Stock prices for Alphabet and Microsoft both rose after the companies reported better than expected quarterly results Thursday.
Notably, Meta PlatformsMeta Platforms
stock stumbled as the company announced plans for an AI investment surge while offering disappointing guidance.
Alphabet and Microsoft are seeing more growth in demand for their generative AI services. Since neither company has achieved enough generative AI-related revenue to report it separately, there is potential for much additional growth.
Achieving an upside surprise depends on whether enough customers are willing to pay for AI-powered chatbots. To keep up with demand, both companies are making record-high capital investments this year, according to the Wall Street Journal.
To be sure, Alphabet and Microsoft enjoyed growth from different lines of business. Alphabet’s growth improved from Search, YouTube and Cloud. Google’s parent also surprised investors with a stock buyback and a dividend, reported Seeking Alpha.
Meanwhile, Microsoft enjoyed a surge in demand for cloud services powered by the tech giant’s Copilot, noted Seeking Alpha.
While demand for their cloud services remains strong, Microsoft and Google must home in on the highest-payoff generative AI applications if they hope to generate significant revenue from customers paying for their AI-powered chatbots.
Alphabet And Microsoft Beat Expectations
Both companies enjoyed faster growth with help from generative AI — mostly due to demand for cloud services.
Alphabet’s Search Recovery
Alphabet was proud of the company’s performance. “Our results reflect strong performance from Search, YouTube and Cloud,” CEO Sundar Pichai told investors.
Here are the key numbers:
Q1 2024 revenue: $80.54 billion — up 15% and $1.95 billion more thanexpected by London Stock Exchange Group.
Q1 2024 earnings per share: $1.89 — 38 cents per share more than the LSEG consensus.
YouTube advertising revenue: $8.09 billion — $289 million more than the StreetAccount estimate.
Google Cloud revenue: $9.57 billion — up 26% and $220 million above the StreetAccount estimate.
Alphabet’s board approved a cash dividend of 20 cents per share to be paid on June 17, to stockholders of record as of June 10. The company said it “intends to pay quarterly cash dividends in the future,”CNBC reported.
Google’s cloud unit is finally generating more significant profits. After “pouring money into the business for years to keep up with Amazon Web Services and Microsoft Azure,” Google’s cloud unit generated $900 million in operating income — more than quadruple the year before, noted CNBC.
“We are well under way with our Gemini era and there’s great momentum across the company.” Pichai told investors. “Google’s AI offerings boosted core search results in the quarter,” he added.
Generative AI Accelerated Microsoft’s Cloud Services Growth
Microsoft’s fiscal third quarter results also beat expectations. The tech giant benefited from “AI adoption across its cloud services, and its forecast largely matched Street estimates,” noted Seeking Alpha.
Here are the key numbers for Microsoft:
Q3 2024 revenue: $61.9 billion — up 17% and $1 billion more than analysts’ estimates compiled by Bloomberg.
Q3 2024 earnings per share: $2.94 — 11 cents per share more than the consensus, according to Bloomberg.
Q3 2024 commercial cloud revenue: $35.1 billion — $1.2 billion ahead of Wall Street estimates, Bloomberg noted.
Q3 2024 Intelligent Cloud revenue: $26.71 billion — and $470 million more than the consensus, Bloomberg reported.
Q4 2024 revenue forecast: A range between $63.5 billion and $64.5 billion — the midpoint of which is 14% above the Q4 2023 level, reported the Journal.
“Microsoft Copilot and Copilot stack are orchestrating a new era of AI transformation, driving better business outcomes across every role and industry,” CEO Satya Nadella said in a statement.
While providing hints, Microsoft has yet to report how much revenue the company’s AI services are delivering.
For example, the tech giant reported a 31% increase in Azure cloud services revenue —noting 7 percentage points of that growth came from AI services which was one percentage point above the previous quarter’s result, according to the Wall Street Journal.
Moreover, “Microsoft is hoping that Copilot will become a major contributor of new revenue to its software business,” the Journal noted.
Alphabet And Microsoft Record Investments In The Future
Investors do not seem to mind Alphabet and Microsoft’s record boost in capital spending. Google-parent Alphabet’s capital expenditures in the most recent quarter nearly doubled to $12 billion from the same quarter last year, the Journal reported.
Microsoft has been scrambling to add data centers and other infrastructure to host the rising AI demand. Microsoft said its capital expenditures were $14 billion — 30.4% more than the company spent in the previous quarter, noted the Journal.
Microsoft will keep spending heavily. Customer demand for AI services “is beyond what Microsoft is able to provide, pushing the company to pour more money into building its infrastructure,” CFOVictoryShares US 500 Enhanced Volatility Wtd ETF
Amy Hood told investors in an April 25 conference call wrote the Journal.
Investors did not appreciate the Meta’s boost in capital spending — sending the Instagram parent down about 11% on April 25. While Meta announced a more modest 12% boost to the company’s capital budget for 2024, investors did not appreciate the social network’s “relatively disappointing revenue forecast for the second quarter,” the Journal reported.
The lesson seems to be this: It is fine to boost capital expenditures if investors see them adding to revenue by building the capacity needed to soak up a surge in demand.
Can Alphabet And Microsoft Create Meaningful AI Chatbot Revenue?
Some analysts believe generative AI could add billions to Microsoft’s revenue. “They have been a leader in AI,” Gil Luria, a software analyst at D.A. Davidson, told the Journal. “They’re really the only ones that can put their finger on actual AI revenue.”
Last October I estimated Microsoft could add $30 billion in revenue from Copilot subscriptions. In March 2023, I found a Credit Suisse report estimating $40 billion in Copilot revenue by 2028. Last July, Macquarie Equity Research published a lower estimate of $14 billion — based on the assumption that 10% of Microsoft’s 382 million customers would pay Copilot’s $30 a month fee.
Sadly, users are not sure Copilot is worth the $30 a head per month Microsoft charges. In February 2024, companies testing Copilot complained of “shortcomings with software including Excel and PowerPoint and its tendency to make mistakes,” noted the Journal.
Meanwhile, Microsoft was not making money on the AI chatbots. Last October, Microsoft the very high cost of operating ChatGPT was driving losses for the company’s Copilot service, according to the Wall Street Journal.
Microsoft was losing “on average more than $20 a month per user” with some customers costing the software giant as much as $80 a month due to the high cost of computing required to run the ChatGPT models. In order to reduce losses, Microsoft intends to raise its monthly fee to $60, the Journal wrote.
Monetizing its Gemini chatbot seems further in Alphabet’s future. Nevertheless, the search giant sees opportunities to monetize AI through its advertising products, cloud offerings, and subscription services, noted Search Engine Journal.
Google One, the company’s subscription service, won more than 100 million paid subscribers in the first quarter of 2024 and “introduced a new premium plan featuring advanced generative AI capabilities powered by Gemini models,” Search Engine Journal reported.
Will Alphabet And Microsoft Stock Outperform?
Analysts are bullish on Alphabet and Microsoft.
Wedbush analyst Scott Devitt raised his price target to $205 a share. “AI is driving increasing contributions to growth,” Devitt wrote in a client note entitled Rumors of Alphabet’s Demise Greatly Exaggerated. If he is correct, Alphabet stock could rise 19.2%.
Microsoft’s average price target implies significant upside. The average price target is $477.41 among analysts offering three-month price targets — implying 16.4% upside.
If you envision both companies reporting specific revenue contributions from generative AI, their stocks could be a good investment.
