Why the AI stock rally depends on cloud growth this earnings season: Goldman analyst

To keep the AI trade moving up and to the right on the charts, third quarter earnings season from hyperscalers like Oracle ( ORCL ) and Amazon ( AMZN ) need to deliver on one important front: another quarter of accelerating cloud computing adoption to show the AI boom is far from peaking.

"Last quarter, the hyperscalers reported accelerating cloud revenue growth and large revenue backlogs that signaled the monetization of their capex investments. Explicit management commentary discussing those returns complemented the strong results," Goldman Sachs strategist Ben Snider said in a new note. "Our equity analysts expect the trend of accelerating cloud revenue growth will continue this quarter, with year over year growth increasing from 48% in Q2 to 55% in Q3. Continued signs of AI capex monetization will be important both for the performance of the hyperscalers and for the outlook for capex growth."

Micron ( MU ) offered an early validating sign last week that hyperscaler cloud sales could be in line with what the likes of Goldman Sachs and others on the Street want to see this earnings season.

The main headline is that the memory chipmaker beat sales and profit forecasts for the quarter, driven by voracious demand from the AI boom . Guidance was also strong.

Consider this: Micron added about $43 billion in sales in the most recent quarter compared to the year-ago quarter. That's massive. Operating margins exploded in all business segments.

Execs told analysts on the earnings call that high chip prices and tight capacity would be the name of the game through 2028.

"We believe expectations for tightening supply-demand conditions through both 2027 and 2028 meaningfully extend the industry's runway for strong pricing and earnings growth, addressing a key investor concern that current fundamentals represent a cyclical peak," D.A. Davidson analyst Gil Luria said.

Brian Sozzi is Yahoo Finance's Executive Editor, host of the Sozzi Unleashed morning show and the Power Players with Brian Sozzi podcast, and a member of Yahoo Finance's editorial leadership team. Follow Sozzi on X @BrianSozzi , Instagram , and LinkedIn . Tips on stories? Email brian.sozzi@yahoofinance.com.