Microsoft Shows the Mag7 What AI Investment Looks Like
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What is the main topic discussed in this episode?
Two stocks diverge on an earnings day. Today on Motley Fool Hidden Gems Investing. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by longtime Fool contributors, Lou Whiteman and Matt Frankel. It is the depths of earnings season, so we're going to try to hit as many companies we can in what we would call a relatively short show that we have here. We're also going to hit some earnings questions And we wanna start with earnings, especially with the two magnificent seven companies that happened to report after the close yesterday, and that's Microsoft and Meta. And guys, there was some pretty large divergence between what the market thought of those results.
As we're taping right now, shares of Meta are down about 8.8%, while Microsoft is up a whopping 15%. Now, last quarter and throughout the show, we have kind of discussed Meta's what is all this spending for question quite a bit. But what stands out to me, kind of in the stark contrast of these two earnings reports, is that Microsoft is the first major AI CapEx spending company to announce earnings and see a positive earnings reaction in the quarter. Is this just like a one-time blip, like, yeah, things look nice comparatively? Or is there some sort of through line here that shows Microsoft is doing the right thing while others, you know, as we discussed previously with Alphabet and here with Meta, that they're making riskier bets?
So, yeah, I'm not at all surprised to see Microsoft spike like it is after earnings. I mean, it isn't the only major AI CapEx spender, like you said, to report solid earnings and accelerating growth in the right ways. I mean, Google or Alphabet reported that Google Cloud revenue was was accelerating as well. And that stock fell right after earnings. Microsoft's Azure revenue accelerated to 43% growth in the first quarter, but it's also showing a clearly solid ROI on that CapEx you're mentioning without having to constantly increase these eye-popping numbers. I mean, Microsoft actually trimmed, we haven't heard that word, trimmed its full-year CapEx projection a little bit in this quarter. I mean, now it's an accounting change mostly related to how long they assume the useful life of their AI data centers are.
but it's still like a welcome reduction in a sea of companies that just seem to not be able to announce enough spending. Speaking of not being able to announce enough spending, Meta's story was kind of the opposite here. I mean, Meta missed estimates for profitability kept its Q3 revenue guidance the same, and didn't do anything to reduce its CapEx forecast, which a lot of investors were kind of thinking they might.
Why did Microsoft and Meta diverge so sharply after earnings?
It isn't showing investors yet that their money is being well spent. Now, to be totally fair, we've said before on these shows that Meta's great at one thing, social media advertising. That business is still growing very strong, but it's not what the bulk of their money is being spent on, and that's what's concerning people. Right.
The whole AI trade is basically suffering right now due to one question. And Microsoft did a better job of answering the market's biggest question than anybody else has. It's really that simple. With Meta, the spending is continuing. Guidance for revenue is, eh. But there is no answer to the question of when sales growth from all of the spending will emerge or how this all ends with a rosier future. Where is the pot of gold? Microsoft, meanwhile, reminded the market of what a diversified business looks like. They saw strong software results, strong Azure AI expansion, real growth across the business. It isn't really about this quarter's business for any of these companies in the stock reaction. It's about the narrative about what the business will look like in two years due to all of this AI excitement.
And Microsoft just presented a much better, clearer picture of the future. And the market's rewarding it.
So as we've been, we and other investors have been assessing the, we'll call it like the best of the cloud hyperscalers or the best investors in AI right now.
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Chapters
4 chapters
1
What is the main topic discussed in this episode?
0:02–2:41
2
Why did Microsoft and Meta diverge so sharply after earnings?
2:41–8:35
3
What evidence did Microsoft give that its AI data center spending is paying off?
8:35–12:37
4
Why are investors concerned about Meta’s continued CapEx on AI?
12:37–19:33