Alphabet, Microsoft Earnings Highlight Surging Growth from AI Investments
In an impressive demonstration of technological and financial might, Alphabet and Microsoft have both revealed that their substantial investments in artificial intelligence (AI) are starting to bear fruit, with recent earnings surpassing expectations. This has fueled a significant rally in technology stocks, dispelling earlier concerns about the potential delay in seeing returns from their heavy spending on AI, especially in the wake of a subdued forecast from Meta Platforms.
Alphabet, the parent company of Google, experienced a remarkable surge, with its stock price jumping 10%, thereby pushing its market value beyond the $2 trillion mark. This increase, which saw the company’s value swell by about $180 billion, was further sweetened by the announcement of its first-ever dividend alongside a massive $70 billion stock buyback program. Notably, Alphabet had flirted with this market milestone on an intraday basis over three years ago but had not previously closed above this level.
Microsoft also enjoyed a significant boost, with its stock price climbing nearly 3%, which was anticipated to augment its market value by more than $80 billion. Both tech giants have been aggressively funding the development and infrastructure required to support AI applications, leading to a quarterly revenue growth that exceeded expectations. This growth is largely attributed to the increasing user engagement with AI-driven services, such as Microsoft’s Copilot AI assistant and Alphabet’s Gemini chatbot.
Microsoft reported that AI services contributed to 7 percentage points of the 31% revenue increase at its Azure cloud-computing platform between January and March. Microsoft’s finance chief, Amy Hood, highlighted that the demand for AI is currently outpacing the company’s capacity, underlining the necessity for continued investment in infrastructure to bolster growth.
Similarly, Alphabet’s Google Cloud reported a 28% jump in revenue, buoyed by strong growth in Google Workspace. This suite of services harnesses the power of Alphabet’s advanced large language model Gemini to offer an array of AI features, further demonstrating the companies’ leadership in the AI domain.
The positive results from Alphabet and Microsoft sharply contrast with Meta’s recent forecast, which hinted at higher spending and lower-than-expected growth, causing its stock to tumble by 10%. Analysts have pointed out that while Meta suggests the fruits of its increased investment may be years away, Microsoft and Google are already showcasing tangible results of their AI endeavors.
Following these announcements, other tech giants and AI chip stocks, including Amazon (which is scheduled to report its earnings soon), Nvidia, Broadcom, and Marvell Technology, saw a rise in their stock prices. This uptick reflects the broader industry optimism that the continued investment in AI by major tech firms will drive demand for semiconductors and related technologies.
Analysts have noted that this is an “arms race” in AI capital expenditure, with the major cloud companies aggressively spending to seize the monumental opportunities AI presents. Microsoft, for instance, increased its capital expenditures by $300 million from the previous quarter to $11.5 billion, whereas Alphabet’s capital expenditures jumped to $12 billion, marking a 91% increase from the year prior.
In light of these developments, at least 19 analysts have revised their price targets for Alphabet upwards, with the median target now at $176.65, up from its last close of $156. Microsoft has also seen price target increases from 17 analysts, setting the median view on the stock at $475.
Despite the higher premium valuation for Microsoft, some analysts justify it based on Azure’s enterprise focus and differentiated capabilities, awaiting Amazon Web Services’ results for further market indications. Google Cloud’s improvement, though significant, was perceived as less remarkable compared to Azure’s growth, underscoring the competitive dynamics within the cloud services and AI technology sectors.
