With Alphabet and Microsoft reporting their quarterly results today, there’s going to be a lot of scrutiny on the ability of their investments in new AI tech to drive growth.
The two American tech giants have benefited from their early entrance into this space. Microsoft’s investments in OpenAI, its rapid integration of generative AI into various products, and the rising popularity of some of its services, like Bing, have greatly increased its worth — shares of Microsoft are up around 44% so far this year as of yesterday’s close.
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Alphabet is in similar waters. Like Microsoft, it has invested in generative AI companies, begun baking the tech into its own suite of products, and is even tinkering with its core search product.
Other tech giants around the world have also benefited from the positive investor attention as large language models (LLMs), which power generative AI services, have progressed quickly.
Indeed, investor attention has been so fixed on neo-AI technologies that you can easily surmise that for tech titans, AI prominence is the new measuring stick. Investors seem hell-bent on seeing evidence from major tech companies that they are not going to get left behind by generative AI, and demonstrations of any sort of AI edge are enough to send shares toward the ceiling.
Tech shares have generally appreciated this year — Alphabet’s stock has climbed 36% so far this year; a popular basket of cloud stocks is up 32%; and the Nasdaq Composite has gained 35%. Meta’s been doing quite well, with its shares up a shocking 134% so far in 2023.
All things considered, the tech rally this year has been overshadowed by fears of a looming recession and the end of the Good Times.
Regardless, we’re about to see some cases of “put up or shut up” this earnings season. Commentary on Microsoft’s and Alphabet’s upcoming results makes that clear.
Bloomberg noted that the recent tech rally has stretched certain tech valuations to eye-popping levels:
Microsoft’s shares have soared 44% in 2023, hitting multiple records in a rally that has left it on the cusp of joining Apple Inc. as the only two companies with market valuations of $3 trillion. […] The results, due after the market closes, will demonstrate whether [new AI] technology is already a big enough driver of growth to justify valuations that have become elevated by recent standards. Microsoft is trading at 31 times estimated earnings, above its long-term history and at a premium to the Nasdaq 100 Index.
While some analysts are content to remain bullish, other market watchers are more worried about costs.
There’s concern around both the top and bottom lines at tech companies that have benefited from this optimism around AI. Investors will be looking for concrete indicators that AI-related work is driving additional revenue, and whether all this new revenue will harm profitability.
In its most recent earnings call, Microsoft said to expect some lift from its AI services:
In Azure, we expect revenue growth to be 26% to 27% in constant currency, including roughly 1 point from AI services. Growth continues to be driven by our Azure consumption business and we expect the trends from Q3 to continue into Q4.
But it also said it was spending heavily on the effort:
We expect capital expenditures to have a material sequential increase on a dollar basis driven by investments in Azure AI infrastructure. Reminder there can be normal quarterly spend variability in the timing of our cloud infrastructure buildout.
Concerns around how much revenue generative AI can drive are therefore reasonable when compared to cost expectations.
And, investors have wagered that new AI tools and services will boost tech companies. When Microsoft announced that its Microsoft 365 Copilot service would cost $30 per month, investors went crazy. Now the company has to live up to the hype.
Today we’ll hear from Microsoft and Alphabet. Tomorrow we have Meta, and we’ll likely see its AI efforts play a prominent role in the discussion of its results and forecasts. We’ll see Apple and Amazon reporting next week, though it appears the former is not yet playing for early AI marbles. Amazon, however, is winning the public cloud wars against Alphabet and Microsoft and will likely have more investors interested in AI.
The tech giants have enjoyed a significant tailwind from AI excitement. Now we’ll see if all that excitement was warranted after all.
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