Alphabet, Microsoft lead technology stocks surge with AI-driven earnings
In a remarkable rally on Friday, technology behemoths Alphabet and Microsoft spearheaded a surge in the stock market, showcasing robust earnings powered by substantial investments in Artificial Intelligence (AI). The impressive performance laid to rest concerns that their hefty investments might take longer to yield returns, especially following Meta Platforms’ lukewarm forecast.
Alphabet soared by an impressive 10%, marking a historic milestone as its stock market valuation surpassed $2 trillion for the first time, as per data from the London Stock Exchange Group (LSEG). The surge was accompanied by a generous offering to investors, including the announcement of its inaugural dividend and a massive $70 billion stock buyback program.
Meanwhile, Microsoft witnessed a nearly 2% increase, adding a staggering $54 billion to its market capitalisation.
Both tech giants, after pouring billions into AI infrastructure, reported quarterly revenue growth that exceeded expectations. This was attributed to the increasing adoption of services such as the Copilot AI assistant and the Gemini chatbot.
Amy Hood, Microsoft’s finance chief, revealed that AI services contributed significantly to the 31% revenue surge at the company’s Azure cloud-computing platform between January and March, accounting for 7 percentage points of the growth. However, she noted that the immediate demand for AI surpassed the company’s capacity, impeding growth for the quarter and underscoring the need for further infrastructure expansion.
Similarly, Google witnessed a robust 28% increase in cloud revenue, propelled by strong growth in Google Workspace, which offers an array of AI features leveraging its expansive language model, Gemini.
These impressive results stood in stark contrast to Meta’s cautionary tale of heightened spending and lower-than-anticipated growth, resulting in a 10% plummet in its stock value on Thursday.
The market’s response was not confined to Alphabet and Microsoft alone, as Amazon.com saw a notable 3.4% increase in its stock price, ahead of its upcoming earnings report on Tuesday.
In terms of capital expenditure, Microsoft saw a $300 million increase from the previous quarter, reaching $11.5 billion, while Alphabet’s capital expenditures surged by 91% year-on-year to $12 billion.
Analysts were quick to react, with at least 28 raising their price targets on Alphabet, with a median view of $190, compared to its previous closing price of $156. Microsoft saw a similar trend, with at least 25 analysts increasing their price targets, setting the median view at $475.
With Microsoft boasting a 12-month forward price-to-earnings ratio of 30.40, compared to Alphabet’s 21.63, some analysts defended the former’s premium valuation, citing justified reasons amidst the tech sector’s AI-driven evolution.
Jaspreet Bindra, Founder, Tech Whisperer UK Limited commented, “If 2023 was the area of unbridled excitement and investments into Generative AI by Big Tech, 2024 was the year where analysts said that these companies will have to prove that these investments are actually converting to revenues and profits for them. The jury is still out since these earnings are from the ‘bottom of the GenAI value stack, which is infrastructure and cloud; but the promised avenues from the application areas of the stack, like Microsoft Copilot, are still not being declared. In fact, one of the reasons Alphabet boomed was that GenAI has still not managed to make a dent in its Search business, which does not paint a rosy picture for GenAI.”
