Microsoft headquarters in Redmond, Washington. Photo: David Ryder (Getty Images)
AI spending at big tech companies is in the spotlight, with Microsoft Corp. set to report quarterly earnings on Tuesday and needing to prove to a skeptical Wall Street that its AI costs are worth it.
Chipmakers partnering with Nvidia achieve highest profits in six years
Investors reacted badly to Google and Tesla’s huge AI spending last week. The Nasdaq had its worst day of 2024 after two of the “Magnificent Seven” companies reported their second-quarter earnings. Tesla investors reacted to the fact that the company’s huge AI spending was the main cause of its (vast) decline in profit margins. Google investors dumped the company’s shares due to slow growth in its YouTube division and concerns about how long it will take for the company to benefit from its AI costs. The stock price plummeted even as Google executives repeatedly asserted that the integration of Gemini AI tools had helped drive Google Cloud revenue to an all-time high and that AI overview for search had helped boost search revenue.
That means investors are becoming a little wary of the enormous costs of AI infrastructure. But there’s an irony to that caution: Analysts at major banks have repeatedly said that building out AI infrastructure will rocket tech stocks to new heights.
Microsoft CEO Satya Nadella would be wise to heed the warnings from Google’s earnings report, where Google CEO Sundar Pichai gave a vague response to a question about the AI bill, saying only that “the risks of underinvestment are significantly greater than the risks of overinvestment.” Microsoft would be better off if Nadella answered those questions head on.
Fortunately, Microsoft is one step ahead of the pack when it comes to monetizing AI. “Microsoft is one of the few technology companies seeing tangible benefits from its enterprise GenAI investments,” Deutsche Bank researchers wrote in an investor note last week. The company’s latest AI innovation is the AI PC, which was unveiled at its annual developer conference, Microsoft Build, in May.
Analysts at Deutsche Bank, Jefferies and Bank of America last week reaffirmed their buy recommendations on Microsoft shares and expect the tech giant to report another strong quarterly earnings report. Microsoft’s strong performance will be driven by the strength of its cloud computing division, Azure. Bank of America analysts expect Azure revenue to grow more than 31% year over year, with 8% of that coming from Microsoft’s AI integrations. Overall, Wall Street analysts surveyed by FactSet see Microsoft revenue growing 14.6% year over year to $64.4 billion.
Microsoft shares are up more than 200% since five years ago and more than 20% in the past year. They were trading around $430 on Friday. Bullish analysts at Jefferies see the stock rising to $550 over the next 12 months, while Bank of America has a $510 target price for Microsoft shares and Deutsche Bank has a $475 target.
