Alphabet, the owner of Microsoft and Google, has allayed investor skepticism about the huge sums it is spending on developing artificial intelligence after being boosted by strong corporate demand for its cloud computing services.
The combined market value of the two U.S. tech giants rose by more than $250 billion on Friday, a day after both reported double-digit revenue growth in their first-quarter results, significantly beating analysts’ expectations. Shares of Amazon and Nvidia, two other beneficiaries of AI spending, also rose by around 3 and 6 percent, respectively.
This week’s earnings reports from Microsoft and Alphabet have eased market concerns about the huge jumps in spending on infrastructure needed to run AI chatbots like OpenAI’s ChatGPT and Google’s Gemini, as well as several other companies experimenting with new AI models , is required.
Meanwhile, advertising revenue at Google also increased, suggesting that AI-powered chatbots are yet to be adopted by the world’s dominant search engine. Jim Tierney, head of U.S. growth at AllianceBernstein, said Alphabet’s first-quarter results released Thursday “raise no questions.” [about AI] relax. But there was so much good elsewhere, it gives them more time.”
Analysts at Baird estimate that capital spending by Alphabet, Amazon, Microsoft and Meta will be around $188 billion this year, nearly 40 percent more than in 2023. Electric car maker Tesla said it spent $1 billion in the first quarter Investing dollars in AI would accelerate spending on chips and automated driving.
The bullish outlook from members of the Magnificent Seven, the leading U.S. tech companies, could reignite the AI-powered rally that drove most of the U.S. stock market’s gains in 2023. This had stalled earlier in the year as pessimism spread about runaway technology spending and general concerns about interest rates and the conflict in the Middle East.
Alphabet shares rose 10 percent on Friday, a rise helped by the company paying the first dividend in its history and boosting its market capitalization above the $2 trillion threshold. Microsoft, the world’s most valuable company and OpenAI’s biggest supporter, rose nearly 2 percent, climbing back above $3 trillion.
The gains contrast with Meta’s 11 percent decline on Thursday after Facebook’s parent company said it would invest “aggressively” in new AI products like chatbots, despite generating limited returns from them so far. Susan Li, Meta’s chief financial officer, said capital spending would rise to $40 billion this year and rise even further in 2025, a forecast that dwarfed a 91 percent rise in net profit in the first quarter.
But those building cloud infrastructure embraced even bolder AI spending plans. Ruth Porat, Google’s chief financial officer, said capital spending would rise 50 percent or more this year to at least $48 billion.
“After more than a year in which I had to catch up [on AI]“We believe Google is starting to go on the offensive,” analysts at JPMorgan said.
Microsoft CFO Amy Hood announced a 79 percent increase in quarterly capital spending to $14 billion year-over-year, adding that even more data center funding is needed because “AI demand is slightly higher than our available capacity.” .
Demand for AI services from startups like OpenAI and Anthropic, as well as large enterprise customers, is growing so quickly that many necessary components, including chips and power supplies, have become scarce.
“If you don’t use AI actively and aggressively, you’re doing something wrong,” Nvidia CEO Jensen Huang said on Wednesday at an event hosted by the payments company Stripe.
“Your company won’t go bankrupt because of AI,” he said. “The business will go out of business because another company used AI. There’s no question about that.”
The first-quarter performance eases pressure on Alphabet CEO Sundar Pichai, who has come under fire for allowing Google to lose the lead in consumer and enterprise AI products to Microsoft following its $13 billion partnership with OpenAI .
Google was forced to stop imaging in its own flagship AI system, Gemini, after it sparked outrage over its inaccurate historical representation of different ethnicities and genders.
“Google has faced near-constant criticism for the inevitable AI-driven disruption of search, a series of PR missteps that raised questions about whether Google was too far behind on AI or too “woke” to pull it off,” said Bernstein analyst Mark Shmulik. “Google had to be perfect or it would be penalized again for micro-errors.”
Sales in Google’s core search advertising business also rose by 13 percent. Longer-term, however, Pichai still faces the question of whether chatbots that provide instant answers will impact usage of its ubiquitous search engine.
He told analysts that early experiments with generative AI to provide more comprehensive answers to search queries “improve user satisfaction.” He added: “I am confident and confident that we can manage the transition to monetization well here.”
Other companies are joining the AI buying spree. Both Apple and Amazon, which report their first-quarter results next week, have said they will also invest heavily in computing power and staff to improve their products.
However, Microsoft’s Azure offering is “the only software company benefiting from AI at this point in the cycle,” said Brad Sills, research analyst at Bank of America. “Microsoft remains ahead in this massive new cycle.”
Additional reporting by George Steer in New York, George Hammond in San Francisco and Philip Stafford in London