Source: Wall Street News

AI has undoubtedly become the key to a new round of strategic layout for tech giants. However, the first-quarter earnings report shows that although they all burn crazy money in the AI field, the current impact on the company's performance is completely different.

First-quarter results were also strong. The stock prices of Google's parent company Alphabet and Microsoft surged during after-hours trading. The former rose more than 15% to a record high after the market on Thursday, while the stock price of Facebook's parent company Meta was hit hard, falling by more than 10% overnight.

The key to this difference is that at this stage, AI investment has begun to bring huge benefits to Google and Microsoft, but it is more like a heavy burden for Meta's performance, and there is a long way to go to monetise AI.

At the conference call that just ended, Google and Microsoft both confirmed the positive effects of AI on performance.

AI boosts Google Cloud revenue by 28% year over year. Google says it will try to control cost growth

According to financial reports, Google's parent company Alphabet's total revenue for the first quarter was US$80.54 billion, an increase of 15% year-on-year, the fastest growth rate since the beginning of 2022, and higher than market expectations of US$79.04 billion. Adjusted earnings per share of $1.89, far exceeding expectations of $1.53, surged 61.5% year-on-year from $1.17 in the same period last year. Net profit jumped 57% year over year to US$23.66 billion, higher than the forecast of US$18.95 billion.

Google Cloud's revenue reached 9.6 billion US dollars in the first quarter, up 28% year over year. Chief Financial Officer Ruth Porat said this was due to “growing contributions from AI.”

Despite the huge expenses for AI, Porat said Google is still controlling these costs. She said:

Looking ahead, we will remain focused on efforts to slow the pace of expenditure growth to make room for higher levels of investment in technology infrastructure and associated increases in depreciation and expenses.

Regarding capital expenditure, our capital expenditure for the quarter was $12 billion. This was mainly an investment in technology infrastructure, with servers as the largest expenditure, followed by data centers. The sharp year-over-year increase in capital expenditure in recent quarters reflects our full confidence in the opportunities AI provides across the business.

However, it will be more difficult to evaluate Google's investment and expenditure in the AI field in the future because of Google's organizational restructuring. Starting in the second quarter, the AI model development team originally belonging to Google's service department will migrate to DeepMind, which directly belongs to Alphabet's parent company.

In other words, starting in the second quarter, AI-related accounting processing will be transferred from Google to the Alphabet headquarters level. This will make it more difficult to evaluate Google's input and output in the AI field, as related expenses will be included in Alphabet as a whole, not just Google units.

Of course, investors' enthusiasm for Google also stems from the shareholder package: 70 billion repurchase plan+first-ever dividend in history.

AI-driven Microsoft's performance has completely exceeded expectations, and huge expenses are not to be feared?

Driven by AI, Microsoft's key financial indicators and various businesses for the quarter comprehensively exceeded expectations. Among them, overall Microsoft cloud revenue increased 23% year over year to US$35.1 billion, smart cloud revenue increased 21% to US$26.7 billion, and Azure revenue accelerated quarter by quarter.

It is worth mentioning that revenue from Azure and other cloud services increased by 31%, higher than market expectations by 28.6%, as well as a growth rate of 29% in the third quarter of last year and a growth rate of 30% in the fourth quarter of last year, which indicates that AI is indeed driving the acceleration of cloud revenue growth.

Amy Hood, Microsoft's executive vice president and chief financial officer, told investors:

We expect capital expenditure to increase over the next few years to support the growth of cloud products and our investments in AI infrastructure and training.

At Microsoft's earnings conference call, Morgan Stanley analyst Keith Weiss raised more detailed questions about Microsoft's investment in AI, and pointed out that Microsoft's capital expenditure will increase by more than 50% year over year to reach 50 billion US dollars. At the same time, there are rumors about spending 100 billion US dollars to build an AI supercomputer. He expressed concern about the huge investment in AI:

Obviously, (AI) investments have almost surpassed revenue contributions, but I'd like you to explain how the management team quantifies the potential opportunities these investments are based on, as the scale of the investment has become very large.

CEO Satya Nadella responded that when it comes to training, Microsoft wants to “be able to invest the necessary capital to basically train these large basic models and stay ahead in this field.”

Hood added that the most important thing is to consider this large-scale expenditure beyond the quarterly impact and to think about how to seize the opportunity of AI to influence every business process.

The opportunity lies in our added value, and I look forward to continuing to achieve this.

The benefits of AI have not yet been fully demonstrated. Is Meta speeding up the pace of “burning money”?

Compared to Google and Microsoft, Meta's performance in the first quarter was not bad. Revenue and profit were higher than expected, and core advertising revenue grew faster.

The revenue from its core advertising business was US$35.64 billion, up 26.8% year over year, and its share of total revenue rose slightly to about 98%.

In addition to the catalytic role of AI, booming demand in the e-commerce and gaming sector is the biggest contributor, adding fuel to the rapid advance of Meta advertising business.

Furthermore, the positive impact of the “Year of Efficiency” continues. Last year, against the backdrop of a severe macroeconomic situation, Meta made drastic layoffs and cost cuts, and called 2023 the “Year of Efficiency.” Under this plan, Meta's financial performance for the whole year was greatly boosted.

However, I never expected that Meta's backlash in the first quarter of the year raised this year's expenditure budget drastically, which will inevitably cause a huge drag on the company's financial performance.

Meta raised its capital expenditure forecast for this year from $30 billion to $37 billion to $35 billion to $40 billion in its first-quarter earnings report, saying it was due to speeding up infrastructure investment to support the AI roadmap. Meta also expects capital spending to continue to rise next year.

In the first quarter call that followed, Meta CEO Zuckerberg said he believes Meta “should significantly increase investment over the next few years to build more advanced models and the world's largest AI service.” He added that “before we can generate significant revenue from these new products,” these expenses must “grow meaningfully.”

What scares investors the most is that Zuckerberg said that it may take a bit long to monetize AI:

Building leading-edge AI will also be a larger task than any other experience we add to the app, which could take years.

After Zuckerberg's statement, Meta's post-market decline widened to nearly 20% on Wednesday, then continued to plummet on Thursday, falling more than 10% at the close.

edit/ruby