The cost of Microsoft and Alphabet’s AI arms race amounts to $22.5 billion
- Microsoft and Alphabet started launching major tech reports on Tuesday
- The Windows owner’s momentum is driven by its AI dominance
- In contrast, Alphabet is considered a laggard in AI among its competitors
Shares of Microsoft and Alphabet traded lower at the U.S. open on Wednesday as investors weighed booming sales against the tech giants’ burgeoning costs.
The pair kicked off a series of major tech earnings updates on Tuesday evening, with analysts keeping a close eye on the pair’s embrace of artificial intelligence.
However, the results raised concerns among some investors after it emerged that the collective cost of the pairs’ AI effort had exceeded $22 billion (£17.3 billion).
Microsoft’s Azure cloud platform has an OpenAI service that provides customers with advanced language AI with OpenAI GPT-4, GPT-3, Codex, DALL-E, and Whisper models
The so-called Magnificent Seven technology stocks, which also include Apple, Amazon, Meta, Nvidia and Tesla, drove a significant portion of global stock gains in 2023, with a cumulative return of 109 percent compared to the MSCI World’s 23 percent gain.
Apple, Amazon and Meta will report their performance for the final quarter of last year on Wednesday, while Nvidia will report at the end of February.
Tesla, the world’s second-largest electric car maker, last week reported a profit of £1.6 billion for the last three months of last year, up from £3 billion in the previous year, and warned that production in 2024 would probably delay.
Windows owner Microsoft posted revenues of $62.02 billion (£48.81 billion) for the final quarter of 2023, up 18 percent year-on-year and beating forecasts of $61.14 billion, with performance were powered by its AI-powered Azure cloud platform and Chatbot for co-pilot.
Microsoft’s stock price has soared over the past 18 months on an AI gold rush, pushing its market capitalization past the $3 trillion mark, as investors bet it will become the dominant force in cutting-edge technology.
But investors in Microsoft, which also reported an encouraging recovery in its PC business thanks in part to its £60 billion takeover of Activision, continued to fret over rising costs.
Ben Barringer, technology analyst at Quilter Cheviot, said: “Going forward, (AI chatbot) Co-Pilot is the product to watch for Microsoft.
“This year we expect 5 to 10 percent of users to get the AI tool within the Office product suite, with the idea that big productivity gains will be realized.
“We expect this number to increase to around 30 percent in the coming years, and we think this is realistic given the march Microsoft has stolen on competitors in this space.”
Microsoft, the largest stock in the S&P 500 and Nasdaq 100, has now surpassed earnings per share expectations for six straight quarters.
Wedbush analyst Daniel Ives added: “This was another masterpiece quarter and guidance from (Microsoft) that will have a major impact on the tech world tomorrow as the AI revolution dawns.
“We believe this is the start of a multi-year initiative aimed at generating significant AI use cases for customers across the enterprise landscape to achieve further efficiencies while accelerating profitable growth, with Redmond leading the way on this potential opportunity of $1 trillion.”
Alphabet is pinning its hopes on advertising spending
In contrast, Google’s parent company Alphabet’s fourth-quarter results disappointed investors, with fourth-quarter advertising revenue of $65.5 billion, up from $59 billion last year, but lower than forecasts of $66.1 billion.
Alphabet, which also owns YouTube, is facing increasing competition for corporate marketing budgets from companies like Facebook, Instagram and TikTok.
The group, which has so far been labeled an AI laggard among its peers, also said it would have to ramp up spending, with new costs such as new servers to power the technology.
Alphabet’s capital expenditures rose 45 percent to $11 billion this quarter, and chief financial officer Ruth Porat said this figure will be significantly higher in 2024.
It comes as the group has cut jobs globally this new year as part of a cost-cutting drive, contributing to the carnage the sector experienced in 2023 when more than 260,000 employees were made redundant.
Analysts at Wedbush said: ‘Alphabet reported healthy fourth-quarter results with total revenue… above consensus and operating income… modestly above expectations.
‘Despite strong results on a consolidated basis, shares are under pressure after hours due to… high headline expectations… a slight consolidated advertising revenue miss… and rising capital expenditures.’