Microsoft, Alphabet Shares Slide Amid Investors' Concern on High Cost of AI Development

By Jace Dela Cruz

Feb 01, 2024 01:24 AM EST

Tech giants like Microsoft and Alphabet discussed on Tuesday the popularity of their generative AI-powered products among consumers.

However, according to Reuters, investors are concerned about the escalating costs associated with developing this ever-growing technology.

(Photo : EVA HAMBACH/AFP via Getty Images)
A Microsoft logo adorns a building in Chevy Chase, Maryland on May 19, 2021. - Microsoft said it is retiring Internet Explorer, the browser it created more than 25 years and which is now largely abandoned as people instead use competitors like Google's Chrome or Apple's Safari

Alphabet, Microsoft Shares Drop

Alphabet witnessed a 6% drop in its shares, while Microsoft experienced a 1% decline, influencing a broader downturn in heavyweight tech stocks, including Apple, Meta, and Amazon.

Both Microsoft and Alphabet disclosed significant increases in their cloud revenue for the December quarter, surpassing Wall Street's expectations.

Despite these positive outcomes, costs still surged, underscoring the heavy bets these companies make in servers, data centers, and research to stay competitive and attract new customer investments. That dampened investor expectations on AI, which drove a stock rally to record highs in recent months.

The valuation of Alphabet's shares, which experienced a 58% rise in 2023, stood at 22.26 times expected earnings. In comparison, Microsoft had a forward PE of 33.09, Meta 22.46, Amazon 42.60, and Apple 27.73.

READ NEXT: Microsoft's Activision Acquisition and Investments on AI Drive 18% Revenue Surge

Here's What Analysts Have to Say

Analysts noted the challenge of maintaining a high AI multiple when larger cloud players achieve faster growth with bigger revenues.

Gene Munster, a managing partner at Deepwater Asset Management, expressed the investor desire for more significant contributions from AI. He noted that while Microsoft's AI efforts are still in the early stages, there is an indication of an uptick.

The decline in Alphabet and Microsoft's stock values was poised to erase approximately $66 billion and $38 billion, respectively, from the companies' market capitalization.

Additionally, chipmaker AMD experienced a 3% fall in its shares. Analysts had initially anticipated AI chip sales ranging from $4 billion to $8 billion, and this adjustment influenced the stock's valuation.

Alphabet's capital expenditure for the reported quarter surged by 45% to $11 billion, with the company's Chief Financial Officer Ruth Porat indicating that spending would be higher in the upcoming year compared to 2023. 

READ MORE: Microsoft Launches Copilot AI Assistant for Small Businesses and Consumers 

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