Tech giants bury mediocre results under AI hype

Touting uncertain future gains from AI is a way for Alphabet's and Microsoft's management to support the companies’ valuations

Microsoft and Google parent Alphabet are employing a bit of artificial intelligence-powered magic to enthrall Wall Street. The technology giants’ quarterly results released on Tuesday jumped the low bar of being better than investors feared. But neither showed the kind of breakneck growth that made them juggernauts. Touting uncertain future gains from AI is a way for management to bring back a jolt of excitement, and support the companies’ valuations.

Microsoft’s revenue was $52.9 billion, or about 7% higher than a year ago, and almost perfectly flat from the previous quarter. Sharply declining PC sales hurt revenue from its Windows operating system. Even former high-growth stars, professional-focused social network LinkedIn and cloud platform Azure, slowed. The latter’s annual growth rate is now 27%, versus 46% a year ago. Still, the company earned $18.3 billion, up 9% year-over-year.

At Alphabet, the picture is similar, if messier. Revenue grew 3% from last year, to $69.8 billion. The search giant earned $15.1 billion, down from last year’s $16.4 billion – but that includes a $2.6 billion charge from reducing employees and workspace as the company focuses on lean penny-pinching to bolster profit down the road. It also added $70 billion to its buyback program, an easy way to get Wall Street on its side.

The numbers beat analysts’ low expectations and amid a tough economy to boot. That was enough to send both stocks up in after-market trading. But consider that Microsoft trades at 27 times estimated earnings over the next year, roughly double its multiple back in 2014, when Satya Nadella became boss. Alphabet trades at 20 times, still substantial for an essentially stalled company. Maintaining these rich valuations looks tough without snappy top-line growth.

That likely explains why both firms can hardly wait for the promise of AI to arrive. It took Nadella only five words to mention it in his comments accompanying Microsoft’s earnings release. Sundar Pichai, his counterpart at Alphabet, restrained himself to his second sentence. Rapid advances in chatbots like ChatGPT, developed by Microsoft partner OpenAI, have caught the public imagination and, according to their boosters, promise to radically improve existing markets like search and create giant new ones.

How fast this will show up in either firm’s financial statements isn’t clear. But, with results ho-hum for now, it’s an easy pleasure for both management and investors to dream of AI gains just around the corner.

CONTEXT NEWS

Microsoft said on April 25 that revenue for the quarter ending March 31 was $52.9 billion, a 7% increase from the same period a year ago. Revenue was flat compared to the previous quarter. The company earned $18.3 billion, or $2.45 a share, compared to $16.7 billion, or $2.22 per share, a year ago.