The biggest driver of headlines across the tech sector last year was the proliferation of artificial intelligence (AI). Many of the world’s largest companies see enormous opportunities in AI and are investing accordingly to participate in the AI revolution. What some investors weren’t prepared for, however, is the level of spending necessary to reap the windfall that AI is expected to bring in the next few years.
Against this background Microsoft (NASDAQ:MSFT) fell by 3.4%, Amazon (NASDAQ:AMZN) was down 2.5%, and alphabet (NASDAQ:GOOGL) (NASDAQ:GOOGL) fell 2.2% as of 1:05 p.m. ET on Thursday.
To be clear, there was very little company-specific news today that drove these so-called “Magnificent Seven” stocks lower (more on that in a moment). This supports the conclusion that investors are reacting to the quarterly results we report Metaplatforms (NASDAQ:META) and what it means for other major players in the AI space.
To make money, you have to spend money
Meta Platforms released its first-quarter report after the market closed on Wednesday, and while the results were better than expected, there was one revelation that surprised investors.
The company reported revenue of $36.4 billion, up 27% year-over-year. Spending rose more moderately, rising just 6%. This benefited operating margins, which rose to 38% from 25% in the same quarter last year. This also helped boost Meta’s earnings as earnings per share (EPS) rose 114% from $4.71.
The results handily beat expectations, with analyst consensus estimates calling for revenue of $36.14 billion and earnings per share of $4.32. However, it was an update to the company’s full-year spending plans that sent the stock reeling.
Like its “Magnificent Seven” peers, Meta is at the forefront of generative AI and is eager to earn its share of the trillions of dollars the technology is expected to generate in the coming decade or so. However, as the saying goes, “there is no such thing as a free lunch,” and developing these systems is expensive. Not only the costs of the AI models themselves must be taken into account, but also the data center infrastructure required to maintain them.
Meta has already developed its large language model Meta AI (Llama) AI system, which is considered one of the best AI systems in the world – but that’s just the beginning. CEO Mark Zuckerberg noted: “We are investing and scaling a new product, but not yet monetizing it.”
As a result, Meta raised its full-year capital expenditure forecast to $35 billion to $40 billion, up from its previous expectations of $30 billion to $37 billion. Meta said: “We continue to accelerate our infrastructure investments to support our AI roadmap.” Meta also expects capital spending to be even higher in 2025 as the company works to capitalize on the opportunities presented by AI.
Together in the pursuit of AI
So what does this have to do with Microsoft, Amazon and Alphabet? The common thread that connects these technologists is their AI ambitions, and each of the three has also spent heavily to reap the rewards of AI. Fair-weather investors viewed Meta’s AI announcement as an indication that the AI-induced buying spree of big tech companies will negatively impact results – but we don’t have any evidence yet that this is the case.
Microsoft and Alphabet are expected to report quarterly results after the market closes today, and Amazon is in the black next week some Investors sold these stocks preemptively could also sell. However, long-term investors will recognize that this is just the beginning of a multi-year profit opportunity and that volatility is the price of entry.
The company-specific news for our trio of stocks was decidedly mixed:
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UBS Analyst Stephen Ju maintained his Buy rating on Amazon shares but raised his price target to $215, suggesting a 22% upside from Wednesday’s closing price. The analyst sees room for improvement across a broad cross-section of Amazon’s business interests this year. This follows two price target increases from other analysts yesterday.
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Chinese hackers accessed U.S. government emails last year, which Microsoft could have prevented, according to a Cyber Safety Review Board report. According to numerous reports, the company has lost face and is working to restore trust in its systems.
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The potential for a TikTok ban signed into law by President Biden today could benefit Meta Platforms, Amazon and Alphabet, according to a report in The Washington Post.
Investors would do well to take a step back and look at the bigger picture when it comes to AI. Analysts at Goldman Sachs Research suggests that if AI penetrates business systems and the rest of society, it could generate up to $7 trillion over the next decade. That’s quite a windfall for the companies willing to participate, including Microsoft, Amazon, Alphabet and Meta Platforms.
When viewed in the context of this significant opportunity, their valuations are compelling. Microsoft, Alphabet and Meta Platforms are selling at 33x, 23x and 22x expected earnings, respectively, while Amazon trades at about 2x expected sales. Additionally, all four stocks significantly outperformed the S&P 500 over the last five years.
Microsoft, Alphabet, Amazon and Meta Platforms are all industry leaders at the cutting edge of AI. Investors should ignore short-term volatility and buy on dips.
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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Danny Vena has positions at Alphabet, Amazon, Meta Platforms and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Goldman Sachs Group, Meta Platforms and Microsoft. The Motley Fool recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Why Microsoft, Amazon, Alphabet and Other ‘Magnificent Seven’ Stocks Plunged on Thursday was originally published by The Motley Fool