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The Big Tech Companies Investing Billions in AI Cloud Capacity

Artificial intelligence (AI) is one of the most transformative technologies of our time. It has the potential to revolutionize every industry, from healthcare to education, from finance to entertainment, from agriculture to defense. AI is already changing the world in many ways, and it will continue to do so in the next decade and beyond.

However, AI is not a cheap technology. It requires huge amounts of computing power and data-crunching to perform tasks that normally require human intelligence, such as reasoning, learning, decision making, perception, and natural language processing. To meet the growing demand for AI services and applications, the leading tech companies who dominate the global cloud market are investing billions of dollars in building and expanding their cloud capacity.

Cloud computing is the delivery of computing services, such as servers, storage, databases, networking, software, analytics, and intelligence, over the internet. Cloud computing enables users to access and use these services without having to own or manage the physical infrastructure. Cloud computing also offers benefits such as scalability, reliability, security, and cost-efficiency.

The three tech giants who together account for more than half of the global cloud market are Amazon, Microsoft, and Google. These companies are also the leaders in AI research and development, and they offer a suite of state-of-the-art AI tools and services to their cloud customers. Each of these companies wants to win new customers and retain existing ones by providing them with the best AI solutions and enhancing their core products with AI capabilities.

To achieve this, the three tech giants are pouring billions of dollars into their cloud capacity, especially for the generative AI systems that require massive amounts of computing power. Generative AI is a type of AI that can create new content or data, such as images, text, audio, or video, based on existing data or models. Generative AI can be used for various purposes, such as content creation, data augmentation, data synthesis, data anonymization, and data compression.

According to a report by the Financial Times1, the three tech giants have boosted their investment in computing infrastructure over the past few years. Capital spending rose to a combined $42 billion in the three months to September 2023, almost 20 percent more than the same period in 2021. That figure, which comprises reported corporate capex from Alphabet (Google’s parent company) and Microsoft and Amazon’s businesswide investment in property and equipment, marked a 10 percent rise from the quarter to June. Analysts expect the pace of cloud-related spending to accelerate next year.

Executives from the companies said last month that significant chunks of capital spending are going towards the generative AI systems that require huge amounts of computing power and data-crunching. Amazon chief executive Andy Jassy predicted that generative AI will drive “tens of billions in revenues”. The three tech giants are vying to increase their shares of the cloud market and must remain competitive in AI to hold on to their customers. Each wants to win new customers with a suite of state-of-the-art AI tools and services, and use the technology to enhance other core products.

The rivals “have to compete on generative AI or they’ll lose relevance and market share”, said Jeff Pearson, managing director at technology consultancy Slalom. “All that is going to require a tremendous amount of capex”, for equipment such as servers and data centers.

Some examples of the generative AI systems that the three tech giants are investing in are:

Amazon Web Services (AWS): AWS is the world’s largest cloud provider, with a market share of 32 percent in the second quarter of 2023, according to Synergy Research Group. AWS offers a range of AI services, such as Amazon Rekognition (image and video analysis), Amazon Comprehend (natural language processing), Amazon Lex (conversational interfaces), Amazon Polly (text-to-speech), Amazon Transcribe (speech-to-text), Amazon Translate (machine translation), and Amazon SageMaker (machine learning platform). AWS also offers generative AI services, such as Amazon Kendra (enterprise search), Amazon Personalize (personalization and recommendation), Amazon Forecast (time series forecasting), and Amazon CodeGuru (code review and optimization). AWS is also developing its own custom chips, such as Inferentia (for machine learning inference) and Trainium (for machine learning training), to boost its cloud performance and efficiency.
Microsoft Azure: Azure is the second-largest cloud provider, with a market share of 20 percent in the second quarter of 2023, according to Synergy Research Group. Azure offers a range of AI services, such as Azure Cognitive Services (vision, speech, language, decision, and web search), Azure Machine Learning (machine learning platform), Azure Bot Service (conversational interfaces), Azure Databricks (big data analytics), and Azure Synapse Analytics (data warehouse). Azure also offers generative AI services, such as Azure Text Analytics for Health (healthcare text analysis), Azure Form Recognizer (form extraction and analysis), Azure Video Analyzer (video analysis and annotation), and Azure Immersive Reader (text comprehension and accessibility). Azure is also developing its own custom chips, such as Brainwave (for machine learning inference) and Project Olympus (for machine learning training), to boost its cloud performance and efficiency.
Google Cloud: Google Cloud is the third-largest cloud provider, with a market share of 9 percent in the second quarter of 2023, according to Synergy Research Group. Google Cloud offers a range of AI services, such as Google Cloud Vision (image analysis), Google Cloud Speech (speech-to-text and text-to-speech), Google Cloud Natural Language (natural language processing), Google Cloud Dialogflow (conversational interfaces), Google Cloud Translation (machine translation), and Google Cloud AI Platform (machine learning platform). Google Cloud also offers generative AI services, such as Google Cloud AutoML (automated machine learning), Google Cloud Document AI (document analysis and understanding), Google Cloud Video AI (video analysis and annotation), and Google Cloud Vertex AI (end-to-end machine learning platform). Google Cloud is also developing its own custom chips, such as Tensor Processing Units (TPUs) (for machine learning training and inference), to boost its cloud performance and efficiency.

The three tech giants are not the only ones who are investing in AI cloud capacity. Other cloud providers, such as IBM, Oracle, Alibaba, and Tencent, are also expanding their AI offerings and infrastructure. Moreover, there are also emerging players, such as Databricks, Snowflake, and C3.ai, who are challenging the incumbents with their specialized AI solutions and platforms.

The competition in the AI cloud market is fierce, and the stakes are high. The leading tech companies who are investing billions in AI cloud capacity are not only aiming to capture the lucrative AI market, but also to shape the future of AI and its impact on the world.

Midjourney prompt “AI in the cloud”

November 8, 2023

Tech Letter

Mad Hedge Technology Letter
November 8, 2023
Fiat Lux

Featured Trade:

(SETTING UP FOR THE NEXT BULL MARKET)
(WEWKQ)

Setting Up For The Next Bull Market

Tech Letter

Taking out long-term leases and turning around to rent short-term i.e. Airbnb style for corporate offices ended with a thud as office sharing tech company WeWork filed for bankruptcy.

The idea never made sense and felt more like a gimmick.

Surprisingly, this bankruptcy didn’t happen much earlier as the “work from home” pivot during 2020-2022 made this business model go from bad to worse.

It’s safe to say that we are far passed the peak “sharing economy” and investors are licking their wounds on this one.

WeWork filed for bankruptcy, capping a dramatic period that saw the once high-flying startup navigate a failed initial public offering, forced government lockdowns, a blank-check merger, and a stubborn avoidance of return-to-office trends.

The company at its 2019 peak commanded a $47 billion valuation with the likes of SoftBank losing more than $14 billion on just this one investment.

The firm’s death spiral arguably started in 2019. In a matter of months, the company went from planning an IPO to firing thousands and procuring a multi-billion-dollar bailout.

WeWork was almost a scam from the beginning with its main business mission explained as to “elevate the world’s consciousness.”

The former CEO of WeWork Adam Neuman operated the business almost as a cult.

The company eventually went public in 2021 through a special purpose acquisition company, two years after its initially planned IPO. But that didn’t stop WeWork from hemorrhaging cash.

While WeWork reached a sweeping debt restructuring deal in early 2023, it quickly signaled desperation soon after.

High-interest rates are starting to knock out the low-quality business ideas that never should have gotten off the ground in the first place.

These developments are a godsend for the tech economy that needs a complete flushing out of the bad ideas that were fueled by 0% interest rates.

Cheap money attracts larger-than-life ideas and personalities that can’t really back up the chutzpah.

Raising the bar for quality in tech has also caused the unintended consequence of raising the top tech companies or magnificent seven even higher up than before.

This trend can easily be seen in the EV sector where incumbent Tesla is putting their foot on the scruff of smaller EV company’s necks that simply can’t keep up with the higher material costs and headache of developing a global manufacturing presence amid deglobalization.

In simple terms, it is substantially harder to build an above-average tech company, or any tech company for that matter in 2023.

The former is an issue with the lofty competition that wields powerful balance sheets and the latter is an issue with draconian funding terms.

Waving goodbye to lemons like WeWork is only healthy for the tech sector in the long term and shortly we should see other junk-status companies be thrown by the wayside as well.

Cryptocurrency mogul Sam Bankman Fried’s fall from grace with a guilty verdict of fraud is another signal that the tech’s excesses are quickly normalizing.

We are in the middle of setting ourselves up for the new bull market in technology stocks which will be kicked into gear if interest rates sniff out the next recession.

Trade Alert - (BRKB) November 8, 2023 - TAKE PROFITS - SELL

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

November 8, 2023

Jacque's Post

(IT’S A GREEN LIGHT FOR THE MARKET ACCORDING TO THIS INDICATOR)

November 8, 2023

Hello everyone,

A reliable and rare market indicator is flashing green meaning we may well see good times on Wall Street for the next 12 months.

This market indicator is called the Zweig Breadth Thrust.

It flashed a buy signal last Friday for only the 18^th time since 1945.

When this happens the S&P 500 averages a 23.3% gain over the following 12 months and is up 100% of the time, history shows.

The gauge – a ratio developed by famous investor Marty Zweig – is used to determine market momentum, particularly the start of a potential move higher. This signal is triggered when the ZBT rises from less than 0.4 to more than 0.615 within 10 days.

The thrust is calculated by:

Determining the ratio of advancing New York Stock Exchange listed names to the total number of rising and declining issues

Then find the 10-day exponential moving average of that ratio.

Put simply, it’s when you go from very oversold to very overbought in less than two weeks.

This by signal came as the S&P 500 wrapped up its biggest weekly gain of the year. The index rallied 5.9% last week, marking its largest one-week surge since November 2022. That move followed the Fed hinting it may be done raising rates.

The idea that the Fed may be done (we don’t know that for sure)

The idea that the economy is rebalancing normally (and not going straight into a recession)

Both are significant.

The technical signal mostly suggests that there is a lot more buying pressure coming in. In other words, an end-of-year rally is still quite likely.

Some analysts believe the S&P 500 can end 2023 between 4,600 and 4,700. This implies an upside of 5.5% to 7.8% from Friday’s close. The index would then close out the year up 19.8% or 22.4%.

Remember that the Zweig Breadth Thrust is just one indicator. The market could be impacted by numerous factors before the end of the year.

Have you heard of Digital Ocean?

It’s a Cloud Computing platform that is at an attractive entry point right now, according to Goldman Sachs.

Analysts have a price target of $33.00 which implies the stock could jump 38.4% over the next 12 months.

Analyst, Gabriela Borges, cited the stock’s significant underperformance as an opportunity for investors. The stock is up 6% this year, while the Nasdaq Composite has gained 30%.

Borges believes the business is now approaching a cyclical trough. Furthermore, she goes on to say that the structural improvements that DO has made to its mix and cost structure will become more obvious, driving better revenue growth, and continued (free cash flow) and margin expansion.

According to Borges, the underperformance has likely been due to a cyclical normalization in cloud optimization spending. She argues that this trend has been particularly acute in areas where DO has outsized exposure, such as video games, streaming, and web agencies. Borges estimated that Digital Ocean’s organic revenue growth rate, excluding M&A and pricing, has slowed from 36% in the first quarter of 2022 to low single digits in the third quarter of this year.

The analyst points out there are positive catalysts ahead for the business, including Digital Ocean’s better-than-expected revenue and earnings for the third quarter and the company’s contributions from its newer initiatives. These initiatives include DigitalOcean’s July acquisition of Paperspace, which should expand the company’s artificial intelligence and machine-learning capabilities, and its ongoing ramping of Cloudways, a cloud hosting and SaaS provider for small-to-medium-size businesses acquired last year.

A new CEO is yet to be announced, and until that happens, analysts do not see a material shift in DigitalOcean’s strategy.

Second Quarter 2023 Financial Highlights:

Revenue was $170 million, an increase of 27% year-over-year. Annual Run-Rate Revenue (ARR) ended the quarter at $682 million, representing 25% year-over-year growth. Gross profit of $102 million or 60% of revenue.

Digital Ocean (DOCN) Trade Idea

Stock Price $26.38.

January 19 (DOCN) $25/$27.50 vertical call spread at a cost of $1.30 (do not pay more than $1.40)

For those who want to be more aggressive, you can look at doing

January 19 (DOCN) $27.50/$30.00 vertical call spread at 0.88cents (do not pay more than 0.95cents)

McDonalds (MCD)

If you took advantage of the McDonald’s trade, I outlined two to three weeks ago, then don’t forget to look at taking profits.

I gave the option of a 250/260 DEC call option spread or a 250/270 DEC call option spread.

MCD is sitting at $268.96 as I am writing this newsletter.

Cheers,

Jacquie

November 8, 2023

Diary, Newsletter, Summary

Global Market Comments
November 8, 2023
Fiat Lux

(I HAVE A NEW OPENING FOR THE MAD HEDGE FUND TRADER CONCIERGE SERVICE),
(TESTIMONIAL),
(RIGHT SIZING YOUR TRADING)

Trade Alert - (MSFT) November 7, 2023 - BUY

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more

November 7, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 7, 2023
Fiat Lux

Featured Trade:

(OUTSMARTING OPIOIDS)

(VRTX), (LLY), (NVO), (BIIB)

Outsmarting Opioids

Biotech Letter

Amid the stark realities of America's opioid crisis, with a staggering 80,000 annual fatalities due to overdose, the pharmaceutical industry is on the brink of a significant shift.

Vertex Pharmaceuticals (VRTX) stands out with its investigational drug VX-548, which promises a novel approach to pain management without the addiction risks of opioids. As the year winds down, this biotechnology company is poised to reveal findings from four clinical trials that could catapult VX-548 into the market spotlight.

Needless to say, the stakes couldn't be higher for Vertex.

The commercial success of VX-548, particularly in the chronic pain market, could mark a significant turning point. While generic opioids are cost-effective for short-term use, their potential for addiction and other risks make a non-addictive alternative like VX-548 an attractive proposition for insurers and patients alike.

Drawing parallels to the recent rise of GLP-1 obesity drugs by Eli Lilly (LLY) and Novo Nordisk (NVO), VX-548 could potentially mirror their impact.

Successful trials could see VX-548 generating annual revenues of $5.1 billion by 2030 — a substantial addition to Vertex’s current cystic fibrosis portfolio, which pulls in just shy of $10 billion.

Yet, it's essential to temper enthusiasm with a dose of reality. After all, the biotech sector is no stranger to the pitfalls of high expectations.

Past failures in the nonopioid pain sector underscore the importance of cautious optimism. Nerve growth factor inhibitors, once hailed as a breakthrough, faltered due to safety concerns, highlighting the unpredictable nature of drug development.

VX-548 aims to circumvent these issues with its unique mechanism of action that targets pain signaling at the peripheral nervous system—potentially a significant advantage over central nervous system-targeting opioids.

So, investors must weigh the risk-reward ratio of betting on Vertex ahead of these results.

This treatment’s success in acute pain management could result in a significant uptick in Vertex's stock value. Analyst projections suggest a potential increase of $58 per share if VX-548 matches opioid efficacy, with an $88 increase if it surpasses it. Should the chronic pain trials yield positive results, the stock could climb an additional $119 per share.

However, like I said, it's crucial to approach these numbers with caution. The market's response to trial outcomes can be unpredictable, and the memory of recent high-profile disappointments, such as Biogen's (BIIB) Aduhelm, still lingers.

In light of this, the downside should not be understated — a failed trial could see Vertex's stock take a substantial hit, potentially up to 20%.

Nevertheless, the financial health of Vertex remains strong even sans this pain management candidate. In fact, its top-selling TRIKAFTA/KAFTRIO patents are secured through 2037, accounting for a dominant 89.9% of sales.

This foundation provides a buffer against the inherent risks that come with drug development. With operating margins at a solid 45.6% and a GAAP EPS increase of 30.8% quarter over quarter, Vertex displays a financial resilience that may be reassuring to interested investors.

Taking everything into consideration, investors stand at a crossroads, with the potential of VX-548 offering both promise and uncertainty. The decision to invest now hinges on more than just the outcomes of the trials; it requires strategic consideration of the broader market, potential competitors, and the overarching trends in pain management.

As Wall Street watches with a trained eye, the early indications from Vertex’s trials suggest that VX-548 has a fighting chance to succeed where others have faltered.

If its subsequent tests affirm its potential, VX-548 could not only transform the company’s financial landscape but also mark a significant advancement in the fight against the opioid epidemic — a win for both public health and discerning investors. I suggest you buy the dip.

Trade Alert - (NVDA) November 7, 2023 - TAKE PROFITS - SELL

Trade Alert

When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more