Investor optimism surrounding Big Tech’s financial gains from generative artificial intelligence (AI) has been tempered by cautionary statements from Microsoft and Google, warning of substantial costs in the ongoing competition to develop cutting-edge AI products.
Despite robust quarterly results reported by both tech giants, investors remain skeptical about the sustainability of growth given the significant investments planned for data centers and servers this year to advance generative AI capabilities.
Microsoft experienced a 1% decline in its shares, even with strong sales in cloud computing, powered by integrated software services with technology from OpenAI, the creator of ChatGPT. In parallel, Alphabet, Google’s parent company, witnessed a nearly 6% drop in shares due to advertising revenues falling slightly below expectations.
Both companies signaled higher capital expenditure in 2024 as they commit to substantial investments in the technological infrastructure supporting generative AI. Microsoft, propelled into the generative AI race through its deal with OpenAI, plans to invest up to $13 billion, with a focus on transforming the financial gains from generative AI into a reality.
Microsoft’s cloud division, driven by its Azure platform, demonstrated strong performance in the final quarter of 2023, with cloud revenues rising 20% to $25.9 billion, surpassing analysts’ expectations. Demand for Microsoft’s AI services contributed to a 6-percentage-point increase in Azure revenues during the quarter.
Google Cloud is also pivotal for Alphabet’s growth, with expectations for the launch of its advanced generative AI, Gemini Ultra, this year. Both companies are experiencing a surge in demand for generative AI, with investors adopting a “buy AI now, figure it out if it works later” mindset, according to Forrester analyst Lee Sustar.
Microsoft CEO Satya Nadella reported an increase in Azure AI customers, totaling 53,000, with over a third being new additions in the past 12 months. While Azure growth is expected to remain stable, the company anticipates slightly decelerated revenue growth in its cloud division.
The companies’ AI strategies are applying pressure on rival Amazon to enhance its AI services to defend its cloud market share leadership. Microsoft and Alphabet are shifting toward an “AI-first” approach, and Microsoft’s CFO, Amy Hood, noted an expectation of increased capital spending driven by investments in cloud and AI infrastructure.
The evolving landscape of generative AI and the costs associated with its development raise questions about the balance between investment and sustainable growth in the AI arms race.
In its earnings report, semiconductor company AMD raised its AI chip sales estimates by $1.5 billion for 2024, citing faster-than-expected deployment by customers, including Microsoft.
As the tech giants navigate the evolving AI market, investors remain vigilant about the balance between investments in cutting-edge technology and achieving tangible financial returns. Total Microsoft revenue in Q4 2023 reached a record $62 billion, surpassing forecasts, and earnings per share of $2.93 exceeded analysts’ expectations.