUs. This investment aims to directly address the surging demand for AI services, which require substantial computing power.

This emphasis on server acquisition underscores the immediate need to enhance capacity to meet current customer requirements. The continue to show discipline in opex and shifting those dollars towards capex, primarily focused on cloud and AI infrastructure. Amy emphasized the company's commitment to "stay aligned" with demand signals and adjust capital expenditure accordingly. Over the long term, Microsoft anticipates a gradual convergence between the growth rates of capital expenditure and cloud revenue. As the initial wave of infrastructure build-out matures and economies of scale are realized, capital expenditure growth is expected to moderate while revenue generated from cloud and AI offerings continues to rise.

MSFT continues to show its dominant position within enterprise and is positioning themselves at the forefront of the ongoing digital transformation wave and the widespread adoption of cloud computing by enterprises. They continue to actively encourages enterprises to migrate to the cloud by offering incentives, particularly to those with existing Enterprise License Agreements. Their focus on hybrid cloud architectures through Azure Stack provides flexibility to enterprises that prefer a blend of on-premises and cloud solutions. This approach caters to diverse customer requirements, further enhancing their appeal. MSFT has been a top 5 position for almost a decade and despite the hefty valuation I continue to hold while opportunistically generating income via call sales. It’s trading at roughly 40x CY25 FCF estimates, but those FCF estimates incorporate heavy capex buildout over the next few years. MSFT should see capex intensity ease as cloud/AI related revenue continues to grow while infrastructure investments moderating. Given the operating margin profile, a FCF margin of 35-40% in ‘28 is reasonable, indicating the stock will need to trade at north of 30x FCF in ‘28 in order to generate a 10% CAGR. Certainly a tall task but I’ve hesitate selling a business with such a dominant entrenched position within enterprise, despite the hefty valuation.

AMZN 0.00%↑

AMZN capped of mega cap earnings with another strong quarter as operating income reached $17.4B, a 56% YoY increase and marking its highest quarterly operating income to date. Both the North America and International segments benefited from increased unit sales, driven by Prime Day, Prime Big Deal Days, and a continued focus on low prices, broad selection, and fast delivery. Additionally, advertising sales continued to grow strongly, providing a high-margin revenue stream.

AWS revenue of 27.5B represented a 19% YoY increase and is now at over $110B annualized run rate. Operating income saw a 50% increase to $10.5B as margins expanded 780 bps to 38.1%, which included a benefit of 200bps related to increasing the estimated useful life of servers. AI services are at a multi-billion dollar revenue run rate with triple-digit YoY growth. Looking forward sell side expectations are for growth to reaccelerate to 20% in ‘25 but margins are expected to settle a bit lower than the current Q. With AWS growing top line in high teens and mid 30s operating margin it is easy to justify a 10x P/S multiple for AWS, bringing its value to ~$1.2T or more than half of AMZNs current market cap.

NA retail sales were up 9% reaching $95.5B and operating margin expanding 100 bps to 5.9% and 5.7B in operating income. Margins will continue to expand as AMZN focuses on improving fulfillment network efficiency which will contribute to better productivity and shipping economics. Growth in advertising, a high incremental margin business, will also driver overall margins higher. RoW sales were 35.9B with 3.6% margins, a 280 basis point expansion. Overtime AMZN expects to achieve operating margins that will be comparable to NA. Ad revenue increased 19% to 14.3B as they continue to grow sponsored products, expand prime video advertising and incorporate AI to drive efficiencies and better outcomes for advertisers.

Capex is expected to be $75B for 2024 and more than that in 2025 (probably near $90B) as they continue to grow their technology infrastructure to support AWS. Jassy acknowledged facing more demand for AWS services than it can currently fulfill due to capacity constraints, primarily in terms of chip availability. he increased CapEx aims to address this supply-demand imbalance and unlock further growth potential. Amazon's AI business, primarily driven by AWS offerings, is experiencing triple-digit year-over-year growth, outpacing the early growth trajectory of AWS itself. This growth necessitates significant upfront investments in data centers, networking gear, and specialized AI hardware, such as accelerators and chips, to support future monetization opportunities.

No matter which way you slice it AMZN is trading at a fair to slightly cheap valuation. I’m not a big fan of SOTP analysis but if we break down AMZN by each business unit we can get an idea of what the company is worth. As mentioned before, AWS should trade at roughly 10x sales or $1.2T. NA and RoW retail should do ~$35B in operating income in 2025 and at a 25x multiple (probably deserves a higher multiple given the higher growth rate in Ads and dominant position within e-commerce) equates to ~$900M in market cap. AMZN FCF is expected to hit $90B by 2026 and at a 30x FCF (MSFT multiple) that would put the MC at 2.7T. If we assume the multiple is closer to META/GOOG at ~22x that would put it at $2T, right where todays market cap is. I don’t own AMZN directly (do own it via index funds) and have no plans to do so given my exposure to mega cap stocks via MSFT/GOOG/NVDA coupled with the fact that I’m not a big fan of Jassy.

ROKU 0.00%↑

ROKU 0.00%↑ reported a solid quarter with revenue growing 16% to $1.1B but they tempered expectations with cautious guidance for Q4 and 2025. The company benefited from political ad spending, price increases on streaming services, and enhanced ad demand through partnerships with third-party DSPs. As I wrote last year ROKU will have to foregoe the walled garden approach and will need to partner with DSPs in order to monetize their user base more effectively.

Roku needs to move away from a "walled garden" approach and giving marketers more robust tools to measure and manage ad campaigns across both Roku and other channels. If Roku can back up its audience scale with greater flexibility and measurement capabilities, it may be able to strengthen its positioning in the TV and streaming ad market.

The platform segment generated $908M, a 15% YoY growth driven by higher ad revenues tied to political ad cycle and increased SSD due to subscription price hikes (one time benefit)​. Total gross margin rose to 45%, a 480-basis-point improvement YoY. Platform gross margin reached 54.2%, reflecting a healthy 610bps increase YoY. ARPU was $41.12, roughly flat YoY as international expansion created a temporary monetization headwind. The Roku Channel achieved 80% YoY growth in streaming hours, with its standing as the third most-engaged app on the Roku platform. This growth was attributed to the prominence of Roku’s home screen, which integrates live sports and offers free content through Roku Originals and FAST channels​.

Device revenue rose 23% YoY to $154 million, supported by expanded retail distribution of Roku-branded TVs. However, device gross margin remained negative at -8%, consistent with the ongoing challenge of monetizing hardware. I’m not worried about dvice GM and I view it as a distribution channel to get ROKU TVs into as many households as possible in order to drive ad monetization in the future. Roku’s active accounts reached 85.5 million, a 13% YoY increase, with net new active accounts totaling 1.9 million in Q3. Total streaming hours were up 20% YoY to 32 billion, while average daily hours per account increased to 4.1 hours, reflecting strong user engagement across Roku’s ecosystem.

Going forward I will be watching progress on two fronts: Roku’s partnerships with third-party DSPs such TTD, designed to increase ad fill rates and broaden ad demand, are showing early positive impacts and will need to continue to scale as these integrations address advertiser needs for more programmatic options, positioning Roku to capitalize on the shift toward automated, data-driven ad buys​. Continue traction in monetizing the home screen with initiatives like the Roku Sport Zone, which drives engagement with sports content and opens sponsorship opportunities with sports leagues like the NFL and MLB. This approach increases Roku’s ad inventory and attracts high-value sponsorships​.

While ROKU posted a solid quarter, the lack of platform revenue acceleration and the decision to cut streaming households and ARPU disclosures starting in Q1 led to a 20% stock selloff. I picked up shares around $62, as it appears Wood and the management team are acknowledging that to fully capitalize on the platform's value they need to collaborate with third-party DSPs to unlock ad inventory potential and drive more effective monetization.

Disclosure: Author has long positions in GOOG, MSFT, ROKU and reserves the right to buy/sell at any time without notification.

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