On paper, Microsoft and Google both reported strong quarterly earnings today and beat expectations. But the tech giants failed to satisfy the market, with shares in both companies down in after hours trading and before the open.
The stocks took a hit as investors fretted over the steep cost of artificial intelligence (AI) and a frosty advertising market.
In its second quarter, Microsoft reported revenue of $62bn, up 18 per cent from a year earlier and slightly ahead of expectations of $61.1bn. Its net income jumped 33 per cent to $27bn.
Shares initially dropped 1.5 per cent following the update yesterday evening but had recovered by market open on Wednesday.
Also ahead of consensus estimates, Alphabet, the parent company of Google, said it hit revenue of $86.3bn in its fourth quarter, up 13 per cent from the same period in 2022.
Its advertising revenue fell just shy of forecasts at $65.52bn, causing shares to slide 5.7 per cent in after hours trading on Tuesday and even further to 6.22 per cent on Wednesday. Advertising represents a significant portion of Google’s overall revenue.
The boom in AI has significantly boosted both the bottom lines of the two cloud providers, according to principal analyst at Forrester, Lee Sustar.
“Google Cloud has left behind years of quarterly losses and now accounts for 10 percent of Alphabet revenue as it uses the AI moment to reintroduce itself to enterprise IT leaders as a partner,” Sustar said.
Investors are also anticipating the launch of Google’s most advanced generative AI model yet, Gemini Ultra, later this year.
Microsoft’s Co-Pilot, an AI tool designed for the workplace, is a product that technology analyst at Quilter Cheviot, Ben Barringer, says is one to watch.
Barringer said the number of users of Co-Pilot needs to rise to around 30 per cent of Microsoft’s customers over the next couple of years.
“We think that is realistic given the march Microsoft has stolen on competitors in this space,” he added.
Both Silicon Valley giants warned of higher capital expenditure in 2024 due to increased investments in the technological infrastructure supporting generative AI.
Microsoft suggested it is looking to continue its high rate of AI investment, with chief Satya Nadella saying the company is “infusing AI across every layer” of the business.
“We’ve moved from talking about AI to applying AI at scale,” Nadella said.
But AJ Bell investment director Russ Mould said the market could be watching Microsoft to see how efficiently it spends on AI.
He explained: “Any sense the company is just throwing cash at AI willy-nilly and hoping some of it pays off would not go down too well.
“These companies have been signalling for a while that investment was needed, but it seems to have fallen on deaf ears until now,” Mould added.
Last week, Microsoft became the second company ever to reach a $3trn stock market valuation, after Apple. Its recent acquisition of game maker Activision Blizzard has pushed the company’s overall revenue up by four per cent, Microsoft said.
The results may have had a knock on effect on other tech giants, with Amazon, Apple and Meta stocks all down when the Nasdaq opened on Wednesday as investors brace for their results on Thursday.