Goldman Sachs: Big Tech revenue growth slowing

Goldman Sachs wrote in a research note this week that revenue growth at large technology companies has slowed and profit margins are under growing pressure.

The bank cited weaker advertising revenue, higher cost of sales for cloud infrastructure, and expanding investment in artificial intelligence research and compute as the main drivers of the weakness and margin compression.

The note added that ad-dependent platforms are experiencing lower advertiser spending and tougher quarter-over-quarter comparisons. Digital-ad revenue softness is weighing on companies that rely heavily on advertising for growth.

Cloud providers are facing higher capital and energy expenses as they scale infrastructure to support generative AI workloads, which has eroded gross margins in cloud businesses.

Firms are increasing spending on talent, custom chips and third-party compute to train and run large AI models. Those expenses have raised operating costs and reduced the benefit from earlier rounds of cost cutting.

Goldman noted some revenue growth persists in enterprise cloud, subscription services and hardware upgrades, but those gains have not fully offset weakness in digital ad sales and the rising expense base.

The bank highlighted variation across companies. Ad-centric platforms have been most affected by advertiser weakness. Cloud leaders are seeing margin pressure as AI services scale. Hardware and services companies are dealing with mixed consumer demand and longer replacement cycles.

Analysts at Goldman adjusted some near-term earnings forecasts to reflect slower revenue and higher costs. They said they will watch upcoming quarterly reports for signs of stabilization and recommended attention to management commentary on advertising trends, cloud margins and the pace and efficiency of AI spending.

Goldman added that many large tech firms entered the post-pandemic period with expanded market share and improved profitability after restructuring. Recent increases in AI and infrastructure costs, together with cyclical advertising weakness, have narrowed the path to further margin expansion.