Alphabet, Microsoft earnings show big AI bet driving growth

Alphabet, Microsoft earnings show big AI bet driving growth

Alphabet and Microsoft sparked a rally in tech stocks on Friday with earnings that showed big AI investments are driving growth, dispelling doubts that their expensive bets will take time to pay off after soft forecasts from Meta Platforms.

After pouring billions of dollars into the infrastructure needed to support AI applications, both Alphabet and Microsoft reported that their quarterly revenue growth exceeded expectations as more users turned to services including the Copilot AI assistant and the Gemini chatbot.

AI services accounted for 7 percentage points of a 31% jump in revenue on Microsoft’s Azure cloud computing platform between January and March, chief financial officer Amy Hood said.

He added short-term AI demand was slightly higher than the company’s capacity, which held back growth in the quarter and underscored the need for spending to expand its infrastructure.

At Google, cloud revenue jumped about 28% with strong growth in Google Workspace, where the Alphabet unit offers a range of AI features powered by Gemini’s big language model.

The results contrasted with warnings of higher spending and softer-than-expected growth from social media giant Meta ( META.O ), open a new tab, whose shares fell 10% on Thursday.

“This quarter illustrates how demand remains high for generative AI from Microsoft customers, and we continue to believe that Microsoft is a leader in this GenAI environment,” said D.A Davidson analyst Gil Luria.

“Meta is showing a return on investment that may be increasing for a few more years while Microsoft and Google are showing it now.”

Alphabet shares rose 12% in premarket trading as it sweetened analyst interest with its inaugural dividend and a $70 billion share buyback.

The company is on track to add about $200 billion to its market value, which will surpass the $2 trillion mark.

The world’s fourth most valuable firm has been toying with that milestone on a daily basis for the past three years although it has never closed above that level, according to LSEG Datastream.

Microsoft gained nearly 4% and is set to add nearly $120 billion to its market value.

The results sparked a 1% to 3% jump in tech stocks such as Amazon.com and Apple, which will report earnings on Tuesday and Thursday, respectively.

Nvidia’s AI chip stock, Advances Micro Devices ( AMD.O ), opened a new tab and Marvell Technology also rose between 1% and 2%, on confidence that a continued boom in spending by the tech giant will bolster demand for its semiconductors.

“The three hyperscalers (major cloud companies) we’ve heard from so far all highlight the same message about AI capital spending – it’s an arms race, the AI opportunity is huge, and spending will continue to be aggressive/outpace market expectations,” said Bernstein analyst Michael Chiang.

Microsoft’s capital spending increased by $300 million from the previous quarter to $11.5 billion, while Alphabet’s capital spending was $12 billion, a 91% jump from a year earlier.

At least 19 analysts raised their price targets on Alphabet, pushing the median view to $176.65, compared to its last close of $156. Microsoft saw 17 price target increases from analysts, with the median view on the stock now at $475.

Microsoft has a trailing 12-month price-to-earnings ratio of 30.40, compared to Alphabet’s 21.63.

Some analysts believe a more premium valuation is warranted.

“Google Cloud showed improvement but less than Azure’s growth. Azure’s enterprise focus and their different capabilities play a role and we (and the market) await Amazon Web Services’ results,” analyst Bernstein said.