While AI spending is top of mind, online ads are driving a lot of Big Tech's growth

As major technology companies ramp up their investments in artificial intelligence, their digital advertising divisions are also witnessing notable growth. Recent quarterly earnings reports from industry leaders like Meta, Amazon, Alphabet, and Microsoft revealed strong revenue figures from their advertising sectors, easing earlier worries about potential declines in ad spending due to economic challenges exacerbated by former President Donald Trump's trade policies. Jasmine Enberg, co-founder of the media firm Scalable, noted the resilience of the digital ad market, stating, "I think the digital ad market is strong. This economic instability and volatility seems to be accepted as the new normal for many companies." Meta emerged as the leader in ad sales growth for the quarter, with a remarkable 26% year-over-year increase, bringing its total third-quarter revenue to $51.24 billion—98% of which comes from online ads. This marks the company’s highest sales figure since early 2024. Amazon also saw its online ad revenue rise by 24% year-over-year, totaling $17.7 billion, outpacing growth in its cloud computing services. CEO Andy Jassy emphasized Amazon's focus on broadening its demand-side platform for third-party applications, highlighting strategic partnerships, including one with Roku, which enhances their connected TV presence. Jassy mentioned, "The integration with ad inventory from platforms like Netflix and Spotify is a powerful addition to our offerings." Alphabet reported a 13% increase in overall advertising sales for the third quarter, amounting to $74.18 billion. YouTube's ad revenue also climbed by 15% to $10.26 billion. Meanwhile, Microsoft's search and news advertising sector generated $3.7 billion in its fiscal first quarter, up 14% from the previous year. Despite some pullback in budgets due to economic uncertainties, many companies appear to be reallocating funds from traditional advertising avenues to digital platforms. Jeremy Goldman, a senior director at Emarketer, suggested that investing in social media and retail media has become a more appealing option for businesses. The trend wasn’t exclusive to the major players; Reddit reported a significant 68% surge in its third-quarter sales, exceeding analyst projections, while Snap and Pinterest are set to release their earnings soon. While the tech giants expressed confidence in maintaining their AI spending, they also raised their capital expenditure forecasts to over $380 billion for the year. This figure is still modest compared to the $1 trillion in cloud computing deals recently announced by OpenAI with partners like Nvidia and Oracle. However, the market reactions varied, with investors responding less favorably to Microsoft and Meta. Meta's stock dropped 11% following its announcement of increased capex guidance, raising concerns about how the company would capitalize on its AI investments compared to its competitors in the cloud sector. Oppenheimer analysts downgraded Meta’s stock, questioning the clarity of the company's AI strategy in relation to its significant spending on Superintelligence compared to the uncertain returns of its Reality Labs division. Meta's finance chief, Susan Li, reaffirmed the company's commitment to AI investment as a priority, acknowledging potential short-term financial pressure. While Meta continues to highlight the advantages its AI initiatives bring to its ad business, the path forward remains less clear in terms of tangible benefits for investors. As the holiday season approaches, market observers are keenly watching consumer spending trends, particularly during Black Friday, to gauge the impact of lingering economic concerns on advertising budgets. Goldman remarked, "The upcoming Black Friday numbers will be a crucial indicator—will they meet expectations?"