Tech giants on Tuesday talked up how customers are lapping up their generative AI-powered products, but mounting costs of developing the cutting-edge features irked investors hoping for an enormous boost to sales from the brand new technology.
Shares of Alphabet fell 6%, while those of Microsoft were down 1%, bringing down heavyweight tech stocks including Apple, Meta and Amazon.
Each Microsoft and Alphabet reported generous increases to their cloud revenue within the December quarter, beating Wall Street estimates, as customers lined as much as test recent AI features and construct their very own AI services.
But costs surged as well, highlighting the heavy investments these corporations are making in servers, data centers and research as they compete fiercely for brand spanking new customer dollars.
This hurt investor expectations that were fueled by the promise of AI, which powered a stock rally to record highs in recent months.
“A lofty valuation means even the slightest hint of disappointment will likely be seized on by investors, and Microsoft’s guidance for revenue growth in its cloud division to slacken just a little in the present quarter was enough to see the shares dip modestly,” said Russ Mould, investment director at AJ Bell.
Gene Munster, a managing partner at Deepwater Asset Management, said he’s on the lookout for more from his firm’s stakes in Alphabet and Microsoft.
“Investors wish to see more contribution from AI,” he said about Alphabet. “Microsoft remains to be nascent, but showing some AI uptick.”
Alphabet’s shares, which rose 58% in 2023, were trading at 22.26 times expected earnings, compared with a forward PE of 33.09 for Microsoft, 22.46 for Meta, 42.60 for Amazon and 27.73 for Apple.
“The one problem here is that Google reported earnings the identical night as Microsoft … (it’s) hard to get that AI multiple pixie dust if larger cloud players are growing faster off of larger revenues,” Bernstein analysts wrote in a note.
Google and Microsoft’s stock drop was set to wipe off about $66 billion and $38 billion in the businesses’ market value, respectively.
Shares of chipmaker AMD, which boosted its 2024 forecast for AI processors to $3.5 billion on Tuesday, fell 3%. Analysts had previously expected AMD to sell $4 billion to $8 billion price of AI chips, said Summit Insights analyst Kinngai Chan, adding the stock’s valuation can also be pegged to those figures.
Alphabet’s capital expenditure within the reported quarter shot up 45% to $11 billion. Meanwhile, Chief Financial Officer Ruth Porat said spending could be notably larger this 12 months than 2023.