Google's higher-than-expected spending shakes the "AI faith" - Can Microsoft's financial report stabilize morale?
Google's stock price plummeted last week due to higher-than-expected expenses, putting pressure on tech giants across the board. While facing pressure, Microsoft needs to demonstrate that its AI-related expenses are translating into sales growth. Investors will closely monitor Microsoft's financial report, as well as the subsequent performance of Meta Platforms, Apple, and Amazon. The Nasdaq 100 index fell by nearly 8%, with large-cap stocks being sold off leading to market instability. In addition, investors are also awaiting the Federal Reserve's interest rate decision. Microsoft's financial report will kick off a crucial week, with Wall Street expected to closely watch the sales growth of the Azure division
According to Zhitong Finance and Economics APP, after the market value of the Nasdaq 100 Index evaporated by $2.3 trillion, investors are anxiously awaiting the latest financial report from Microsoft (MSFT.US) after the U.S. stock market closes on Tuesday, hoping that this software manufacturer can turn the situation around.
As traders are increasingly concerned that tech companies have not seen returns from their significant investments in artificial intelligence, Google (GOOGL.US) plummeted last week due to higher-than-expected expenses, exacerbating the general sell-off of tech giants. This puts Microsoft to a tougher test as the company's current valuation is quite high, about 32 times the expected earnings. Microsoft needs to prove that the expenses related to artificial intelligence are translating into sales growth for its Azure cloud business.
Ted Mortonson, Managing Director of Robert W. Baird, said, "Microsoft's performance must significantly exceed expectations, they must demonstrate the monetization of generative artificial intelligence." He added that last week's sell-off increased the pressure on the performance announcement on Tuesday. Microsoft is "the second most over-owned company globally after Nvidia (NVDA.US). So these two companies must present some good data. You need to see Azure business accelerating growth beyond Wall Street's expectations to change the situation."
Before the recent industry sell-off, Microsoft's stock price had risen by about 24% this year, and current options data indicate that the implied daily volatility of the stock is about 4.6%.
Microsoft's financial report will kick off a crucial week for the industry. The sell-off of large-cap stocks has caused the Nasdaq 100 Index to drop by nearly 8% from its high point about three weeks ago. After Microsoft's financial report, Meta Platforms (META.US), Apple (AAPL.US), and Amazon (AMZN.US) will all announce their performance later this week, while investors are also waiting for the Federal Reserve's interest rate decision on Wednesday local time.
Investors are expected to closely monitor the sales growth of the Azure division. Compiled data shows that Wall Street currently expects this business to grow by 30% year-on-year in the fourth quarter. Investors also hope to see artificial intelligence's contribution to Azure higher than the 7% reported in the previous quarter.
A strong performance on these indicators is expected to help Microsoft better demonstrate its path to monetizing expenses on artificial intelligence compared to some competitors. The software company is in an early lead in releasing generative artificial intelligence products, with its investment in ChatGPT owner OpenAI and its nascent Microsoft 365 Copilot (an artificial intelligence assistant for Office programs) driving demand for Azure.
Martin Currie fund manager Zehrid Osmani said, "Microsoft's investment in OpenAI has given it a first-mover advantage. It also has the most natural cross-selling opportunities from artificial intelligence, offering its over 400 million Microsoft 365 paid users a $30 Copilot per month."
Investors will also closely monitor capital expenditures. In the last quarter, Microsoft's spending (excluding leases) was close to $11 billion. Management has indicated that capital expenditures will increase next year as demand for artificial intelligence services exceeds Microsoft's data center capacity, necessitating increased spending on data centers.
Synovus Trust senior portfolio manager Daniel Morgan is optimistic that Microsoft will strike a balance between artificial intelligence spending and investment returns.
"I expect Microsoft's financial data to be strong - in terms of disclosing the growth rate of artificial intelligence, they have consistently been ahead of the curve compared to their spending, especially in the Azure data center field."
However, he is more cautious about the performance of other large tech companies later this week.
"When you see Amazon and Apple's financial reports later this week, I don't know if Wall Street will be satisfied with the investment returns their new artificial intelligence product roadmaps will provide to offset all the capital expenditures they plan to make."