Alphabet and Microsoft show that big AI bets are driving growth
Alphabet and Microsoft sparked a rally in tech stocks on Friday with earnings results that showed big AI investments were driving growth, erasing doubts that it would take time for their costly bets to pay off after a soft forecast from Meta Platforms.
Alphabet rose 10%, surpassing its $2 trillion market cap with profits of about $180 billion, while widening the pot for investors with its first dividend and a $70 billion share buyback.
The world’s fourth most valuable company flirted with this milestone on an intraday basis more than three years ago, although it never closed above that level, according to LSEG Datastream.
Microsoft gained almost 3% and would add more than $80 billion to its market value.
After pouring billions of dollars into the infrastructure needed to support AI applications, both Alphabet and Microsoft reported that their quarterly revenue growth exceeded expectations as more users turn to services like the Copilot AI assistant and the Gemini -chatbot.
AI services were responsible for 7 percentage points of the 31% revenue increase on Microsoft’s Azure cloud computing platform between January and March, says Chief Financial Officer Amy Hood.
She added that near-term demand for AI was slightly higher than the company’s capacity, which slowed growth in the quarter and highlighted the need for spending to expand infrastructure.
At Google, cloud revenues rose about 28%, with strong growth in Google Workspace, where the Alphabet unit offers a range of AI features powered by the major Gemini language model.
The results contrasted with a warning of higher spending and softer-than-expected growth from social media giant Meta, whose shares fell 10% on Thursday.
“This quarter illustrated how demand for generative AI from Microsoft customers remains strong, and we continue to believe Microsoft is a leader in this GenAI space,” said DA Davidson analyst Gil Luria.
“Meta indicates that the results of further increased investments are still years away, while Microsoft and Google are showing them now.”
The results led to a 2% rise at Amazon.com, which is set to report earnings on Tuesday. AI chip stocks Nvidia, Broadcom and Marvell Technology also rose between 1% and 2%, riding on optimism that a continued surge in spending by tech giants would boost demand for their semiconductors.
“The three hyperscalers (large cloud companies) we’ve heard from so far all emphasized a similar message about AI capex spending: this is an arms race, the AI opportunity is huge, and spending will remain aggressive/ahead of market expectations. says Bernstein analyst Michael Chiang.
Microsoft’s capital expenditures rose $300 million from the previous quarter to $11.5 billion, while Alphabet’s capital expenditures were $12 billion, up 91% from a year earlier.
At least 19 analysts raised their price targets on Alphabet, bringing the median to $176.65, up from the last closing price of $156. Microsoft saw seventeen price target increases from analysts, with the average view on the stock now at $475.
Microsoft has a trailing twelve-month price-to-earnings ratio of 30.40, compared to 21.63 for Alphabet.
Some analysts believe the higher valuation was justified.
“Google Cloud showed improvement, but less than Azure’s growth. Azure’s business focus and their differentiated capabilities played a role and we (and the market) await results from Amazon Web Services,” Bernstein analysts said.
First print: April 26, 2024 | 8:08 PM IST