Shares of Alphabet and Microsoft soared in after-hours trading today after the AI-focused companies reported better-than-expected quarterly profits.
Microsoft is now up 4.3% to $416.25 per unit. Google's parent company rose 11.4% to $176.
Alphabet reported first-quarter 2024 revenue of $80.5 billion, up 15% year over year. Net income increased 53% to $23.7 billion, with diluted earnings per share of $1.89.Alphabet's stock price rose about 15% after the announcement.
Part of the enthusiasm for Alphabet's stock can be attributed to the introduction of a quarterly dividend of $0.20, payable starting June 17, 2024, on Class A, Class B, and Class C shares. The search industry also announced a $70 billion stock buyback plan. Microsoft also returned $8.4 billion to shareholders in the form of stock buybacks and dividends during the quarter.
Google Cloud's revenue reached $9.6 billion, a 28% year-over-year growth, which CFO Ruth Porat attributed to “increased contributions from AI.”
However, running AI requires technical talent and computing infrastructure, which also increases costs. Alphabet is trying to control those costs. “Looking forward, we remain focused on efforts to moderate the pace of expense growth to create the ability to meet the increased depreciation and expenses associated with higher levels of investment in technology infrastructure,” Porat said. I'm going,'' he said.
“In terms of capital expenditures, we reported $12 billion in capital expenditures in the first quarter, again driven overwhelmingly by investments in technology infrastructure, with the largest component being servers, followed by It’s a data center,” she reported. “The strong year-over-year increase in capital spending in recent quarters reflects our confidence in the opportunities that AI presents across our business.”
However, the organizational change that will move AI accounting from Google to Alphabet may make it a little harder to assess the cost of Google's AI ambitions going forward. “In our Google Services division, the AI model development team, previously under Google Research, will be incorporated as part of Google DeepMind and will be reported within Alphabet-level activities starting in Q2 2024. ,” Chocolate Factory said in its financial results announcement.
Meanwhile, Microsoft announced that its revenue for the third quarter of 2024 will be $61.9 billion, an increase of 17% year-on-year. Net income increased 20% to $21.9 billion, with diluted earnings per share of $2.94.
Microsoft's business groups worked as follows:
- Productivity and Business Processes: Revenue of $19.6 billion, up 12%
- Intelligent Cloud: $26.7 billion, up 21%
- Personal computing growth: 17% increase to $15.6 billion
The only significant failure in an otherwise strong quarter came from the More Personal Computing group's device sales, where sales fell 17%. Xbox content and services revenue increased by 62%. This is primarily due to Microsoft's acquisition of Activision Blizzard.
Amy Hood, Microsoft's vice president and chief financial officer, told investors to expect increased capital spending to support cloud and AI products. This forecast is incorporated into the company's financial statements.
“We expect capital spending to increase over the next few years to support the growth of our cloud offerings and our investments in AI infrastructure and training.”
During Microsoft's earnings conference call, Morgan Stanley's Keith Weiss asked for more details about Microsoft's AI investments, and Redmond said it would increase capital spending by more than 50% year over year amid talk of spending $100 billion. He noted that the company is on track to reach $50 billion. on an AI supercomputer.
“Obviously, the investments are significantly outweighing the contribution to revenue, but my expectation is that because the investments are getting so large, as a management team, we are looking at the potential opportunities underlying these investments. “So you can give us some input on how we're trying to quantify that,''' Weiss said.
CEO Satya Nadella responded by saying that on the training side, Microsoft “wants to essentially allocate the funding needed to train these large foundational models so that we can maintain our leadership position there.”
Microsoft CFO Hood added that it's important to consider the impact of that big spend beyond the quarterly impact and instead consider the opportunities for AI to impact every business process.
“That opportunity is represented by the amount of value we add, and I look forward to continuing to deliver that,” Hood said.
In other words, the opportunity will depend on how many people are willing to pay for AI-enhanced services.
The market reaction to Alphabet and Microsoft was much different than when Meta beat the stock following Wednesday's earnings report. Investors drove Meta's stock price down about 10% due to higher capital spending, in part due to the cost of AI infrastructure, and weaker revenues that were not expected to benefit from AI. ®
