For the past year, investors have been buoying megacap tech shares, banking on their involvement in artificial intelligence (AI) to herald a new era of heightened growth and efficiency. Now, as Microsoft Corp. and Alphabet Inc., two titans in AI-related software, prepare to release their earnings reports after market close, the pressure is on for them to substantiate these expectations.
Both Microsoft and Alphabet have seen their stocks fueled by AI optimism. Microsoft, with its valuation soaring above $3 trillion, and Alphabet’s parent company reaching all-time highs, have enjoyed significant boosts from investor enthusiasm surrounding AI.
However, scepticism looms among some investors regarding the tangible impacts of AI on these tech giant’s earnings. Dan Taylor, Chief Investment Officer of Man Numeric, underscores the importance of clarity from the companies regarding the anticipated effects of AI on their financial performance in the coming years. He emphasizes that if the outlooks fail to support the high expectations, it could spell trouble for their stocks.
While expectations for AI-related growth are lofty, recent market performance hasn’t fully reflected these projections. Although revenue forecasts for both Microsoft and Alphabet suggest healthy growth, the excitement over AI hasn’t translated into improved near-term expectations, as indicated by Bloomberg data.
For Microsoft, analysts at JPMorgan Chase & Co. suggest that this year is about laying the groundwork for widespread AI adoption, with significant revenue impact expected closer to 2025. Similarly, Citigroup estimates substantial monetization opportunities for Microsoft’s Office Consumer Copilot by 2026, highlighting the long-term perspective required for AI-driven growth.
Should Microsoft indicate that the AI-driven inflection point is further out than anticipated, it could lead to downward pressure on its stock. With shares trading at elevated multiples and well above historical averages, any deviation from high growth expectations could unsettle investors.
Alphabet, though trading at a lower multiple compared to Microsoft, still faces similar scrutiny. The upcoming reports are critical for Alphabet, particularly after its last quarter’s results were viewed as disappointing, especially in the context of its cloud business.
In a broader context, the tech sector has experienced a remarkable rally, with the Nasdaq 100 adding over $4 trillion in market value since October. This surge has been partly fueled by rising earnings estimates, particularly as tech giants gear up to report their results.
Despite the optimism surrounding AI, challenges remain in translating transformative technology into tangible profits. As investors await the earnings reports, the focus shifts to how these tech behemoths are navigating the AI landscape and their strategies for sustainable growth in the evolving tech landscape.
