Google and Microsoft ease the pain of AI capital

The two tech giants began rolling out generative AI services for enterprise and consumer customers a year ago. Neither company has yet disclosed specific financial details about what kind of business these services will generate, but the charges are clear. Both companies reported record capital spending for the March quarter in their respective reports Thursday afternoon. Microsoft cut $14 billion between capital expenditures and equipment acquired under finance leases in the most recent quarter. That's more than the company was spending in his year just five years ago. Alphabet, Google's parent company, spent $12 billion, nearly double the same period last year.

However, both stocks rose following these reports, in sharp contrast to what happened with Metaplatform. Shares of the Facebook and Instagram parent company fell more than 10% on Thursday following its own first-quarter report, which included a 12% increase in this year's capital spending budget. The difference is that Meta also issued a relatively disappointing earnings forecast for the second quarter. And the hurdles to clear are much higher, with the stock up 39% since the beginning of the year ahead of the earnings release. Shares of Microsoft and Alphabet rose 6.1% and 11.7%, respectively, over the year.

Google's parent company in particular released a strong report. Revenue was $80.5 billion, up 15% from a year earlier, beating Wall Street expectations due to improved growth in search advertising, YouTube and cloud businesses. The company also showed notable improvements in cost control, with operating margins of around 32% (the highest in nearly three years) and headcount down by 1%. A new $70 billion share buyback and the company's first dividend in 25 years provided additional benefits. Alphabet shares soared more than 12% in the after-hours, marking the best post-earnings reaction in at least five years, according to FactSet.

Microsoft stock rose more than 4%. Sales and operating profit also exceeded Wall Street's targets, and sales of the company's much-anticipated cloud computing service, Azure, rose 31% year-on-year, beating analysts' expectations by 2 percentage points. The company also said it expects to end the fiscal year in June with operating margins 2 percentage points higher than a year ago, despite increased investments in AI. The company also said it expects sales and operating profit growth to remain in double-digit territory next fiscal year. Currently, profit margins are around 42 cents a year, no small feat for a company with annual sales of more than $236 billion. dollars of that revenue.

Still, the reaction to Meta's results shows that investors are watching AI spending closely and that there are limits to it. The first question asked by analysts during both Google and Microsoft's earnings calls on Thursday was about future spending plans. Both numbers are rising. Ruth Porat, Alphabet's chief financial officer, said capital spending for the remaining quarters of the year will be “about the same or higher” than recent levels. That would represent about $48 billion for the full year, or 14% of Alphabet's expected revenue of 10%. last year.

Microsoft CFO Amy Hood said capital spending grew “significantly” this quarter and is expected to grow further next year. Wall Street has already predicted about $47 billion for Microsoft in the current calendar year, about 18% of the company's forecast. With revenue growing by 15% compared to the previous year, Hood said positively that “near-term AI demand is slightly outpacing our available capacity.”

Big Tech investors expected this situation to continue for a long time.

Email Dan Gallagher at dan.gallagher@wsj.com.