Google revitalizes "AI faith"! Will Microsoft and Meta's performance continue to gain momentum?

According to the Zhitong Finance APP, global investors have increasingly stringent expectations regarding when the billions of dollars spent by tech giants on artificial intelligence will translate into substantial sales and profit margins. This will dominate the earnings reports of tech behemoths Microsoft (MSFT.US) and Facebook's parent company Meta Platforms (META.US) after the U.S. stock market closes on Wednesday. The earnings report released by Google's parent company Alphabet (GOOGL.US) after the U.S. market closed on Tuesday showed that massive infrastructure investments related to AI, such as AI GPUs, are generating strong profits. Therefore, this report from Google can be seen as revitalizing the market's positive expectations for AI profitability. If Microsoft and Meta's performance clarifies the monetization prospects of AI, it will reignite the "AI faith" that has recently resurfaced, and the investment frenzy in AI is bound to create huge waves again.

Alphabet's earnings report released on Tuesday revealed significant information that revitalizes tech stock investors' faith in artificial intelligence. The company stated that its expensive attempts at AI are beginning to yield positive results, driving its cloud computing business's profitability to outperform analysts' general expectations. Additionally, under the active promotion of the Gemini AI large model, the usage scale of its flagship Google search engine has significantly increased.

According to analyst expectation data compiled by institutions, Microsoft's capital expenditure in the last quarter may be around $14.6 billion, indicating a potential increase of over 45% compared to the same period last year. Analysts generally expect Facebook's parent company Meta's spending to soar nearly 70%, reaching about $11 billion.

"Global companies have invested heavily in developing artificial intelligence—what we are really concerned about is who is profiting from it, who is truly achieving a return on investment, and what the real returns look like," said Brian Mobley, a client portfolio manager at Zacks Investment Management.

Given the massive spending on AI infrastructure, high valuations, and gradually slowing profit growth, the seven major tech giants (Magnificent Seven) are being tested in their status as global tech stocks and absolute leaders in AI. Since the second half of the year, investors have begun to adopt a cautious attitude toward the stock prices and performance prospects of these seven tech giants—especially regarding AI profitability scenarios. The "Magnificent Seven Stock Index" tracked by investment institutions has struggled to return to the historical highs seen in July.

"You have to prove that your large-scale capital expenditures and investments in AI are actually driving sales and upward revisions in performance guidance," said Paul Marino, Chief Revenue Officer at Themes ETFs. "If a publicly traded company can do this, I think it will be very successful."

Can AI Boost Microsoft's Azure Revenue Growth? This is the Focus of Investors

Investors buying Microsoft stock may be very eager to get answers regarding the revenue prospects and profitability pathways of AI. This stock is the second worst performer among the seven tech giants this year, only outperforming Tesla (TSLA.US), which has significantly underperformed the market, and has lagged far behind the broader U.S. market—the S&P 500 Index (S& P 500 Index).

Due to the market's dual negative weighing on when Microsoft's massive spending on artificial intelligence will translate into profits and the slowing revenue growth of Microsoft Azure cloud services, Microsoft's stock price has been in a long-term sideways trend this year, and has recently even trended downward. At fixed exchange rates, Microsoft's overall revenue in the third quarter is expected to grow only 1% compared to the same period last year. Last quarter, the revenue growth rate of Microsoft Azure cloud services was unexpectedly weak, and artificial intelligence seems to have failed to significantly boost the performance of Microsoft Azure cloud services and the advertising business related to the Bing search engine, which greatly affected Microsoft's stock price trend.

For the three tech giants Microsoft, Google, and Amazon, the market believes they are the beneficiaries of the artificial intelligence frenzy, second only to AI chip leader Nvidia. Since the AI boom swept the globe in 2023, these three global cloud computing giants, which have a market share far ahead of other cloud computing participants, have been aggressively purchasing Nvidia's high-performance AI GPUs and focusing on building ecosystems for B-end and C-end software application developers related to AI, aiming to comprehensively lower the IT technical barriers for developing AI application software across various industries. Therefore, in the eyes of investors, the three tech giants occupying a huge share in the cloud computing field will undoubtedly benefit from the massive scale of software and cloud AI training/inference computing power expenditures brought about by global enterprises' layout of AI technology.

Among them, Microsoft, leveraging its status as a major shareholder of OpenAI, launched the Azure OpenAI Studio cloud service based on ChatGPT core technology last year, which is essentially a new AI-enhanced version of Azure. Azure OpenAI cloud service is a reinforced cloud computing service provided by Microsoft that integrates OpenAI's proud GPT series AI large models, allowing users to call OpenAI's incredibly powerful latest version AI large language models through REST API, including the GPT-4o/4, GPT-4 Turbo with Vision, GPT-3.5-Turbo, and Embeddings model series. Azure OpenAI Studio can be said to be specifically designed for enterprise-level AI software developers targeting various industries and C-end AI application software developers targeting different groups. With the integrated resources of Azure OpenAI and cloud GPU computing power resources, the entire development process does not require starting from scratch to build and deeply train complex and cumbersome AI large models, significantly lowering the barriers to AI application development.

As enterprises and individual users gradually realize the significant improvement in work efficiency brought by AI since 2023, it is expected that AI technology will soon be widely applied across global economies and markets. Therefore, the critical point for the explosive growth of various types of AI software based on AI seems to be getting closer to us, and the cloud giants dedicated to building AI software development ecosystems, For giants like Microsoft, Google, and Amazon, the market is eagerly anticipating their "iPhone moment"—the time when both performance and stock prices soar together. There is a pressing desire to see increasingly positive signals and trends regarding AI profitability in their financial reports. Google has already demonstrated through actual performance that cloud services can indeed benefit from this unprecedented AI boom.

According to a recent forecast by the well-known research firm IDC in its "Worldwide Artificial Intelligence and Generative AI Spending Guide," the firm expects that by 2028, global spending related to artificial intelligence (AI)—focusing on AI-supported applications, AI chips, and other AI infrastructure, as well as related IT and business services—will at least double from current levels, reaching approximately $632 billion. AI, particularly generative AI (GenAI), is rapidly integrating into various end devices and products, with IDC projecting a compound annual growth rate (CAGR) of 29.0% for global AI spending during the forecast period from 2024 to 2028.

IDC points out that software or applications will be the largest category of AI technology spending, accounting for more than half of the entire AI market in most forecasts. IDC expects the five-year (2024-2028) CAGR for AI software to reach 33.9%.

In a report released on October 22, the analyst team led by Brent Bracelin at Piper Sandler wrote that given the rapid growth of capital expenditures in AI infrastructure this year, it is "understandable" that investor anxiety has intensified.

Nevertheless, they still believe that Microsoft's excess spending risk in AI is limited, as the company has already made substantial investments in buildings and land. Additionally, its strong operating cash flow provides the company with "flexibility for positive investments while increasing earnings per share and capital return," the Bracelin-led analyst team stated.

The analyst team led by Tyler Radke at Citigroup believes that market expectations for Microsoft's quarterly earnings report are actually mixed, not entirely positive. They agree that AI spending is necessary and expect reassuringly optimistic commentary for Azure cloud services in the second half of this year. The Radke analyst team views "stock price pullbacks" as an important opportunity to buy Microsoft on dips.

Overall, analysts expect Microsoft to report total revenue of $64.5 billion and adjusted diluted earnings per share of $3.11, indicating that the growth rates for these two core performance metrics are significantly lower than in previous quarters.

Can AI Continue to Drive Meta's Advertising Revenue Expansion?

Market expectations for Meta's performance are even more fervent, with advertising revenue driven by AI technology consistently exceeding expectations. With the enormous AI revenue potential from over 3 billion users, the stock has risen 64% this year, significantly outperforming the broader U.S. stock market. In its last earnings report, the company stated that AI technology has attracted more businesses to increase their advertising spending, resulting in significant growth data for its advertising business, providing more time and space for large-scale AI investments to achieve stronger returns

Meta and Microsoft spending will rise—capital expenditures for both companies are expected to increase significantly

Meta's advertising revenue in the third quarter has attracted significant attention from investors, as advertising is the core revenue engine for Meta. Currently, the market is focused on whether AI can help Meta's advertising revenue continue to exceed expectations. The AI technology embedded in Meta's advertising tools is expected to enable more advertisers to efficiently place ads and reach a broader audience. Additionally, the rapid expansion of Instagram Reels, which is as popular as TikTok, along with new technology products from Meta aimed at advertisers, is also expected to drive growth in advertising revenue.

In the digital advertising space that Meta relies on, the powerful open-source AI model launched by Meta, which has 3 billion users, along with various developer tools, is pushing advertisers to cover a larger potential user base, providing Meta's advertisers and users with a new AI-based advertising recommendation experience. This is an important logic behind Wall Street's continued bullish outlook on Meta's stock price.

Why are more and more businesses starting to use Meta's advertising tools on a large scale? The main logic lies in the fact that with the support of Meta AI, an AI chatbot, advertisers hope to use this tool to accurately reach a larger potential user base (after all, the user base of Meta's software ecosystem exceeds 3 billion). Research data shows that most advertisers plan to increase or maintain their advertising spending on Meta's digital advertising platform, which may help achieve stronger-than-expected performance in the third quarter and keep Meta on a positive growth trajectory in the second half of the year and into next year.

Earlier this year, this tech giant provided advertisers with powerful advertising tools enhanced by artificial intelligence technology, as well as Meta AI, a chatbot similar to ChatGPT, which can answer user questions more accurately and recommend products that users need.

Many Wall Street analysts believe that Meta AI, launched by Meta, which has over 3 billion users globally, may become the most popular AI chatbot in the world, with its popularity expected to far exceed that of ChatGPT. This is also the core logic behind analysts' optimism about Meta's stock price, as advertising and software applications are undoubtedly areas where Meta excels. Therefore, with a massive user base of 3 billion, Meta is in the best position for AI monetization.

In a report on October 22, analysts from Bank of America, led by Justin Post, wrote that although investors are bargaining for more evidence of AI advantages, "the overly high expectations and potential for a generally conservative outlook for fourth-quarter performance" pose a threat to recent stock price fluctuations Analysts generally expect Meta's third-quarter revenue to be around $40 billion, indicating a year-on-year growth of approximately 18%; it is widely anticipated that Meta's diluted earnings per share for the third quarter will grow nearly 20%, reaching $5.24.

Moubry from Zacks Investment stated, "Ambitious Meta has a long way to go in terms of investment in artificial intelligence. This is one of the reasons we are closely monitoring their progress, and why their genuine forward-looking guidance on AI monetization will become increasingly important."

Of course, both companies face the risk of disappointing investors with their spending. Compared to the AI spending frenzy at Google—where the CEO has emphasized that the risks of under-investing in AI far outweigh those of over-investing—Meta and Microsoft’s expectations for AI spending may not be as striking, especially since Meta also has to manage substantial R&D expenditures in VR and AR. Some analysts believe they may not be able to sustain sufficient funding, which could be seen as a significant sign of falling behind in the AI competition trend.

"CEOs of tech companies are more likely to be fired for under-investing in AI than for over-investing," said Shana Cissel, president and CEO of Banrion Capital Management. "Because right now, that is the deciding factor."