Investors weary of cost of AI development as Microsoft, Alphabet shares fall

Tech giants on Tuesday talked up how customers are lapping up their generative AI-powered products, but mounting costs of developing the cutting-edge features irked investors hoping for a big boost to sales from the new technology.

Shares of Alphabet fell 6%, while those of Microsoft were down 1%, bringing down heavyweight tech stocks including Apple, Meta and Amazon.

Both Microsoft and Alphabet reported generous increases to their cloud revenue in the December quarter, beating Wall Street estimates, as customers lined up to test new AI features and build their own AI services.

But costs surged as well, highlighting the heavy investments these companies are making in servers, data centers and research as they compete fiercely for new customer dollars.

This hurt investor expectations that were fueled by the promise of AI, which powered a stock rally to record highs in recent months.

Investors of big tech companies are concerned about the price of developing AI technology. REUTERS

“A lofty valuation means even the slightest hint of disappointment will be seized on by investors, and Microsoft’s guidance for revenue growth in its cloud division to slacken a little in the current quarter was enough to see the shares dip modestly,” said Russ Mould, investment director at AJ Bell.

Gene Munster, a managing partner at Deepwater Asset Management, said he is looking for more from his firm’s stakes in Alphabet and Microsoft.

Shares of Alphabet fell 6%. REUTERS

“Investors want to see more contribution from AI,” he said about Alphabet. “Microsoft is still nascent, but showing some AI uptick.”

Alphabet’s shares, which rose 58% in 2023, were trading at 22.26 times expected earnings, compared with a forward PE of 33.09 for Microsoft, 22.46 for Meta, 42.60 for Amazon and 27.73 for Apple.

Shares of Microsoft fell 1%. REUTERS

“The only problem here is that Google reported earnings the same night as Microsoft … (it is) hard to get that AI multiple pixie dust if larger cloud players are growing faster off of larger revenues,” Bernstein analysts wrote in a note.

Google and Microsoft’s stock drop was set to wipe off about $66 billion and $38 billion in the companies’ market value, respectively.

Shares of chipmaker AMD, which boosted its 2024 forecast for AI processors to $3.5 billion on Tuesday, fell 3%. Analysts had previously expected AMD to sell $4 billion to $8 billion worth of AI chips, said Summit Insights analyst Kinngai Chan, adding the stock’s valuation is also pegged to those figures.

Alphabet’s capital expenditure in the reported quarter shot up 45% to $11 billion. Meanwhile, Chief Financial Officer Ruth Porat said spending would be notably larger this year than 2023.

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