Alphabet and Microsoft kick off a spate of big tech earnings updates on Tuesday, with analysts keeping a close eye on the pair’s embrace of artificial intelligence.
An AI gold rush has helped drive Microsoft beyond the $3trillion market capitalisation mark as investors bet the Windows owner will emerge the dominate force in the cutting edge technology, with attention turning to the performance of its Azure cloud business and the integration of its Copilot chatbot.
Alphabet – primarily made up of Google – has in contrast developed a reputation as an AI laggard among tech giant peers.
Investors will be keenly watching for developments in this area, as well as its key metric of advertising revenue growth.
Microsoft’s Azure cloud platform has an OpenAI Service that gives customers advanced language AI with OpenAI GPT-4, GPT-3, Codex, DALL-E, and Whisper models
The so-called Magnificent Seven tech stocks, which also includes Apple, Amazon, Meta, Nvidia, and Tesla, drove a substantial bulk of global equity gains in 2023 with a cumulative return of 109 per cent compared to the MSCI World’s 23 per cent gain.
Apple, Amazon and Meta will report their performance for the final quarter of last year on Wednesday, while Nvidia will report in late February.
Tesla, which is the second largest electric car maker in the world, last week reported profit of £1.6billion for the final three months of last year compared to £3billion in the previous year, and warned production would likely slow in 2024.
Analysts at Wedbush said: ‘Microsoft will be the most important earnings report and conference call (Apple being #2) in all of earnings season regardless of sector as the launch of Copilot success and early adoption of AI will have all the eyes of the Street globally tuned in with popcorn in hand.’
They added that forecasts of 27 per cent revenue growth for the AI-powered Azure cloud platform look ‘very beatable…given the level of activity we witnessed during the quarter’ and, as a result, the group should beat sales expectations of $61billion.
Microsoft, which is the biggest stock in S&P 500 and Nasdaq 100, has beaten earnings per share expectations for five consecutive quarters. It is forecast to post EPS of $2.77 this time around.
Wedbush said: ‘We also believe [Microsoft] is just starting to hit its next gear of growth with ChatGPT and AI also adding a new layer of growth to the MSFT story over the coming years.
‘Copilot continues to be a focus going forward as hundreds of organizations wait in line for various use cases with AI technology including Copilot for Power Platform, Power Pages, Dynamics 365, and Windows.
‘In a nutshell we view this as Microsoft’s ‘iPhone Moment’ with AI set to change the cloud growth trajectory in Redmond the next few years. We maintain our outperform rating and $450 price target on Microsoft.’
Chief market analyst at CMC Markets UK Michael Hewson added: ‘Investment in AI solutions is… likely to be a key area for Microsoft as it develops solutions for business as well as its Copilot chatbot getting integrated into its Windows operating system as it looks to replace Cortana.’
Alphabet pins hopes on ad spending
By contrast, Alphabet ‘lags behind its peers in marketing its cloud product and optimising it for AI’, according to senior market analyst at capital.com Kyle Rodda, thereby ‘driving underperformance compared to other mega-tech giants’.
Alphabet has instead had to rely on ad spending and a strong uptake of its subscription model for YouTube.
It has also been slashing jobs globally in the new year as part of a cost-cutting drive, adding to the industry blood bath experienced in 2023 when over 260,000 staff were axed.
Hewson said Alphabet’s shares have ‘continued to reverse the decline that we saw in 2022’, with shares up by around 75 per cent over the last 12 months, ‘although it hasn’t managed to regain the record levels we saw two years ago.
He added: ‘In the aftermath of its Q3 numbers the shares saw a sharp fall to 3-month lows, but the declines proved short-lived.
‘There wasn’t much to dislike about the Q3 numbers, apart from a miss on cloud revenue. which came in at $8.4billion, slightly below forecasts of $8.6billion, even though it was still well above last years $6.87billion.
‘For Q4 revenues are expected to come in at $85.3billion, with cloud expected to come in at $8.95billion, and profits of $1.59 a share.’
