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  • Writer's pictureSamiksha Jain

Tech Investors Disappointed as Microsoft and Alphabet's AI Investments Underperform Expectations

Tech giants like Alphabet (which owns Google) and Microsoft recently shared how their new products that use generative AI technology are becoming popular with customers. However, the high costs of developing these advanced features are causing concern among investors, who were hoping that this technology would significantly increase the companies' sales.

Alphabet's stock, traded under the symbol GOOGL.O, dropped more than 5%, losing about $55 billion in market value. On the other hand, Microsoft's shares (MSFT.O) saw a slight increase in their value, although the trading was quite unstable.

Both companies reported a significant rise in their cloud revenue for the December quarter, surpassing the expectations of Wall Street analysts. This increase was mainly due to customers showing a keen interest in testing new AI features and developing their own AI services.

However, the costs for these companies have also risen sharply. This is because they are investing heavily in servers, data centers, and research to stay competitive and attract new customers.

This increase in costs has dampened the excitement of investors. They were previously very optimistic about AI technology, which had led to a substantial rise in stock prices in recent months.

Russ Mould, the investment director at AJ Bell, commented that the high valuation of these companies means that any small disappointment can cause a negative reaction from investors. For example, Microsoft's forecast of a slight slowdown in cloud division revenue growth was enough to cause a modest drop in its share price.

Gene Munster, a managing partner at Deepwater Asset Management, mentioned that investors are expecting more significant contributions from AI in the performance of Alphabet and Microsoft.

In 2023, Alphabet's shares went up by 58%, and they were trading at 22.26 times expected earnings. This is in comparison to Microsoft's forward PE (price-to-earnings ratio) of 33.09, Meta's 22.46, Amazon's 42.60, and Apple's 27.73.

Analysts at Bernstein noted that Alphabet's announcement of its earnings on the same night as Microsoft made it difficult for Alphabet to benefit from the AI hype, especially since Microsoft's cloud revenue was growing faster.

AMD, a chipmaker, also saw its shares fall by 4% even though it raised its forecast for AI processor sales to $3.5 billion for 2024. This was below what analysts expected, as they had predicted sales of $4 billion to $8 billion for AMD's AI chips.

Alphabet reported a 45% increase in its capital expenditure, reaching $11 billion in the reported quarter. Ruth Porat, Alphabet's Chief Financial Officer, said that this spending would be significantly higher this year than in 2023.

Similarly, Microsoft's capital expenditure jumped by 69% to $11.5 billion, and the company expects this number to increase substantially in the following periods.

Gil Luria, an analyst at D.A. Davidson, believes that Microsoft can still improve its profit margins by keeping its overall number of employees relatively stable and reducing its investments once it has enough data center capacity to meet demand. Luria suggests that Microsoft needs to continue its growth trajectory to justify an even higher share price in the future.

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