Tech titans Alphabet and Microsoft propel stock rally with AI-driven earnings surge

AI fuels surge: Alphabet and Microsoft drove a surge in technology stocks on Friday with earnings reports highlighting substantial investments in artificial intelligence (AI) that are fuelling growth. This dispelled concerns that their significant expenditures might take time to yield returns, following a disappointing forecast from Meta Platforms.

Alphabet saw a 10 per cent increase and surpassed a market value of $2 trillion for the first time, according to LSEG data. The company further pleased investors by announcing its inaugural dividend and a $70 billion stock repurchase programme.

Microsoft also experienced a nearly 2 per cent rise, adding approximately $54 billion to its market capitalisation.

AI investment pays off

Having poured billions into the necessary infrastructure for AI applications, both Alphabet and Microsoft reported revenue growth exceeding expectations for the quarter. This is attributed to a growing number of users engaging with services such as the Copilot AI assistant and the Gemini chatbot.

AI services contributed 7 percentage points to the 31 per cent revenue increase at Microsoft's Azure cloud-computing platform in the first quarter of the year, as stated by CFO Amy Hood. She highlighted that near-term AI demand exceeded the company's capacity, necessitating further infrastructure investment to facilitate growth.

Google's cloud revenue surged by about 28 per cent, driven by robust growth in Google Workspace, which offers various AI features powered by its extensive language model Gemini.

These results stand in contrast to Meta's cautionary outlook, which led to a 10 per cent drop in its stock value on Thursday.

DA Davidson analyst Gil Luria commented, "This quarter showcased sustained demand for generative AI amongst Microsoft customers, positioning Microsoft as a frontrunner in this environment."

Furthermore, Bernstein analyst Michael Chiang noted a consistent message across major cloud companies regarding AI capital expenditure, emphasising an ongoing "arms race" given the vast opportunities in AI.

AI-driven growth trajectories

Both Microsoft and Alphabet demonstrated aggressive spending on AI, with Microsoft's capital expenditures reaching $11.5 billion and Alphabet's at $12 billion, marking a 91 per cent increase from the previous year.

Numerous analysts have raised their price targets for Alphabet and Microsoft, reflecting optimism about their AI-driven growth trajectories.

Microsoft, with a forward price-to-earnings ratio of 30.40, commands a higher valuation compared to Alphabet's 21.63. Analysts attribute this premium to Azure's enterprise focus and unique capabilities compared to its counterparts.

Microsoft is leading the charge in Big Tech's AI investment spree, with both Microsoft and Alphabet showing strong performance driven by their AI initiatives.

(With Reuters Inputs)