In a flurry of activity on Tuesday, tech giants boasted about the increasing popularity of their generative AI-powered products, yet investors were left uneasy as the mounting costs of developing these cutting-edge features overshadowed expectations for a sales surge driven by the new technology.
Alphabet, the parent company of Google, saw its shares take a hit, dropping 6%, while Microsoft experienced a 2% decline in premarket trading. This downward trend also affected heavyweight tech stocks like Apple, Meta (formerly Facebook), and Amazon.
Both Microsoft and Alphabet reported significant increases in their cloud revenue for the December quarter, surpassing Wall Street estimates. Customers flocked to test the new AI features and create their own AI services, contributing to this revenue surge. However, the costs associated with developing and maintaining these services surged as well, showcasing the substantial investments these companies are making in servers, data centers, and research to stay competitive and attract new customers.
The stock declines of Google and Microsoft are poised to result in market value losses of approximately $59 billion and $56 billion, respectively, underscoring the elevated investor expectations fueled by recent months' stock rally, driven by the promise of AI technology.
Gene Munster, managing partner at Deepwater Asset Management, expressed his desire for more substantial contributions from Alphabet and Microsoft in the realm of AI, reflecting investor sentiments.
Shares of chipmaker AMD also experienced a decline of 7% after boosting its forecast for AI processors to $3.5 billion in 2024. Analysts had previously anticipated sales ranging from $4 billion to $8 billion, indicating a mismatch between expectations and actual performance.
Alphabet's capital expenditure in the reported quarter surged by 45% to $11 billion, with Chief Financial Officer Ruth Porat signaling even larger spending for the upcoming year compared to 2023.
Bernstein analysts commented on the challenge faced by Google, noting that it is challenging to command a premium for AI technology when larger cloud players are experiencing faster growth from larger revenue streams.
Meanwhile, Microsoft reported a 69% increase in capital expenditure to $11.5 billion and anticipates a significant sequential increase in this metric.
Gil Luria, an analyst at D.A. Davidson, emphasized the importance of Microsoft delivering on its growth trajectory to justify its current share price and potentially achieve even higher valuations in the future.
Looking ahead, analysts expect Microsoft to increase margins by maintaining a relatively flat headcount while anticipating a decrease in investments next year once sufficient data center capacity is in place to meet demand.
Alphabet's shares, which rose by 58% in 2023, are trading at 22.26 times expected earnings, while Microsoft's forward PE stands at 33.09, with shares trading at record highs.
