Microsoft and Alphabet Urged to Demonstrate AI’s Financial Impact

In the past few months, there has been an apparent rise in investor confidence when it comes to megacap tech shares. Investor confidence has surged due to the belief that their forays into artificial intelligence (AI) will usher in a new era of accelerated growth and improved efficiency. 

Today, with Microsoft Corp. and Alphabet Inc., two prominent companies in the AI sector, getting ready to release their financial results after the market closes, there is a significant focus on confirming the high expectations regarding the impact of AI on earnings and revenue.

Microsoft, currently boasting a historic $3 trillion valuation, and Alphabet, whose parent company recently reached all-time highs, have both seen substantial support from the excitement surrounding AI. 

Investors, however, are eager for tangible evidence that the rally-driving technology will begin to make a significant impact on their financial performance.

Dan Taylor, the Chief Investment Officer of Man Numeric, which manages approximately $40 billion, expressed questions about the current state of big tech stocks and their use of AI. 

He believes that, while AI may contribute to growth in the future, these stocks have yet to demonstrate substantial earnings. Taylor identified the worth of the upcoming financial reports, underscoring the need for clarity on the potential impact of AI in 2024 or 2025.

For Microsoft, the stakes are particularly high. Trading at an elevated multiple and having introduced AI-supported assistant services, the company’s last quarter highlighted the increasing influence of AI on growth in its Azure cloud business. Investors now await confirmation of a repeat performance, if not an improvement.

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Tech Giants Grapple with AI Projections

In the past few months, there has been an apparent rise in investor confidence when it comes to megacap tech shares.

Both Microsoft and Alphabet are part of the so-called Magnificent Seven, driving the market’s advance with gains exceeding 70% since the end of 2022. The Nasdaq 100 Index, in contrast, has seen less than a 5% increase this year. Expectations for AI-related growth are substantial, with UBS Group AG forecasting a staggering $420 billion in AI revenue by 2027. 

Despite this optimism, consensus expectations for the upcoming quarter have seen little change in the past three months, suggesting that the enthusiasm over AI hasn’t translated into improved short-term projections.

JPMorgan Chase & Co. analysts view this as a pivotal year for Microsoft, referring to it as a “year of laying the foundation for GenAI adoption.” 

However, they note that the actual takeoff may be closer to 2025. If Microsoft signals that AI’s impact is further out than anticipated, it could put pressure on the stock, which currently trades at a high multiple of over 33 times estimated earnings.

Investors are cautious, recognizing the challenge of translating transformative AI potential into tangible products and profits. Michael Rosen, Chief Investment Officer at Angeles Investments, acknowledged the solid track record of these companies but warned of market reactions, stating, “given the run we’ve had, it wouldn’t surprise me to see markets selling on the earnings, even if the news is good.”

As tech stocks have rallied nearly 25% from their October low, and the Nasdaq 100 has added over $4 trillion in market value, the spotlight remains on the ability of tech giants to turn AI optimism into concrete financial results. Analysts continue to raise earnings estimates for tech firms, and as the largest mega-caps gear up to report results this week, the industry faces a critical juncture in proving the worth of their AI investments.

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