Microsoft, Alphabet both show a growing financial dependence on AI

Artificial intelligence is becoming more than just a talking point for Big Tech companies.

Earnings from Microsoft and Alphabet, released after the market close Tuesday, both underlined how quickly interest in AI is driving growth at both companies. Reaction to those releases, though, demonstrated just how high investor expectations are, as well.

Both Microsoft and Alphabet surpassed analyst expectations for earnings per share and revenue, sometimes by a fairly hefty margin. Microsoft reported EPS of $2.93 versus expectations of $2.78. Alphabet, meanwhile, had earnings of $1.64 per share, compared to an expected $1.59. Revenues for both companies were about $1 billion higher than expected.

Microsoft also showed faster growth than expected in its Azure Cloud unit, which jumped 30% (versus an expected 27.5% bump), topping its Q1 growth numbers. That could point to additional AI activity at the company, thanks in part to its relationship with OpenAI.

“We’ve moved from talking about AI to applying AI at scale,” said Satya Nadella, chairman and chief executive officer of Microsoft in a statement. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”

The company did not break out the performance of its Copilot product (a generative AI assistant that is integrated into Microsoft 365), but Microsoft Office and commercial revenues were up 15%, which could be, in part, because of adoption of that tool by corporate customers.

Google’s parent company, meanwhile, earned $9.2 billion in its cloud unit, topping expectations by about $250 million. And the company is expected to talk more about its AI roadmap and monetization efforts on its call with analysts.

 “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud,” said Sundar Pichai, CEO of Alphabet. “Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”

Investors react

Despite the solid beats, neither stock saw a lot of positive activity in after-hours trading.

Google’s stock was 4% lower after the bell, as ad revenue was slightly lower than expectations. 

Microsoft shares initially jumped after hours, before settling back to a roughly even level.

It’s all about AI

Shareholders have been looking at key AI-centric metrics for a few quarters now from companies like Alphabet and Microsoft (along with Nvidia, AMD, and several others). As they evaluate these stocks moving forward, though, the performance of cloud initiatives, which help power AI networks, as well as monetization efforts for their own AI offerings will become increasingly important.

The Alphabet stock drop, though, shows that the focus on AI can’t come at the expense of other parts of the company. Investors are expecting those divisions to continue to outperform and won’t hesitate to slap wrists if they don’t.

The bigger question is how long can this sort of growth continue? The 25% to 30% growth figures for Azure and whatever numbers Gemini is able to post won’t last forever. It’s easy for investors to get spoiled by those sorts of numbers.

That’s a problem for a future date, though. The AI gravy train is seemingly speeding up, and each of the companies in the Magnificent Seven are set to feast on it.