By Lucy Adautin
Investor enthusiasm surrounding Big Tech’s financial gains from generative artificial intelligence (AI) was tempered, following warnings from Microsoft and Google regarding increased costs this year in the competitive race to develop cutting-edge AI products.
Despite strong quarterly results from the rival tech giants on Tuesday, investors remained skeptical about the sustainability of growth, considering the substantial investments planned for data centers and servers this year to support the development and deployment of generative AI.
Shares in Microsoft were up about 0.7 percent shortly after Wall Street’s opening bell on Wednesday after the company reported strong cloud computing sales from customers eager to use its suite of software services that have been integrated with technology from ChatGPT-maker OpenAI.
Alphabet shares dropped more than 5 percent in early Wednesday trading after its advertising revenues narrowly missed expectations, even as it moves to integrate its Gemini generative AI into its advertising, search and cloud businesses.
Both Microsoft and Google cautioned that capital expenditure would increase in 2024 as they ramp up investments in the technological infrastructure supporting generative AI.
Microsoft’s prominent position in the generative AI race was solidified last year following its deal with OpenAI, to which it has committed up to $13 billion. Investor enthusiasm has propelled its share price up by more than 60 percent over the past 12 months, pushing its market value to $3 trillion and surpassing Apple as the world’s largest company this month.
Investors have been closely monitoring Microsoft’s cloud division, particularly its Azure platform, which is the primary driver of sales, for indications that its investment in OpenAI would translate into tangible financial returns.
In the final quarter of 2023, Microsoft’s cloud revenues rose 20 per cent to $25.9bn, ahead of analysts’ expectations for $25.3bn, with sales growth for Azure reaching 30 per cent.
Demand for Microsoft’s AI services boosted Azure revenues by 6 percentage points during the quarter, an acceleration from the roughly 3 percentage point boost in sales in the previous three months.
Google Cloud will also be a crucial growth driver for Alphabet amid rising demand for generative AI, and investors are waiting for the launch of its generative AI Gemini Ultra this year, the most advanced upgrade to its chatbot, Bard.
Alphabet and Microsoft customers were in “‘buy AI now, figure it out if it works later’ mode”, said Forrester analyst Lee Sustar. The companies had similar “AI-everywhere strategies” that would also pressure rival Amazon to “ramp up AI services to defend its cloud market share leadership”.
Microsoft chief executive Satya Nadella said Microsoft now had 53,000 Azure AI customers, more than a third of whom were new to the service over the past 12 months, and was seeing an increase in the number of “billion-dollar-plus Azure commitments”. But it expects revenue growth at its cloud division to decelerate slightly to 18-19 per cent in the current quarter, while Azure growth would remain stable.
Brett Iversen, vice-president of investor relations, said Microsoft was increasing its AI infrastructure capacity by investing in areas such as data centres and servers, but that had not yet squeezed margins thanks to rising demand for cloud services and “cost control” in other areas.
Semiconductor company AMD raised its AI chip sales estimates by $1.5bn for 2024 in an earnings report on Tuesday, saying that customers including Microsoft had moved faster than expected in their deployment of its new MI300 chips, which compete with Nvidia.
Microsoft chief financial officer Amy Hood said the company expected capital spending, driven by investments in cloud and AI infrastructure, to “increase materially”. Meanwhile, the company was “pivoting” to an “AI-first” workforce rather than hiring large numbers of people to focus on the technology, she added.
Total Microsoft revenue in the three months to the end of December climbed 18 per cent to a record $62bn, ahead of forecasts for $61.1bn. Earnings per share of $2.93 were well ahead of analysts’ forecasts for $2.77.