On Tuesday, tech giants Alphabet – the parent company of Google – and Microsoft released their earnings report for the second quarter of 2023. Despite their interest and investment in artificial intelligence (AI) and generative AI-related technologies, the stocks of both companies headed in the opposite direction.
While Microsoft’s Intelligent Cloud, a platform that provides server products and cloud services like Azure, SQL Server, Windows Server, and Visual Studio, surpassed the market’s expectations in revenue performance, Alphabet’s cloud unit delivered a disappointing quarter.
Stocks of Microsoft Rises and Google’s Fall Despite Investment and Market Demand for AI Products
Both Microsoft and Google attributed their increased capital expenditure to AI, but Microsoft was able to channel its revenues directly towards AI research and development, which startled Wall Street analysts.
During the earnings call, Microsoft CFO Amy Hood told investors that 3% of revenue growth of its cloud unit in the last quarter can be attributed directly to the performance of its AI-powered services. Hood said “some of the improvements” the company was making in Azure, Microsoft 365, and even in the core of the commercial cloud were due to the pace at which it was delivering AI revenues ahead of the market demand despite increasing cost expense and capital investment.
Meanwhile, Alphabet and Google CEO Sundar Pichai said despite the downtrend the company is continuing to see a lot of interest and demand, especially in the cloud segment, for AI products. However, he noted in Google’s earnings call that revenue growth for the sector continued to slow down “sequentially” in Q3 2024.
A Morgan Stanley analyst asked Pichai for examples of return on capital to Google Search with regards to AI and the CEO had no specific numbers to provide. Search has been a key battleground for Google in its AI arms race since Microsoft introduced OpenAI-powered “Copilot” generative AI to its Bing search engine.
Pichai responded by saying that Google sees AI as a “foundational platform shift” and is excited about the opportunities the technology provides across its business. He gave a nonanswer by stating that AI research at the company starts with Search and that he was pleased with the user feedback that Google has been receiving.
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Investors Starting to Pay Attention to Companies that Actually Deliver on AI Tech
The reactions of Microsoft and Alphabet stocks are an example of how the narrative surrounding AI has shifted over the course of the year. News about AI integrations was driving the market to insanely high levels in the first half of the year, led by Microsoft announcing a $10 billion investment in OpenAI, and chip maker Nvidia’s decision to go all in on the AI demand by producing AI-powered chips for cloud computers running large language models (LLMs). All this convinced investors that the technology could be the wake-up call for tech stocks.
However, after AI drove much of the tech stock rally in June and macro strategists boosted the technology’s overall outlook on the S&P 500, investors are now paying more attention to companies that are actually best positioned to deliver on AI.
For the time being, Wall Street analysts are not declaring any clear winners or losers from AI among the tech giants. Some even got on board with Google’s strategy of leveraging AI in the long term instead of focusing on short-term revenue growth from the technology.
In a research note, Jefferies analyst Brent Hill wrote that Wall Street may have “embedded too much AI benefit” into Alphabet’s revenue estimates for the last quarter. He also noted that the increased spending of Google’s parent company in the niche is an indication that the management team has a clear idea of future cash flows that investors may be unaware of.
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Hill ended his research note by stating that while interest in generative AI technology is high, the tech industry’s challenge in ramping up AI infrastructure may become a major factor in slowing recognized revenues. He expects AI to have a much better impact on the market in 2024.
