Google and Microsoft Cushion Their AI Capital Pains

The artificial intelligence race is getting more expensive for all. Google and Microsoft’s latest results managed to take some of the sting out of the rising price tag.

The two tech giants began rolling out generative AI services to corporate customers and consumers a year ago. Neither is yet disclosing specific financial details of what kind of business those services are generating, but the bills are clear. Both reported record capital expenditures for the March quarter in their respective reports Thursday afternoon. Microsoft dropped $14 billion between capex and equipment acquired under finance leases in the latest quarter—more than the company used to spend in an entire year just five years ago. Google-parent Alphabet’s outlay of $12 billion nearly doubled from the same quarter last year.

Yet both stocks rose following those reports—a sharp contrast to what happened with Meta Platforms. The parent company of Facebook and Instagram saw its shares slide more than 10% on Thursday following its own first-quarter report, which included a 12% raise to its planned capex budget for this year. The difference was that Meta also issued a relatively disappointing revenue forecast for the second quarter. And it had a much higher bar to clear, with a stock price up 39% for the year to date ahead of its results. Shares of Microsoft and Alphabet are up 6.1% and 11.7% for the year, respectively.

Google’s parent, in particular, had a strong report. Revenue of $80.5 billion was up 15% from a year earlier and beat Wall Street’s expectations, driven by improving growth in search advertising, YouTube and its cloud business. The company also showed notably improved cost controls, with operating margin of nearly 32%—the highest in nearly three years—and a 1% reduction in its employee head count. A new $70 billion share buyback and the 25-year-old company’s first-ever dividend were additional helpful touches. Alphabet shares jumped more than 12% after hours, setting up what could be the stock’s best post-earnings reaction in at least five years, according to FactSet.

Microsoft’s shares rose more than 4%. Revenue and operating earnings also beat Wall Street’s targets, while revenue for its closely watched Azure cloud computing service rose 31% from the year-earlier period—two points better than analysts had projected. The company also said it expects to end its fiscal year in June with operating margins 2 percentage points higher than the previous year, despite its increased investments in AI. It also said it expects growth in revenue and operating earnings to remain in double-digit territory in the next fiscal year—no simple feat for a company now generating more than $236 billion a year in revenue—and profit margins of about 42 cents on every dollar of that revenue.

Still, the reaction to Meta’s results show investors are eyeing AI spending closely and that they have their limits. The first questions from analysts Thursday on earnings calls for both Google and Microsoft were about plans for future spending. The numbers are going up for both. Alphabet Chief Financial Officer Ruth Porat said capital expenditures for the remaining quarters of the year will be “roughly at or above” the recent period’s levels. That implies about $48 billion for the full year, or 14% of Alphabet’s projected revenue compared with 10% last year.

Microsoft CFO Amy Hood said capex would “increase materially” in the current quarter and grow further in the next fiscal year. Wall Street was already projecting about $47 billion for Microsoft in the current calendar year, which would be about 18% of the company’s projected revenue compared with 15% the year before. Positively, Hood noted that “near-term AI demand is a bit higher than our available capacity.”

Big Tech’s investors had better hope that remains the case for a long while.

Write to Dan Gallagher at [email protected]