Investors Express Concerns as Microsoft and Alphabet Grapple with AI-Driven Challenges

In a recent turn of events, technology behemoths Microsoft and Alphabet found themselves facing the ire of investors, who were less than impressed by the returns generated by their artificial intelligence (AI) endeavors. Despite both companies showcasing robust growth in their cloud revenue during the last quarter of 2023, the toll of developing cutting-edge AI features left investors dissatisfied and sparked a decline in share prices.

Alphabet witnessed a significant 6% drop in its stock (GOOGL.O), while Microsoft experienced a more modest decline of 1% (MSFT.O). This downturn also affected other tech giants like Apple (AAPL.O), Meta (META.O), and Amazon (AMZN.O). Although both Microsoft and Alphabet reported noteworthy increases in their cloud revenue, surpassing Wall Street predictions, the escalating costs associated with AI development became a cause for concern.AI, AI, AI, AI, AI, AI, AI, AI,

The allure of AI-powered products had driven stock prices to record highs in recent months, creating high expectations among investors. However, the surge in costs, attributed to substantial investments in servers, data centers, and research, cast a shadow on these optimistic projections. Analysts pointed out that the lofty valuations made these companies vulnerable to even the slightest signs of disappointment.

Russ Mould, the investment director at AJ Bell, noted, “A lofty valuation means even the slightest hint of disappointment will be seized on by investors,” referring to Microsoft’s guidance indicating a slowdown in revenue growth in its cloud division. This minor setback was enough to prompt a dip in the company’s shares.

The stock drops in Google and Microsoft were poised to erase approximately $61 billion and $27 billion in market value, respectively. Investors, such as Gene Munster of Deepwater Asset Management, expressed a desire for more substantial contributions from AI. While Alphabet’s shares had seen a 58% rise in 2023, concerns about the company’s forward price-to-earnings ratio (PE) and the growth rates of other tech giants added to the apprehension.

Analysts from Bernstein emphasized the challenge for Google in achieving an attractive AI multiple when larger cloud players were experiencing faster growth based on larger revenues. Meanwhile, chipmaker AMD (AMD.O), which had raised its 2024 forecast for AI processors to $3.5 billion, witnessed a 3% drop in its stock.

Alphabet reported a staggering 45% increase in capital expenditure to $11 billion, with Chief Financial Officer Ruth Porat hinting at even more significant spending in the coming year. Microsoft also disclosed a 69% surge in capital expenditure to $11.5 billion and anticipated a substantial increase in the metric on a sequential basis.

Despite the challenges, Gil Luria, an analyst at D.A. Davidson, expressed optimism about Microsoft’s ability to boost margins by maintaining a relatively flat overall headcount. Luria anticipated a reduction in investments next year once Microsoft had sufficient data center capacity to meet the rising demand, underscoring the company’s need to consistently deliver on its growth trajectory to justify a higher share price.