What's up with Alphabet and Microsoft lately? Profits, sales – and AI costs

If ML proves an expensive habit in future, these money printers won't have much to worry about ... probably

Alphabet and Microsoft's stock prices jumped in after-hours trading today after the AI-infatuated businesses delivered higher-than-anticipated quarterly earnings.

Microsoft is right now up 4.3 percent to $416.25 apiece; the Google parent is up 11.4 percent to $176.

Alphabet reported revenue of $80.5 billion, up 15 percent year-on-year, for its first quarter of 2024. Net income reached $23.7 billion, up 53 percent, for diluted earnings per share of $1.89. Alphabet's stock price rose around 15 percent after the announcement

Some enthusiasm for Alphabet's stock can be attributed to the introduction of a quarterly $0.20 share dividend, to be paid starting June 17, 2024, for Class A, Class B, and Class C shares. The search biz also announced a $70 billion stock repurchase plan. Microsoft also returned $8.4 billion to shareholders during the quarter in the form of repurchases and dividends.

Google Cloud revenue reached $9.6 billion, a 28 percent year-on-year growth that CFO Ruth Porat said was due to "an increasing contribution from AI."

But AI is also adding costs as running it requires technical talent and computing infrastructure. Alphabet is trying to manage those costs. "Looking ahead, we remain focused on our efforts to moderate the pace of expense growth in order to create capacity for the increases in depreciation and expenses associated with the higher levels of investment in our technical infrastructure," said Porat.

"With respect to capex, our reported capex in the first quarter was $12 billion, once again driven overwhelmingly by investment in our technical infrastructure, with the largest component for servers, followed by data centers," she reported. "The significant year-on-year-growth in capex in recent quarters reflects our confidence in the opportunities offered by AI across our business."

Assessing the expense of Google's AI enthusiasm looks a bit more difficult going forward, however, due to organizational changes that move AI accounting from Google to Alphabet. "AI model development teams previously under Google Research in our Google Services segment will be included as part of Google DeepMind, reported within Alphabet-level activities, prospectively beginning in the second quarter of 2024," the Chocolate Factory said in its earnings release.

Microsoft, meanwhile, revealed revenue of $61.9 billion, up 17 percent year-on-year for the third quarter of its FY 2024. Net income was $21.9 billion, up 20 percent, with diluted earnings per share of $2.94.

Microsoft's business groups performed as follows:

  • Productivity and Business Processes: $19.6 billion in revenue, up 12 percent
  • Intelligent Cloud: $26.7 billion, up 21 percent
  • More Personal Computing: $15.6 billion, up 17 percent

The only significant misstep in an otherwise strong quarter came from device sales in the More Personal Computing group, which saw revenue decline by 17 percent. Xbox content and services revenue jumped 62 percent, largely due to Microsoft's acquisition of Activision Blizzard.

Microsoft EVP and CFO Amy Hood told investors to expect increased capital expenditures to support cloud and AI offerings. That prediction has been baked into the company's financial filing.

"We expect capital expenditures to increase in coming years to support growth in our cloud offerings and our investments in AI infrastructure and training."

During Microsoft's earnings conference call, Keith Weiss of Morgan Stanley sought further details about Microsoft's investment in AI, noting that Redmond is on track to increase its capex more than 50 per cent year-on-year to $50 billion, amid talk of spending $100 billion on an AI supercomputer.

"So obviously investments are coming well ahead of the revenue contribution, but what I was hoping for is that you could give us some color on how you as the management team try to quantify the potential opportunities that underlie these investments because they are getting very big," Weiss said.

CEO Satya Nadella responded by saying on the training side, Microsoft wants "to be able to allocate the capital required to essentially be training these large foundation models and stay on the leadership position there."

Microsoft CFO Hood added that it's important to consider that massive spending’s impact beyond quarterly impact and instead to think about grasping the opportunity of AI affecting every business process.

"The opportunity is represented by the amount of value we add, and I look forward to being able to continue to deliver that," said Hood.

Put another way, the opportunity depends upon how many people will pay for AI-enhanced services.

Market reaction to Alphabet and Microsoft differed significantly from the beating Meta's stock took following its Wednesday earnings report. Higher capital expenditures, in part due to AI infrastructure costs, and weak earnings that saw no lift from AI saw investors send Meta's share price down by around ten percent. ®

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