Alphabet and Microsoft Show Strong Growth

Alphabet and Microsoft sparked a surge in technology stocks on Friday, as their earnings reports revealed substantial investments in AI were fueling growth. This reassured the investors who had concerns about the payoff timeline for these expensive ventures, particularly in light of Meta Platforms’ tepid forecast.

Alphabet saw a remarkable 10% surge, pushing its market value above $2 trillion for the first time, according to LSEG data. The company further incentivized investors by announcing its inaugural dividend payout along with a massive $70 billion stock buyback program.

Three years ago, according to LSEG Datastream, the world’s fourth most valuable firm came tantalizingly close to this milestone on an intraday basis. Microsoft, gaining nearly 2%, contributed approximately $54 billion to its market value.

Having invested billions into the infrastructure essential for supporting AI applications, both Alphabet and Microsoft disclosed that their quarterly revenue growth surpassed expectations. This surge was attributed to a growing user base embracing services such as the Copilot AI assistant and the Gemini chatbot.

During the period from January to March, AI services contributed 7 percentage points to the impressive 31% revenue surge observed at Microsoft’s Azure cloud-computing platform, as stated by finance chief Amy Hood. She noted that the demand for AI in the near term slightly exceeded the company’s capacity, thereby restraining growth in the quarter and underscoring the necessity for investment to expand its infrastructure.

At Google, cloud revenue experienced a robust 28% increase, driven by substantial growth in Google Workspace. This Alphabet unit provides a range of AI features powered by its expansive language model Gemini.

These results stand in stark contrast to the cautionary note sounded by social media giant Meta, which projected increased spending and softer-than-expected growth. Consequently, Meta’s stock plummeted by 10% on 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. Meta is indicating the results of further increased investment may be years away while Microsoft and Google are showing them right now.” said D.A. Davidson analyst Gil Luria.

Microsoft AI Spendings

Furthermore, these results triggered a 3.4% increase in Amazon.com’s stock (AMZN.O), which is set to report its earnings on Tuesday.

“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/ahead of market expectations,” said Bernstein analyst Michael Chiang.

Microsoft’s capital expenditures increased by $300 million from the previous quarter, reaching $11.5 billion. Meanwhile, Alphabet’s capital expenditures soared to $12 billion, marking a substantial 91% increase from the previous year.

At least 28 analysts have raised their price targets on Alphabet, with the median view now at $190, compared to its last close of $156. Similarly, Microsoft witnessed price-target increases from at least 25 analysts, with the median view on the stock now at $475.

In terms of valuation metrics, Microsoft boasts a 12-month forward price-to-earnings ratio of 30.40, while Alphabet’s stands at 21.63. Some analysts argue that the higher premium placed on Microsoft’s valuation is justified.

Bernstein analysts said that “Google Cloud showed improvement but less than the growth of Azure. Azure’s enterprise focus and their differentiated capabilities played a part and we (and the market) await Amazon Web Services results.”