After Alphabet, now it’s Microsoft’s turn to show Wall Street the reality of artificial intelligence.
Microsoft reported its earnings for the quarter ending in June, disappointing investors despite massive annual growth. Microsoft’s stock dropped over 7% in extended trading on Tuesday, with an additional 3% fall on Wednesday.
Year-to-date, the stock is now up “only” 11.78%, down from its 17% high.
Revenues in the quarter increased 15% year-on-year to $64.73 billion, less than the $65.24 billion forecast by LSEG-polled economists. Net income was however above expectations, coming in at $22.04 billion vs the $20.08 billion estimate. That amounts to $2.95 earnings-per-share, also more than expected.
Net income exceeded estimates because operating costs were lower than expected.
Crucially, the company’s cloud division grew 19% year-on-year at $28.52 billion. That was slightly below market expectations of $28.68 billion, or a 19.4% annual growth.
Cloud, especially its AI-powered Azure service, is Microsoft’s most profitable segment. With Azure, Microsoft plunged head-first into the AI race, and the company has retained the lead against its competitors. Last year, Microsoft acquired a $10 billion stake in OpenAI, the start-up behind ChatGPT and DALL-E.
The artificial intelligence frenzy made Microsoft’s stock skyrocket, reaching an all-time high of $430 in July. Other big tech companies including Alphabet (Google), Amazon, and the AI chipmaker Nvidia received similarly outstanding boosts.
However, the AI frenzy seems to have reached a turning point.
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Bursting the AI bubble
Microsoft was not the only tech stock to suffer a sudden downturn. Alphabet (Google) plummeted over 5% last Friday before rebounding this week. Nvidia is down 4.5% for the last 5 days after experiencing the strongest growth in stock market history. At one point, Nvidia briefly became the world’s highest-valued company at over $3 trillion.
Alphabet reported earnings last week and, like Microsoft today, the stock market was disappointed despite better-than-expected figures. Nvidia will release its second-quarter earnings on August 28th.
The current market trend may suggest that Wall Street is overhyped about artificial intelligence. Investors now seem afraid of AI’s stunning costs and relatively low margins. High costs and low margins are typical of any new technology, and artificial intelligence is actually faring better than previous digital innovations.
Nevertheless, analysts warned about the overvaluation of some big tech companies. Last quarter, Nvidia reported $26.04 billion in revenues and $14.88 billion in profits. By comparison, Apple reported $90.75 billion in revenues and $23.64 billion in profits.
By sheer financial prowess, Nvidia could never achieve the same market evaluation as Apple, let alone beat it. The fact that it did, some analysts argue, is a clear sign of overvaluation.
