Alphabet, Microsoft earnings show big AI bets are driving growth

NEW YORK:

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

After pouring billions of dollars into the infrastructure needed to support artificial intelligence applications, both Alphabet and Microsoft reported quarterly revenue growth that beat expectations as more users turn to services like AI assistant Copilot and chatbot Gemini.

Artificial intelligence services accounted for 7 percentage points of the 31% revenue growth at Microsoft’s Azure cloud-computing platform between January and March, chief financial officer Amy Hood said.

Read: Ex-Google engineer accused of stealing AI secrets to help Chinese companies

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

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

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

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

“Meta shows that the results of further increased investment may be years away, while Microsoft and Google are showing them right now.”

Alphabet shares rose 12% in premarket trading as it sweetened the pot for analysts with its maiden dividend and $70 billion share buyback.

The company was on track to add about $200 billion to its market value, which would push it past $2 trillion.

Read: Alphabet, Meta ad sales in Q4 unlikely to reflect generation AI investments

The world’s fourth-most valuable company flirted with the landmark on an intraday basis three years ago, although it has never closed above that level, according to LSEG Datastream.

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

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

Shares of artificial intelligence chip Nvidia Advances Micro Devices ( AMD.O ) opened a new tab and Marvell Technology also rose between 1% and 2%, riding on optimism that a continued boom in spending by the tech giants would fuel demand for their semiconductors.

“The three hyperscalers (big cloud companies) we’ve heard from so far have all emphasized a similar message about AI capital spending – this is an arms race, the opportunity for AI is huge, and spending will continue to be aggressive / above market expectations,” said Bernstein analyst Michael Chiang.

Microsoft’s capital spending rose $300 million from the previous quarter to $11.5 billion, while Alphabet’s capital spending was $12 billion, up 91% from a year ago.

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

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

Some analysts believe the higher premium valuation was justified.

“Google Cloud showed improvement, but less than Azure’s growth. Azure’s enterprise focus and differentiated capabilities played a role, and we (and the market) look forward to Amazon Web Services results,” Bernstein analysts said.