Microsoft plunges, Meta rallies as investors demand AI payoffs

Big Tech Earnings Show Investors’ Appetite for AI Growth

By Aditya Soni and Deborah Mary Sophia

Jan 29 (Reuters) – The latest Big Tech earnings announcements this week have sent a clear message to investors: they are willing to overlook significant spending on artificial intelligence if it leads to strong growth, but are quick to penalize companies that fall short.

The market reaction on Thursday to earnings from Microsoft and Meta highlighted the evolving landscape since the AI boom sparked by the launch of ChatGPT over three years ago. Microsoft saw a 10% drop, losing over $350 billion in market value after its cloud business failed to meet expectations, while Meta gained 10%. Despite Microsoft’s still higher market valuation of $3.2 trillion compared to Meta’s $1.86 trillion, Meta’s shares have outperformed Microsoft’s over the past two years.

Having been the world’s most valuable company in 2024 with its first-mover advantage through OpenAI, Microsoft is now facing increasing pressure from investors to justify its high capital expenditure. The company reported revenue growth in its Azure cloud-computing business that only slightly exceeded expectations.

On the other hand, AI has played a pivotal role in Meta’s success, with improved ad targeting driving a 24% revenue increase in the December quarter and a positive first-quarter forecast. This demonstrates how Meta’s gains from AI are fueling its capital spending, which is projected to rise by up to 87% to $135 billion this year.

“Meta’s strong numbers reflect the market’s positive sentiment towards AI spending,” said John Belton, portfolio manager at Gabelli Funds. “Despite concerns in a normal scenario, the company’s robust revenue guidance for the first quarter is reassuring.”

Microsoft is facing challenges with its OpenAI investment, as it represents 45% of its cloud backlog. Investors fear that the $280 billion tied to the unprofitable startup could be at risk as it falls behind in the AI race. The company is playing catch-up in AI coding to competitors like Anthropic’s Claude Code, which has achieved an annualized run rate exceeding $1 billion.

“Microsoft’s reliance on OpenAI may pose a concentration risk despite its leadership in enterprise AI,” noted Zavier Wong, market analyst at eToro. Microsoft anticipates stable Azure growth in the January to March period, despite a slowdown in the previous quarter due to AI chip capacity constraints.

For Meta, the revenue growth underscores the success of its AI strategy in catching up to early leaders. The company reported a 24% revenue increase in the fourth quarter and anticipates growth of up to 33% in the current quarter. Meta’s AI pivot is proving beneficial, with expenses expected to jump by 43% to $169 billion this year.

Tesla, led by Elon Musk, is also increasing its spending, doubling its outlay to over $20 billion this year as it shifts focus to AI, humanoid robots, and self-driving vehicles. The company’s quarterly profit and revenue exceeded expectations, boosting its shares by 2.9%. However, analysts point out a disconnect between corporate AI goals and investors’ expectations for returns.

“The market is questioning whether these significant capital expenditure increases will yield sufficient returns,” said Jesse Cohen, senior analyst at Investing.com. “There is a growing disparity between tech companies’ AI ambitions and Wall Street’s tolerance for prolonged investment cycles.”

The latest earnings reports from Big Tech firms showcase the delicate balance between AI investments and shareholder expectations. As companies continue to prioritize AI development, investors will closely monitor their ability to drive sustainable growth and profitability in the long run.

(Reporting by Aditya Soni, Deborah Sophia, and Jaspreet Singh in Bengaluru; Editing by Clarence Fernandez and Anil D’Silva)