Traders expect fresh insight into how broadly consumers and enterprises are adopting AI services — and what growth will look like from here. Scrutiny will be intense after Meta revealed it will spend billions more dollars than expected this year — triggering a stock selloff.
More disappointment could put bears in charge of the near-term narrative. Microsoft and Alphabet — which have a combined market capitalization of $4.8 trillion and together comprise 9.4 per cent of the S&P 500 Index — need to leap over high expectations to justify their rallies and validate the AI optimism fueling the market’s advance.
“This is the show-me quarter for Microsoft and Alphabet in particular, but also AI broadly,” said Michael Arone, chief investment strategist at State Street Global Advisors. “Their prices are reflective of a perfect environment, and a modest beat won’t be enough this time. They need to show their ability to surpass even elevated expectations. That’s critical for the market to rebuild its momentum.”
Microsoft fell 4.5 per cent and Alphabet fell five per cent on Thursday, pressured as Meta sank 15 per cent Besides stocks of firms like Nvidia Corp., which makes the chips used in AI processing, Microsoft and Alphabet are seen as the companies most likely to see a direct impact from AI in the near term.
However, should they indicate that the tailwind is smaller, further out, or more expensive than bulls are hoping — as Meta seemed to — that could be as damaging for the stocks as missing expectations.
“The prevailing question for investors remains ‘when does the Generative AI piece of the equation ramp more fully?’,” wrote Morgan Stanley analysts. “Investor patience for top-line results has worn thin.”
Microsoft has been aggressive in implementing its Copilot AI assistant into its products, including Office and its GitHub coding platform. Last quarter, AI demand fueled growth in its Azure cloud-services business, and investors will want to see a repeat performance on that front. It is expected to deliver growth above 15 per cent on both the top and bottom lines this time.
Alphabet is facing more skepticism on the AI front. Its offerings have featured some high-profile missteps, and the integration of AI into Bing and other search engines means it is on the defensive in protecting Google’s dominant market share.
While net earnings are expected to rise more than 30 per cent this quarter, with revenue up almost 14 per cent, any sign of disappointment could reinforce the narrative that it has fallen behind. The company’s past two reports have been met with sizable selloffs.
This divergence is reflected in their valuations. Microsoft trades at 30 times estimated earnings, above its long-term history and at a premium to the Nasdaq 100 Index’s multiple of 24.4. Alphabet is cheaper, with a multiple below 21, although it is essentially even with its 10-year average, which could limit additional upside.
“Investors have really paid up for Microsoft shares in particular. That suggests they’re really expecting it to deliver on the AI promise,” Arone said. “Alphabet has a lot it needs to prove” and investors “really want to see an AI lift.”
Microsoft is up four per cent this year while Alphabet is up eight per cent, outperforming the Nasdaq 100 Index. Overall, Wall Street remains extremely optimistic about both, with investors pointing to durable growth trends, strong balance sheets, and robust cash flow. Nearly 85 per cent of the analysts tracked by Bloomberg recommend buying Alphabet, with a higher percentage bullish on Microsoft.
“It’s possible prices have gotten ahead of themselves, but we’re very likely to get good earnings out of both companies,” said David Miller, chief investment officer at Catalyst Capital Advisors. “Interest rates are acting as something of a headwind, but I think the underlying tailwinds are strong enough to stay positive.”
Tech Chart of the Day
Meta shares fell 15 per cent on Thursday, their biggest intraday percentage drop since October 2022. Investors are spooked by its weaker-than-expected sales forecast and higher capital expenditures, and in the past, big post-earnings selloffs have not been buying opportunities.
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Published: 25 Apr 2024, 08:48 PM IST