Google catching up with Meta pulled on shares following earnings, says D.A. Davidson's Gil Luria

Key Concepts

• Meta's Financial Performance: Strong quarterly results, exceeding expectations despite comparisons to a previous election quarter.
• Google's Financial Performance: Also reported fantastic results, with accelerating growth in Google Cloud and ads.
• AI's Impact on Ad Platforms: Both Meta and Google are leveraging AI to improve ad targeting and performance, leading to increased ad revenue.
• Market Dynamics: Google is currently trading at a higher multiple than Meta, indicating investor optimism about its AI prospects.
• Competitive Landscape: TikTok (ByteDance) and OpenAI are identified as the primary threats to Meta and Google's dominance in the consumer space.
• Amazon's AWS Outlook: Expectations for Amazon's AWS growth are high, with a need to accelerate beyond recent performance to avoid perceived market share loss.
• Project Rainier: Amazon's initiative to provide capacity for Anthropic's AI model, expected to boost AWS growth.

Meta and Google's Strong Quarterly Performance

Gil Lauria from DA Davidson asserts that Meta's recent performance was "great," and that all three "mega caps" (implying Meta, Google, and likely Amazon) reported "fantastic quarters." He highlights four key numbers to illustrate this:

• Microsoft Azure: Accelerated growth to 39% from 37% in the previous quarter.
• Google Cloud: Accelerated growth to 34% from 32% in the previous quarter.
• Google Ads: Grew 15%, an acceleration from 12% in the previous quarter.
• Meta Ads: Grew 25%, an acceleration from 22% in the previous quarter.

Lauria emphasizes that these accelerations are occurring from "very large bases," indicating robust underlying business health.

Market Perception and AI's Role

Lauria notes a shift in market perception, where Google has "caught up" to Meta in terms of valuation, with Google now trading at a higher multiple. This is attributed to investor excitement around Google's perceived leadership in Artificial Intelligence (AI). While acknowledging Google's AI potential, Lauria states, "We think that that may be true, but Meta is going to be a winner."

The primary reason for Meta's after-hours trading dip, according to Lauria, was a slightly lower-than-expected guidance for the next quarter. However, he reiterates that Meta "just beat expectations significantly this quarter."

Both Meta and Google are described as "ad names" that are "using AI to try to improve their performance." Lauria confirms that this AI integration is working, leading to:

• Continued Dominance: These platforms are expected to remain dominant in their respective spaces.
• Consumer Spending Resilience: Regardless of the "working-class consumer," advertisers will continue to need Meta and Alphabet's platforms to target consumers who are spending.

AI's Impact on Ad Targeting and Revenue

Lauria elaborates on how AI is benefiting these companies:

• Improved Targeting: Companies are becoming "better and better at targeting the right ads," which allows them to "charge more."
• Meta's Market Share Gain: Meta is specifically highlighted for "gaining share" in ads, growing at 25% compared to Google's 15%. This is attributed to Meta "doing even better" in its ad targeting capabilities.
• Consumer Engagement: Both companies are succeeding in "keeping the consumer in their apps."

Competitive Threats and Future Outlook

The primary threats to Meta and Google's consumer-side dominance are identified as:

• TikTok (ByteDance): A significant competitor in the social media space.
• OpenAI: Expected to introduce ads within the next 12 months. Lauria predicts this will "take from both of them but more from Google because it'll be more search ads."

Despite these threats, Lauria concludes that Meta and Google are currently "splitting the rest of the pie" and that "meta still doing better than Google."

Amazon's AWS and Project Rainier

Lauria then shifts focus to Amazon's upcoming earnings report, particularly concerning Amazon Web Services (AWS). He sets a high bar for AWS growth:

• Expectation: AWS "better grow... more than 20%."
• Benchmark: This is in comparison to the accelerated growth seen in Microsoft Azure (39%) and Google Cloud (34%).
• Consequence of Underperformance: If Amazon reports another 17.5% growth quarter, it "will be very disappointing" and "will mean that they're now losing share in a very significant way."

Lauria mentions Project Rainier, Amazon's initiative to provide "significant capacity for Anthropic's ramp." He believes this should "drive accelerating growth" for AWS. While it might not have fully impacted the September quarter, Amazon "better guide for it to help accelerate AWS growth." Failure to do so will lead to Amazon being "really perceived as falling behind."

Conclusion

The transcript emphasizes the strong financial health of major tech companies like Meta and Google, driven by accelerating growth in their core businesses and the effective integration of AI for improved ad targeting. While Meta experienced a slight dip due to forward guidance, its current performance and market share gains are impressive. Google's AI leadership is a key driver of its current market valuation. The competitive landscape is evolving with the emergence of TikTok and the anticipated entry of OpenAI into the ad market. For Amazon, the upcoming AWS earnings are critical, with expectations for accelerated growth, potentially fueled by initiatives like Project Rainier, to avoid perceived market share erosion.