Key Takeaways
Meta Platforms, Inc.'s stock surged 8% after its earnings release, as its strategy of continued investment in the artificial intelligence sector appears to have gained investor approval. Growth in Microsoft's Azure cloud business slowed, coupled with high AI-related expenditures, leading to a sharp decline in the company's stock price. Sentiment surrounding artificial intelligence also spread across the broader tech sector, with market concerns that the technology could disrupt software industry business models, causing Salesforce's stock to fall.
This article mentions the following stocks: Meta Platforms, Inc. (META): +58.60 (+8.76%); Microsoft (MSFT): -58.16 (-12.08%) This earnings season presented a stark contrast in the performance of two tech giants within the artificial intelligence arena. Meta Platforms, Inc. saw its AI investments begin to fuel profit growth, propelling its stock price upwards by over 8%; conversely, Microsoft struggled to justify its recent spending plans to investors amidst slowing cloud business growth, resulting in a significant stock drop. Wall Street's debate over capital allocation towards AI and new technologies continues, with investors increasingly demanding tangible returns from the massive investments made over the past year. Meta's persistent strategy of betting on AI seems to have won investor support. The social media titan issued strong forward guidance and announced plans to invest between $115 billion and $135 billion in AI this year. This figure nearly doubles its projected investment for 2025. Investors had expressed concern over the company's hefty spending in prior quarters. However, a 24% year-over-year revenue increase, primarily driven by online advertising, appears to have alleviated those earlier worries. CEO Mark Zuckerberg stated that Meta will develop a range of new products this year, with the investments supporting its vision to build "personal superintelligence." While investors responded positively to Meta's spending plans, Microsoft's stock plummeted over 12%. Growth momentum slowed for the software giant's Azure cloud business, a key indicator watched by investors to gauge enterprise AI demand, decelerating from 40% in the first fiscal quarter to 39% this reporting period. Simultaneously, to support demand in its cloud and AI segments, Microsoft's capital expenditures and financing lease payments surged 66% to $37.5 billion for the quarter, exceeding the $34.31 billion consensus from Visible Alpha surveys. The company also indicated that current demand for AI-related computing power continues to outstrip supply, presenting challenges with compute capacity. Microsoft CFO Amy Hood noted that Azure's growth rate could have reached 40% if all the new GPU chips added in the first and second fiscal quarters had been allocated to that business. Microsoft's backlog of orders swelled to $625 billion, a massive 110% year-over-year increase, which includes a $250 billion cloud services agreement with OpenAI. OpenAI now accounts for 45% of Microsoft's commercial remaining performance obligation. Analysts at Evercore ISI suggested that market "concerns about OpenAI's ability to fund its commitments" might be one reason for the post-earnings stock plunge but also deemed this sentiment "overblown."
Spillover Effects Across the Tech Sector The divergent stock movements of the two giants, driven by AI dynamics, rippled across the broader technology sector. IBM's AI strategy garnered significant investor approval, sending its stock up 8%. The technology and consulting firm exceeded earnings expectations, reporting strong growth in its software and infrastructure units as it develops new automation tools and AI infrastructure. Goldman Sachs analysts stated that growth in IBM's software and infrastructure businesses, coupled with market share gains in consulting, puts the company "on track for a long-term growth transformation." Furthermore, IBM's AI-related business bookings more than doubled, increasing from $5 billion last year to $12.5 billion, seemingly validating the company's related investments. J.P. Morgan analysts characterized IBM as a "defensive name with improving exposure to software and AI tailwinds." On the other hand, despite Salesforce reporting better-than-expected earnings, its stock fell 11% as market fears that AI could disrupt the entire software industry's business model overshadowed the positive results. The software sector has faced sustained selling pressure in recent months, driven by concerns that next-generation AI tools could reduce demand for traditional software workflows and licensing services, thereby threatening the industry's longstanding revenue models. On the analyst earnings call, Salesforce CEO Bill McDermott defended the company's business model and its recent multi-billion dollar acquisition strategy—which some investors view as an attempt to re-ignite growth. He stated, "The proof is in the pudding. Enterprise AI will be the single biggest driver of ROI in the multi-trillion dollar AI infrastructure investment super-cycle."
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