Shares of " Magnificent Seven " big tech companies Amazon (NASDAQ: AMZN) , Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) , and Meta Platforms (NASDAQ: META) each rallied hard in the first half of 2024, rising 27.2%, 30.4%, and 42.5%, respectively, according to data from S&P Global Market Intelligence .
All three are major players in the digital advertising business, which saw a strong recovery in the first half as the U.S. economy remained resilient. Another commonality is that each is investing in new generative artificial intelligence (AI) functionality, which continued to capture the attention of investors.
Core businesses reaccelerate as new AI announcements spur excitement
Each of these three businesses saw a slowdown during 2022 and early 2023. The downturn forced all three to cut expenses in terms of real estate and personnel. Both Alphabet and Meta engaged in high-profile layoffs in what Mark Zuckerberg called the "year of efficiency," and Amazon completely retooled its e-commerce distribution architecture, from a national to a regional one, after the massive COVID-era overexpansion. The retooled format sped up deliveries and lowered costs significantly.
Therefore, as inflation began to fall in earnest late last year and economic growth accelerated, all three companies posted impressive growth. With new streamlined cost structures, each company reported an upward inflection in profit margins, too.
Amazon, for its part, was able to accelerate its revenue in its Q4 2023 and Q1 2024 earnings reports, achieving 13% growth in each quarter, up from 12% and 11% in the prior-year quarters. But because management had cut so much in the way of costs, operating cash flow surged a whopping 82% year over year in each of the two reported quarters. Incredibly, Amazon was able to do this even as it lowered capital expenditures relative to the prior year. That led to a massive surge in free cash flow , which reached over $50 billion on a trailing-12-month basis in Q1 2024, up from a slight free-cash-flow loss on the same basis just a year prior.
Alphabet and Meta also had interesting commonalities and contrasts in the first half. First, both initiated a first-ever dividend , with Meta announcing a $0.50 quarterly dividend in February and Alphabet announcing a $0.20 quarterly dividend in April. In addition, both beat analyst expectations for revenue and profits on their Q4 2023 and Q1 2024 earnings releases, with each company posting accelerating year-on-year growth.
However, Alphabet and Meta reacted differently to their earnings reports. Alphabet initially fell after its Q4 earnings release, only to jump double-digits after its Q1 earnings release. While Alphabet beat its Q4 revenue and earnings estimates overall, ad sales came up just short of analyst expectations. However, that concern quickly evaporated as investors came to focus on companies that will benefit from AI. And in Alphabet's first-quarter release, digital ad sales accelerated, as did cloud growth. With the announcement of a dividend and a fresh $70 billion repurchase program , investors put concerns aside and bid up the stock.
In contrast, Meta soared after its Q4 earnings report, then sold off after its Q1 earnings report -- although that pullback proved to be short-lived. Perhaps not coincidentally, Meta's announcement of a dividend may have spurred the big gain after its Q4 call in February. But it was also likely due to the massive inflection in the company's profitability. After Zuckerberg's "year of efficiency" and investment in AI capabilities for engagement and ad targeting, Meta's revenue jumped 25% and its operating margin more than doubled from 20% to 41%.
However, on its first-quarter release, Meta announced a pivot back to more spending. While the company accelerated revenue 27% and beat earnings estimates, management also announced an increase in its 2024 capital expenditures, to a range of $35 billion to $40 billion, up from prior guidance of $30 billion to $37 billion.
Investors had perhaps been expecting a continuation of the past year's austerity, so the announcement of increased spending, mainly going to AI data center infrastructure, threw them off.
Image source: Getty Images.
And all three came forward with generative AI offerings
Coming into the year, all three of these companies had been thought to be behind the combination of Microsoft and OpenAI in the generative AI race. However, during the first half of the year, each of these three giants made big strides in their AI efforts.
In March, Amazon completed a $4 billion investment in Anthropic, an OpenAI rival started by previous OpenAI employees. The investment follows a number of AI-related tools unveiled in 2023, such as Amazon Bedrock and the company's own Inferentia and Trainium AI accelerators. Furthermore, Amazon Web Services' (AWS) revenue acceleration in Q1 to 17% growth, up from 13% in Q4 2023, indicated customers weren't abandoning AWS for competitors.
Alphabet had also been seen as an AI laggard, even though it invented some of key technologies used by all AI companies today. In February, its initial rollout of its Gemini large language model garnered some controversy, when it generated inaccurate historical photos. However, it seems investors think Gemini will become a highly competitive chatbot. Later in the quarter in April, PC Magazine gave Gemini a four-star rating, picking it as its top chatbot at that time.
As for Meta, concern over its high AI spending soon turned around. This is likely due to CEO Mark Zuckerberg's messaging that he sees a large opportunity to be one of the leading AI companies in the world, even outside of Meta's core platforms. Currently, Meta's Llama family of large language models is posting exciting performance specs. While some are skeptical, others are clearly giving Zuckerberg and his team the benefit of the doubt here, given their past successes in making business transitions.
In sum, while the generative AI revolution has some disruptive possibilities, it's also possible it will only make large tech incumbents stronger, due to the large investments required to compete. In the first half, investors seemed to get on board with that thesis.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein and/or his clients have positions in Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Meta Platforms, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy .
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