Microsoft (MSFT) And Google (GOOG) Make Billions, But Investors Only Look At AI

(MENAFN- Investor Ideas) The results season is in full swing and Alphabet and Microsoft brought their numbers from the really biggest companies. The companies are quite different in their original focus (Alphabet was in advertising, Microsoft in computers, office suites, etc.), but in recent years they have become increasingly close and compete in many areas. The companies also have in common that, together with Amazon, they are dominant cloud players who have jumped on the AI wave. Microsoft cooperates with OpenAI, google works more or less independently, but both companies have a wide range of products and services in which AI tools can be applied. The companies are also among the richest in the world, earning tens of billions of USD every quarter, and can thus afford to invest huge sums in new projects and areas where AI naturally falls.

But artificial intelligence needs a large and expensive infrastructure and high computing power. For this, companies need to invest in new data centers and servers. Figures from recent quarters show that companies spend literally tens of billions of dollars each quarter for this purpose. Investing is also largely about the future and what investors think the companies will achieve in a few years, and for this reason, the shares of the mentioned companies have grown significantly by more than 70% in the last year and a half. However, investors often sooner or later want to see the real impact on the numbers without hesitation, not just promises, and it was this fact that caused the negative reaction of the shares of both companies after the publication of the latest economic results. Those were really good, but investors were also looking for signs of whether or not AI will start making money soon, and whether the growth rate of the cloud that AI runs on will continue.

Companies are very cautious about publishing numbers related to the impact of AI on their business. We find practically nothing in the reports, and we learn partial information, for example, on subsequent earnings calls. Alphabet's management recently mentioned that AI is already generating billions in revenue and that it is a much greater risk for the company to invest little in this area than to invest too much. In turn, Microsoft management said, for example, that AI-related tools accounted for 29% of the growth of the Azure cloud, with an increase of 8 percentage points, which is more than the previous quarter. However, cloud growth has slowed slightly, which has spooked the market. There is really a lot of hype around artificial intelligence, so any hesitation can be taken very negatively. In addition, the financial director of the company said that they are investing huge money in the IT infrastructure to support monetization over the next 15 years and more. I personally read between the lines that whoever expects that AI tools will start generating more profits for companies in the foreseeable future is mistaken. Anyway, none of the companies will say how much AI generates in sales and profits.

In the course of the last months, various pieces of information have also leaked out. According to them, for example, Microsoft's sales are growing thanks to AI, but in the area of profits, it still subsidizes services to users and processes tens of USD per month on a large part of them. On the one hand, we have investments in the order of tens of billions of USD per year, but on the other hand, we only have a relatively small impact on sales and probably a negative impact on profits. Therefore, investors were waiting for some indication in the latest results that the companies will bring positive news in the area of profit prospects in connection with AI, or that the rate of revenue growth will be higher. But they basically did not come, and companies continue to compete in terms of how much they invest in infrastructure. It is for this reason that the shares of Alphabet and Microsoft took a beating after the numbers were published - investors simply expected more in connection with AI. Alphahbet essentially kicked off the stock market's biggest one-day selloff in a year and a half, with Microsoft shares down about 8% in the aftermarket, though it eventually erased most of its losses after accompanying information from management that said it would increase the pace of cloud growth by a couple of quarters.

But it doesn't change the fact that investors are apparently starting to be sensitive to whether AI will ever make money and how it will continue to grow. So it looks like the phase of AI euphoria and that the promises are enough is behind us, and sooner or later companies will have to show that AI is not just an expensive pastime, but a business capable of making real money. Of course, no one knows whether it will be successful. AI monetization models are still a big unknown and differ in many ways compared to previous inventions. Take common software, you program it once, which involves high costs, but each copy sold has practically zero costs.

AI is different, each additional user increases the need for computing power and energy consumption, therefore scalability may be worse. The reliability of AI tools for more important things is still questionable, but also how much they will cost users. It is already clear that some of them increase productivity. But it is important that the increase in productivity does not cost more than the cost of the given tool. Even if AI proves to be widely usable and the costs of operating it are lower than the benefits, it may still take some time before we see widespread adoption. If we look at previous office revolutions, such as the creation of the typewriter or the arrival of the first usable computers, we will see that it benefited individuals really early, but from a macro perspective, the first real effects were not noticeable until maybe 10 years later. People do not like change, they are afraid of new technologies and it takes time to learn to work with them in a way that is beneficial. Nobody really knows how it will work in the case of AI, because there are really a lot of unknowns. But maybe it's time to slightly reconsider the fact that AI will start bringing profits soon and accept that possible wider adoption with an impact on companies will still take a while. It looks like at least part of the investors are already starting to admit it, and because of that, the shares reacted negatively.

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