Alphabet and Microsoft: Billion Dollar AI Bettors

The 2025 Q4 earnings season continues to move at a rapid pace, with a fair chunk of S&P 500 companies already delivering their results. Among the bunch have been most of the Mag 7 members, including Microsoft MSFT and Alphabet GOOGL, both of which are deeply involved in the broader AI frenzy.

Both stocks have seen weak reactions post-earnings so far, though the reaction to MSFT has been considerably more negative. Extremely high capital expenditures (CapEx) have been a major driver of sentiment, with both investing heavily in their futures.

Microsoft Earnings

Microsoft posted a double-beat relative to our consensus expectations, continuing its established history of exceeding expectations. Adjusted EPS of $4.14 grew by 24% year-over-year, whereas sales of $81.3 billion grew 17% from the year-ago period.

But while the growth is impressive, investors have expressed concerns about CapEx for cloud and AI offerings and, importantly, a slowdown in Azure growth. For years, investors have placed a strong emphasis on accelerating cloud revenue, which has often dictated post-earnings reactions across the space, including with Amazon’s (AMZN) AWS.

CapEx for the period totaled $37.5 billion, of which $29.9 billion was for property and equipment, such as GPUs and CPUs to support Azure demand. Its broader Intelligent Cloud segment, which includes Azure, saw sales grow 28% year-over-year to $32.9 billion, though the segment’s gross margin took a hit due to continued AI investments.

Below is a chart illustrating its CapEx on a quarterly basis.

Nonetheless, the valuation picture for the tech giant currently remains constructive, with the current 23.4X forward 12-month earnings multiple well beneath the 30.6X five-year median, also reflecting just a 3% premium relative to the S&P 500. The median premium over the last five years sits at 45%.  

In addition, the EPS outlook for its current fiscal year remains notably bullish, having risen 15% over the past year and also seeing a big post-earnings revision. The negativity in shares feels a bit overdone given the favorable earnings estimate revisions trend and sound valuation picture, but the stock nonetheless remains highly sensitive to broader AI trends.

It’s also worth noting that MSFT shares have lagged the S&P 500 by a notable margin across a five-year timeframe, up 62% against the S&P 500’s 82% gain.

Alphabet Earnings

Similar to its peer MSFT, Alphabet posted a double-beat relative to our consensus expectations, with adjusted EPS of $2.82 shooting 31% higher year-over-year alongside a 18% sales increase.

Importantly, Google Cloud results were notably strong, with revenues increasing by a mighty 48% to $17.7 billion. Growth was driven by increased adoption of Google Cloud Platform (GCP) across enterprise AI infrastructure and enterprise AI Solutions, helping the company clear a critical hurdle from a sentiment standpoint.

Sundar Pichai, on the results –

‘We’re seeing our AI investments and infrastructure drive revenue and growth across the board. To meet customer demand and capitalize on the growing opportunities we have ahead of us, our 2026 CapEx investments are anticipated to be in the range of $175 to $185 billion.’

The CapEx guide obviously reflects a massive bet on its future, with the $180 billion midpoint surprising the market in a big way. Below is a chart illustrating Alphabet’s CapEx on a quarterly basis.

Similar to MSFT, the earnings estimate revisions trend for its current fiscal year is one of bullishness, with the current $11.06 Zacks Consensus EPS estimate moving 8.2% higher over the past year.

Putting Everything Together

The reactions to Alphabet GOOGL and Microsoft MSFT quarterly releases have been adverse, though MSFT has faced much more pressure. Both companies are laying out huge capital to build out during the broader AI frenzy, with the trend seemingly not slowing anytime soon.

The rough price action MSFT has faced seems a bit overdone, with the stock now widely underperforming relative to the S&P 500 across many timeframes, including the last five years. Valuation multiples have come down to more tolerable levels, while Alphabet remains a bit rich relative to the general market.

Importantly, both companies are seeing rising earnings estimate revisions for their current fiscal years, a bullish signal.

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This article originally published on Zacks Investment Research (zacks.com).

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