Microsoft and Alphabet

Investors are punishing Microsoft and Alphabet because AI returns do not meet high expectations

On Tuesday, technologists noted that customers were accepting their AI-based generative products, but the rising costs of developing advanced features were rattling investors hoping for a big revenue boost from the new technology.

Shares of Alphabet fell 7.5%, while those of Microsoft fell 2.7%, dragging down heavyweight tech stocks like Apple, Meta, and Amazon.

Microsoft and Alphabet both reported generous increases in cloud sales in December, beating Wall Street estimates as customers came online to test new AI features and develop their own AI services.

But costs have also risen, reflected in these companies’ high investments in servers, data centers, and research, as they compete fiercely to attract new customers.

This will impact the expectations of investors inspired by the promises of AI, which have led to a stock market rally to record levels in recent months.

“A high rating means that investors themselves will accept even the slightest disappointment, and Microsoft’s prediction that revenue growth in its cloud division will slow somewhat in the current quarter was enough to easily send the shares lower,” Russ Mold said. Investment director at AJ Bell.

Gene Munster, managing partner of Deepwater Asset Management, said he expects more stakes from his firm in Alphabet and Microsoft.

“Investors want to see a greater contribution from AI,” he said of Alphabet. “Microsoft is still in its infancy, but is showing some growth in AI.”

Alphabet shares, which are up 58% in 2023, were trading at 22.26 times forward earnings, compared to a forward COG of 33.09 for Microsoft, 22.46 for Meta, 42.60 for Amazon, and 27 .73 for Apple.

“The only problem here is that Google announced its results the same night as Microsoft… (it’s) hard to get that multiple AI pixie dust when the big cloud providers are growing faster thanks to higher revenues,” Bernstein wrote to analysts in a note.

The decline in shares of Google and Microsoft has wiped approximately $140 billion and $80 billion from their market values, respectively.

Shares of chipmaker AMD, which on Tuesday raised its AI processor forecast for 2024 to $3.5 billion, fell 2.5%. Analysts previously expected AMD to sell $4 billion to $8 billion worth of AI chips, said Kinngai Chan, an analyst at Summit Insights, adding that the stock’s valuation was also tied to those figures.

Alphabet’s capital expenditures rose 45% to $11 billion in the quarter. Meanwhile, Chief Financial Officer Ruth Porat said spending would be significantly higher this year than in 2023.

Microsoft also reported a 69% increase in capital spending, to $11.5 billion, and said it expected this figure to increase “materially” sequentially.

“By providing a positive outlook (…) (Microsoft) has given investors just enough to justify its current stock price, but it needs to continue its growth trajectory to justify an even higher stock price,” said analyst Gil Luria of D.A. Davidson.

Luria expects Microsoft can further expand margins if overall headcount remains relatively low, and that capital expenditures will decline again next year once Microsoft has enough data center capacity to meet requirements.