The "Magnificent Seven" all seem to be grouped together at times, but as the artificial intelligence (AI) races heat up, each of these marquee companies is fighting the others for AI supremacy.
That's why investors are so tuned in to the details of each company's earnings results; specifically, whether each company's investments in AI are paying off. That requires looking at two things, obviously: the spending, and the payoff.
While recent third-quarter results appear to show strong AI growth across leaders Alphabet (GOOG +1.44%) (GOOGL +1.71%), Microsoft (MSFT +2.11%), and Meta Platforms (META +2.41%), only Google parent Alphabet saw a post-earnings surge of about 3% on Wednesday after reporting Tuesday, while Microsoft and Meta were both down about 5% and 4%, respectively, by midday Thursday after their reports Wednesday night.
The disparity appears to be for a very specific reason.
NASDAQ: GOOG
Key Data Points
AI-powered growth for all
First, the positives: Both Alphabet and Microsoft showed an acceleration in their cloud-related revenue, as you can see below.
|
Cloud Segment |
June 2024 Growth (YOY) |
September 2024 Growth (YOY) |
Improvement |
|---|---|---|---|
|
Google Cloud |
28.8% |
35% |
6.2 points |
|
Microsoft Azure |
29% |
33% |
4.0 points |
Data source: Company press releases. YOY = year over year.
While Meta's AI-powered advertising-heavy revenue growth decelerated from 22% in the June quarter to 19% in September, its top and bottom lines still exceeded analyst expectations.
So, big picture, all three companies showed strong growth in their most AI-oriented segments, with Microsoft's and Google's clouds accelerating, and Meta's core business exceeding expectations.
While Microsoft and Google use AI across their businesses, it's a bit difficult to ascertain the specific AI impact within Google Search and YouTube, or Microsoft Office or Dynamics, even though AI "copilots" are increasingly being integrated into these platforms. So their clouds seem to be a good proxy for the current AI "returns."
The difference: Spending
While all three companies reported strong growth, it was their reported and forecast capital spending numbers that likely explain the difference in their stock performance.
Starting with Meta, it increased its outlook for capital spending to $38 billion to $40 billion for the year, up from a prior range of $37 billion to $40 billion. But CFO Susan Li's commentary regarding the 2025 spending outlook was quite aggressive. She said, "We expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses of our expanded infrastructure fleet."
Meta is already spending heavily on its AI infrastructure to power its core social media platforms, as well as its Llama generative AI models and even its Reality Labs segment. So for management to expect a "significant acceleration" was much more aggressive than investors wanted.
Meanwhile, there was a stark contrast between Alphabet's and Microsoft's capital spending in the September quarter, too.
|
Capital Spending |
June 2024 |
September 2024 |
QOQ Growth |
September YOY Growth |
|---|---|---|---|---|
|
Alphabet |
$13.2 billion |
$13.1 billion |
(0.9%) |
62.1% |
|
Microsoft |
$13.9 billion |
$14.9 billion |
7.6% |
50.5% |
Data source: Company press releases. YOY= year over year. QOQ = quarter over quarter.
This is where things get interesting. Even though Alphabet's cloud growth accelerated more than Microsoft's, Alphabet's capital expenditures actually declined slightly from the prior quarter, though they were up a healthy 62.1% over the prior year. Still, the recent figures indicate Alphabet is currently moderating its spending. But Microsoft saw steady 7.6% growth over the prior quarter, indicating it continues to grow its outlays for AI infrastructure.
On its conference call, Alphabet's new CFO, Anat Ashkenazi, indicated that the fourth-quarter spend would be about flat quarter to quarter. And while she also said spending would likely rise in 2025, she declined to say by how much. Meanwhile, Microsoft noted it would see another sequential increase in spending in the December quarter and much more in 2025.
What could make the difference
One thing that may explain the difference is that both Microsoft and Meta are somewhat late to the game in designing their own custom AI accelerators. On the other hand, Alphabet has been designing its custom tensor processing units (TPUs) since 2015.
Producing more custom in-house chips is significantly cheaper than buying Nvidia GPUs, which is likely what Microsoft and Meta are mostly doing today. Thus, they are spending more on their respective infrastructures. In fact, the high prices for Nvidia chips is what recently led one analyst to downgrade Microsoft shares to neutral.
That skepticism appears to have been borne out by earnings. But while Alphabet appears to have the upper hand today, Microsoft and Meta are now looking to make more of their own custom chips, too. So, investors should monitor each company's announcements regarding custom AI chips, and how their capital spending evolves.
The good news? End AI demand seems strong for all three companies today.
