Microsoft and Alphabet Spend Billions On AI: A Closer Look

Among the bunch of big-time spenders concerning the AI frenzy, a pair of Mag 7 members involved in the cloud, including Microsoft MSFT and Alphabet GOOGL, stick out considerably, with each pouring billions into their respective AI efforts.

Extremely high capital expenditures (CapEx) have been a sensitive topic among the bunch, though all three remain more than committed to the future growth runways expected to stem from the investments. Let’s take a closer look at just how much the tech giants are spending.

Microsoft Bets Big

Microsoft posted a double-beat relative to our consensus expectations in the latest release, 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 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.

Alphabet Guides Huge CapEx

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.

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.

Putting Everything Together

Both Alphabet GOOGL and Microsoft MSFT are laying out huge capital to build out during the broader AI frenzy, with the trend seemingly not slowing anytime soon. It’s worth noting that both companies’ current fiscal year outlooks remain bullish, with estimates trending higher over recent months, as shown below.

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

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