Microsoft, Google earnings get AI leverage
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Both Microsoft and Google parent Alphabet reported strong earnings Thursday in the midst of a fierce AI race that has jolted both companies — and offered investors the hope that there's still room for these giants to grow.
Why it matters: Traders punished Meta a day earlier when it made clear its AI investments would take time to pay off, but Microsoft and Google both found more favor with the market.
The big picture: The huge "frontier models" that lead the AI race — like OpenAI's GPT-4, which Microsoft uses, and Google's Gemini — cost a fortune to train and operate.
- But both Microsoft and Google can balance their own investments in AI development with revenue from hosting other firms' AI work.
By the numbers: Microsoft's Azure and other cloud services grew 31% last quarter, Microsoft said in a slide accompanying its earnings report.
- AI accounted for seven of those 31 percentage points of growth, the company said.
Google, meanwhile, chose this moment to issue its first-ever dividend to stockholders.
- For decades, Silicon Valley turned up its nose at sharing profits with investors, believing that cash derived from profit should be hoarded for acquisitions or research.
- But some of tech's biggest companies have grudgingly accepted the inevitability of dividends: Both Microsoft and Apple started issuing them regularly more than a decade ago.
Meta similarly announced it would start issuing dividends in its previous earnings report, on Feb. 1, and its stock took a leap.
- But Wednesday, CEO Mark Zuckerberg's promise of continued long-term investments in both AI and the metaverse made investors run for the exits.
What we're watching: These companies — along with Apple and Amazon — all see themselves as fighting for the lead in AI as the tech world's new platform.
- If that turns out to be as big as AI optimists believe, there will be plenty of market growth for all of them over time, no matter who ends up "winning."
- But they have to keep investors on board while footing the cost of that competition, and that's a game played by the calendar quarter.
Between the lines: The game's high cost of entry means it's decreasingly likely that a newcomer will upset the incumbents.
- Elon Musk's relatively tiny X.ai is reportedly close to raising a massive $6 billion round from leading Silicon Valley VC firms including Sequoia, per the Information.
- Yet even a historically huge investment like that represents a fraction of the sums Microsoft, Google and Meta have spent and plan on continuing to spend on AI.
What's next: For AI to deliver the kinds of returns everyone on Wall Street and in Silicon Valley now expects, companies across the economy will have to embrace it.
- On Microsoft's earnings call, CEO Satya Nadella cautioned that the "rate limiter" for AI adoption will be "culture change inside of organizations."
- "At the end of the day," he said, "companies will have to take a process, simplify the process, automate the process and apply these solutions. And so that requires not just technology but in fact companies to go do the hard work of culturally changing how they adopt technology."
