Alphabet, Microsoft earnings show hefty AI bets are driving growth

LONDON: Alphabet and Microsoft ignited a rally in technology stocks with earnings that showed big artificial intelligence (AI) investments were driving growth, allaying doubts that their costly bets would take time to pay off after a soft forecast from Meta Platforms.

Alphabet rose 10%, crossing US$2 trillion in market value with a gain of about Us$180bil as it sweetened the pot for investors with its maiden dividend and a Us$70bil stock buyback.

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

Microsoft gained nearly 3% and was set to add more than Us$80bil to its market value.

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

AI services accounted for seven percentage points of the 31% jump in revenue at Microsoft’s Azure cloud-computing platform between January and March, finance chief Amy Hood said.

She added near-term AI demand was a bit 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 jumped about 28% with strong growth in Google Workspace, where the Alphabet unit offers a slew of AI features powered by its large language model Gemini.

The results contrasted with a warning of higher spending and softer-than-expected growth from social media giant Meta, whose stock tumbled 10% last Thursday.

“This quarter illustrated how demand remains high for generative AI from Microsoft customers, and we continue to believe that Microsoft sits as a leader in this GENAI environment,” D.A. Davidson analyst Gil Luria said.

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

The results sparked a rise of 2% in Amazon. com, which will report earnings tomorrow. AI chip stocks Nvidia , Broadcom and Marvell Technology also rose between 1% and 2%, riding on optimism that an ongoing boom in spending by tech giants would power demand for their semiconductors.

“The three hyperscalers (major cloud companies) we’ve heard from thus far all highlighted a similar message on AI capital expenditure – this is an arms race, the AI opportunity is enormous, and spending will continue to be aggressive or ahead of market expectations,” Bernstein analyst Michael Chiang said.

Microsoft’s capital expenditures grew by Us$300mil from the previous quarter to Us$11.5bil, while Alphabet’s capital expenditures were Us$12bil, a 91% jump from a year prior.

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

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