Quiver Quantitative - Tech giants Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) are facing heightened investor scrutiny as their ambitious advancements in artificial intelligence (AI) fall short of lofty market expectations. Despite reporting substantial increases in cloud revenue and the growing popularity of their AI-powered products, both companies experienced a significant drop in their stock values. Microsoft's shares declined by 2.7%, while Alphabet's plummeted by 7.5%, influencing a broader downturn in heavyweight tech stocks including Apple (NASDAQ:AAPL), Meta (NASDAQ:META), and Amazon (NASDAQ:AMZN).
The core of investor discontent lies in the burgeoning costs associated with AI development. Both Microsoft and Alphabet are investing heavily in servers, data centers, and research to stay competitive in the race for AI dominance. These investments, while necessary for long-term growth, have impacted short-term returns, causing apprehension among investors who expected a more immediate sales boost from AI technologies. This sentiment was echoed by Russ Mould, investment director at AJ Bell, who noted that even a slight hint of disappointment in Microsoft's cloud division growth was enough to cause share prices to dip.
Market Overview: -Investor hopes for AI-fueled windfalls crumble as Microsoft and Alphabet (GOOG) miss revenue targets despite strong cloud growth. -Soaring costs associated with building cutting-edge AI technology erode profit margins, raising alarm bells for tech-heavy portfolios. -Apple, Meta, and Amazon dragged down by broad sector sell-off triggered by disillusionment with the "AI premium."
Key Points: -Microsoft and Alphabet report impressive cloud revenue gains, but AI investments drive up expenses, falling short of market expectations. -Microsoft's guidance for slowing cloud growth fuels anxiety, while Alphabet's lack of clear AI contribution disappoints investors. -High valuations amplify sensitivity to earnings misses, with Google and Microsoft shedding billions in market capitalization. -Chipmaker AMD (NASDAQ:AMD), heavily reliant on AI processor sales, also falls amidst sector-wide pessimism despite raising its own forecast.
Looking Ahead: -Increased scrutiny lies ahead for AI-related spending, with investors demanding tangible returns on hefty investments. -Continued scrutiny of cloud market share and growth expectations within the broader tech sector. -Questions linger around the profitability of advanced AI projects and their ability to justify premium valuations.
Compounding the issue, Alphabet and Microsoft's high valuations have set investor expectations at a peak. In 2023, Alphabet's shares surged by 58%, trading at a forward PE of 22x, compared to Microsoft's forward PE of 33x. This high valuation, coupled with intense competition in the cloud sector, has made it difficult for these companies to meet the market's AI-driven expectations. Bernstein analysts highlighted this challenge, noting the difficulty of achieving an "AI multiple pixie dust" when larger cloud players are growing faster off larger revenues.
The financial implications of this investor reaction are significant. Google and Microsoft's stock drop erased approximately $140 billion and $80 billion in market value, respectively. Similarly, chipmaker AMD (AMD), despite boosting its 2024 forecast for AI processors, saw its shares fall by 2.5%. This trend extends beyond just stock prices. Alphabet reported a 45% increase in capital expenditure to $11 billion, and Microsoft's capital expenditure jumped 69% to $11.5 billion, with expectations of further increases. As these companies navigate the challenging landscape of balancing AI investments with market expectations, their ability to adapt and deliver on growth trajectories will be crucial for regaining investor confidence.
This article was originally published on Quiver Quantitative