1, March, 2024
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Tech Giants Microsoft and Alphabet Face Investor Scrutiny as AI Returns Fall Short

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Leading tech companies Microsoft and Alphabet witnessed a downturn in their stock values on Tuesday, as investors expressed disappointment over AI returns not meeting optimistic expectations. Alphabet’s shares closed 7.5% lower, while Microsoft’s fell 2.7%, impacting other major tech stocks like Apple, Meta, and Amazon.

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Both Microsoft and Alphabet reported substantial increases in their cloud revenue during the December quarter, surpassing Wall Street estimates. However, the costs associated with developing advanced AI features surged, emphasizing the significant investments in servers, data centers, and research required to compete in the evolving tech landscape.

Investors, fueled by the promise of AI, were disheartened by the increased costs, affecting the lofty valuations that had propelled stock rallies to record highs in recent months. Microsoft’s guidance indicating a slight slowdown in revenue growth in its cloud division for the current quarter contributed to the dip in its shares.

Russ Mould, Investment Director at AJ Bell, noted, “A lofty valuation means even the slightest hint of disappointment will be seized on by investors.” Gene Munster, Managing Partner at Deepwater Asset Management, expressed the desire for more substantial contributions from AI in companies like Alphabet and Microsoft.

Alphabet’s shares, which had a remarkable 58% rise in 2023, traded at 22.26 times expected earnings. In comparison, Microsoft, Meta, Amazon, and Apple had forward PE ratios of 33.09, 22.46, 42.60, and 27.73, respectively. The simultaneous reporting of earnings by Google and Microsoft complicated Alphabet’s chances of gaining an AI multiple.

The combined market value loss for Google and Microsoft amounted to about $140 billion and $80 billion, respectively. Chipmaker AMD, which raised its 2024 forecast for AI processors to $3.5 billion, also saw a 2.5% drop in its stock.

Alphabet’s capital expenditure rose by 45% to $11 billion in the reported quarter, with expectations of notably larger spending in the coming year. Microsoft reported a 69% increase in capital expenditure to $11.5 billion, anticipating a substantial sequential increase.

Read Also | Alphabet’s Q3 Results: Google Cloud Revenue Miss Hits Earnings, Shares Dip Over 5%”

Analysts, like Gil Luria from D.A. Davidson, emphasized that Microsoft needs to deliver on its growth trajectory to justify its current share price. Luria expects Microsoft to improve margins by maintaining overall headcount, with investments expected to decrease once data center capacity meets demand.

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