Alphabet, Microsoft earnings show hefty AI bets are driving growth

Alphabet and Microsoft ignited a rally in technology stocks on Friday with earnings that showed big AI investments were driving growth, allaying doubts that their costly bets would take time to pay off after a soft forecast from Meta Platforms.

After pouring billions of dollars into the infrastructure needed to support AI applications, both Alphabet and Microsoft reported that their quarterly revenue growth was outpacing expectations as more users turn to services including the Copilot AI assistant and the Gemini chatbot.

AI services accounted for 7 percentage points of the 31% jump in revenue at Microsoft's Azure cloud-computing platform between January and March, finance chief Amy Hood said.

Read: Former Google engineer indicted for stealing AI secrets to aid Chinese companies

She added near-term AI demand was a bit higher than the company's capacity, which held back growth in the quarter and highlighted the need for spending to expand its infrastructure.

At Google, cloud revenue jumped about 28% with strong growth in Google Workspace, where the Alphabet unit offers a slew of AI features powered by its large language model Gemini.

The results contrasted with a warning of higher spending and softer-than-expected growth from social media giant Meta (META.O), opens new tab, whose stock tumbled 10% on Thursday.

"This quarter illustrated how demand remains high for generative AI from Microsoft customers, and we continue to believe that Microsoft sits as a leader in this GenAI environment," D.A Davidson analyst Gil Luria said.

"Meta is indicating the results of further increased investment may be years away while Microsoft and Google are showing them right now."

Shares of Alphabet rose 12% in premarket trading as it sweetened the pot for analysts with its maiden dividend and a $70 billion stock buyback.

The company was on track to add around $200 billion to its market value, which would vault it past the $2 trillion mark.

Read: Alphabet, Meta ad sales in Q4 unlikely to reflect gen AI investments

The world's fourth most valuable firm flirted with the milestone on an intraday basis over three years ago although it never closed above that level, according to LSEG Datastream.

Microsoft gained nearly 4% and was set to add nearly $120 billion to its market value.

The results sparked a 1% to 3% jump in tech stocks such as Amazon.com and Apple, which will report earnings on Tuesday and Thursday, respectively.

AI chip stocks Nvidia, Advances Micro Devices (AMD.O), opens new tab and Marvell Technology also rose between 1% and 2%, riding on optimism that an ongoing boom in spending by tech giants would power demand for their semiconductors.

"The three hyperscalers (major cloud companies) we've heard from thus far all highlighted a similar message on AI capital expenditure - this is an arms race, the AI opportunity is enormous, and spending will continue to be aggressive/ahead of market expectations," Bernstein analyst Michael Chiang said.

Microsoft's capital expenditures grew by $300 million from the previous quarter to $11.5 billion, while Alphabet's capital expenditures were $12 billion, a 91% jump from a year prior.

At least 19 analysts raised their price target on Alphabet, pushing the median view to $176.65, compared with its last close of $156. Microsoft saw 17 price-target increases from analysts, with the median view on the stock now at $475.

Microsoft has a 12-month forward price-to-earnings ratio of 30.40, compared with Alphabet's 21.63.

Some analysts believe the more premium valuation was justified.

"Google Cloud showed improvement but less than the growth of Azure. Azure's enterprise focus and their differentiated capabilities played a part and we (and the market) await Amazon Web Services results," Bernstein analysts said.