- Microsoft and Alphabet kicked off big tech reporting spree on Tuesday
- The Windows owner’s momentum has been driven by its AI dominance
- By contrast Alphabet is considered an AI laggard among peers
Microsoft and Alphabet shares were trading lower at the open in the US on Wednesday as investors weigh booming sales against the tech giants’ rapidly growing costs.
The pair kicked off a spate of big tech earnings updates on Tuesday evening, with analysts keeping a close eye on the pair’s embrace of artificial intelligence.
However, the results sparked concern among some investors after the collective costs of the pairs’ AI drive were revealed to have exceeded $22billion (£17.3billion).
Microsoft’s Azure cloud platform has an OpenAI Service that gives customers advanced language AI with OpenAI GPT-4, GPT-3, Codex, DALL-E, and Whisper models
The so-called Magnificent Seven tech stocks, which also includes Apple, Amazon, Meta, Nvidia, and Tesla, drove a substantial bulk of global equity gains in 2023 with a cumulative return of 109 per cent compared to the MSCI World’s 23 per cent gain.
Apple, Amazon and Meta will report their performance for the final quarter of last year on Wednesday, while Nvidia will report in late February.
Tesla, which is the second largest electric car maker in the world, last week reported profit of £1.6billion for the final three months of last year compared to £3billion in the previous year, and warned production would likely slow in 2024.
Windows-owner Microsoft posted revenues of $62.02billion (£48.81billion) for the final quarter of 2023, an 18 per cent year-on-year jump and beating forecasts of $61.14billion, with performance driven by its AI-powered Azure cloud platform and Co-Pilot chatbot.
Microsoft’s share price has been supercharged by an AI gold rush over the last 18 months, driving its market capitalisation beyond the $3trillion mark, as investors bet it will emerge the dominate force in the cutting edge technology.
But investors in Microsoft, which also reported an encouraging recovery in its PC business thanks in part to its £60billion Activision acquisition, were left mulling spiralling 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 per cent of user to get the AI tool within the Office suite of products, with the idea of big productivity gains being realised.
‘We would be looking for that number to climb to around 30 per cent in the next couple of years, and we think that is realistic given the march Microsoft has stolen on competitors in this space.’
Microsoft, which is the biggest stock in S&P 500 and Nasdaq 100, has now beaten earnings per share expectations for six consecutive quarters.
Wedbush analyst Daniel Ives added: ‘This was another masterpiece quarter and guidance from [Microsoft] that will send a major ripple impact across the tech world tomorrow as the AI Revolution is here.
‘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 gain further efficiencies while accelerating profitable growth with Redmond leading the charge in this potential $1trillion opportunity.’
Alphabet pins hopes on ad spending
By contrast, Google’s parent company Alphabet’s fourth quarter results disappointed investors, with fourth quarter ad revenue of $65.5billion up from $59billion last year but short of forecasts of $66.1billion.
Alphabet, which also owns YouTube, faces increasing competition for corporate marketing budgets from the likes of Facebook, Instagram and TikTok.
The group, which has been branded an AI laggard among peers so far, also said it would have to ramp up spending, with fresh costs such as new servers to power the technology.
Alphabet’s capital expenditure quarter for the quarter soared 45 per cent to $11billion, and finance chief Ruth Porat said this figure will be significantly larger in 2024.
It comes as the group has been slashing jobs globally in the new year as part of a cost-cutting drive, adding to the industry blood bath experienced in 2023 when over 260,000 staff were axed.
Analysts at Wedbush said: ‘Alphabet reported healthy 4Q results with total revenue… above consensus and operating income… modestly ahead of expectations.
‘Despite strong results on a consolidated basis, shares are pressured after hours reflecting… elevated expectations heading into the print… a slight miss on consolidated advertising revenue… and rising capital expenditures.’
