A number of US big tech companies experienced a decline on Wednesday as Microsoft’s results indicated the costly nature of the high-stakes battle for AI supremacy. These tech giants had previously seen their shares rally due to the hype surrounding AI technology.
Microsoft’s shares fell by 3.6 percent during early trading as the company outlined an aggressive plan for AI-related spending. Microsoft believes that deeper investments in AI are necessary before the gains reach the bottom line.
If Microsoft’s losses continue until the end of trading, the company could potentially lose approximately $100 billion (approximately Rs. 8,20,100 crore) in market capitalization. The stock had previously experienced a 46.4 percent gain prior to the release of these results.
According to Paul Nolte, a senior wealth advisor and market strategist for Murphy & Sylvest, AI has the potential to generate significant revenue and earnings for these firms. However, many investors were driven by speculation and are now taking profits after the release of earnings. There is still a great deal of excitement surrounding AI, but its impact on the bottom line of these companies remains uncertain.
The NYSE FANG+ index, which includes many large-cap growth names, saw a 0.2 percent decline. The index has risen by approximately 76 percent this year, largely fueled by the frenzy surrounding AI.
Alphabet, Google’s parent company, stood out from the crowd with a 5.6 percent increase in shares after beating expectations for second-quarter results. This positive performance could potentially add $100 billion to Alphabet’s market capitalization.
Microsoft’s recent rally has led to an increase in its valuation. The stock currently trades at a price-to-earnings (PE) multiple of 31 times the 12-month forward earnings, compared to Alphabet’s PE multiple of 20.
Mark Haefele, the global wealth management chief investment officer at UBS, commented that the tech earnings season has started on a mixed note. The tone set by quarterly results over the next week will play a crucial role in the performance of tech stocks throughout the remainder of the third quarter.
Apple, the world’s most valuable publicly listed company, and Amazon.com are scheduled to report their quarterly earnings next week.
Fed fears vs AI boost
Investors remained cautious on Wednesday as Wall Street’s main indexes showed muted performance ahead of the expected Federal Reserve interest rate hike. This hike could potentially raise borrowing costs to the highest level since the global financial crisis.
Large tech companies, which heavily rely on borrowed money, have faced pressure since the Federal Reserve began tightening monetary policy to control inflation.
However, optimism surrounding AI and the belief that the Federal Reserve is nearing the end of its rate hiking cycle have provided support for tech stocks in recent months.
Stuart Cole, the chief macro economist at Equiti Capital, explained that tech stocks are often affected by sentiment surrounding central bank policy because many of them rely on robust economic growth to deliver promised returns.
Cole further stated that while there are concerns about a weakening US economy, the Federal Reserve will maintain its hawkish stance until there is sustained evidence of softening inflationary pressures. This approach carries the risk of tipping the economy into negative growth.
Meta Platforms’ shares rose by 1.0 percent after Alibaba’s cloud computing division announced that it has become the first Chinese enterprise to support Meta’s open-source AI model called Llama.
Amazon shares dropped by 1.3 percent following a media report suggesting that the Federal Trade Commission is finalizing an antitrust lawsuit against Amazon.
Snap Inc shares tumbled by 18.3 percent after the company reported a weaker-than-expected forecast for the third quarter. Bernstein stock analyst Mark Shmulik commented, “Band-Aids are not yet fixing bullet holes.” Shmulik noted that although Snapchat has introduced a new AI-powered chatbot to attract more users, the company has struggled to consistently grow revenue and catch up to rivals like Meta, the owner of Facebook.
© Thomson Reuters 2023
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