Microsoft Has Investors Wondering… Did AI Peak?

Alex Moschina|July 31, 2024

We do our best not to sound repetitive in our weekly missives. But these days… it’s tough.

Just a week ago, we were drawing lines of difference between Alphabet (GOOG) and Tesla (TSLA) – two tech monoliths who released wildly dissimilar earnings results.

And yet, the initial market reaction was negative for both.

Now here we are poring over the earnings releases of Microsoft (MSFT) and Advanced Micro Devices (AMD).

Like Alphabet last week, Microsoft beat on earnings. Q2 revenue rose 15.7% to $64.7 billion.

The only area where the company was “weak” was growth of its cloud/AI business. As far as Wall Street is concerned, the rate of return doesn’t mesh with the tens of billions Microsoft is investing into these initiatives.

Shares of the stock swiftly dropped more than 5%.

It’s pretty much a repeat of the narrative we explored last week with Alphabet.

Both stories highlight the nagging concern that artificial intelligence may, in fact, be in a bubble.

The meteoric rise of Nvidia (NVDA)… the sudden injection of AI into every corporate earnings call… the rapid adoption of programs like ChatGPT followed by the inevitable tapering of enthusiasm…

Investors are wondering…

Did AI peak?

Is it a mere fad that’s about to go the way of the much-hyped “Metaverse?”

The answer is simple.

In a word… no. (And in two words… HECK no.)

As one Goldman Sachs analyst put it in a report released last month…

Spending [on generative AI] is certainly high today in absolute dollar terms. But this capex cycle seems more promising than even previous capex cycles because incumbents – rather than upstarts – are leading it, which lowers the risk that technology doesn’t become mainstream.

Translation: The shift to AI isn’t stalling. It isn’t even slowing. But the full integration of a paradigm-shifting technology like AI does take time.

More to the point… it can take a long while for meaningful rewards to make their way to investors of a multitrillion-dollar company like Microsoft.

The company isn’t just focused on AI. It makes hardware… develops and licenses software… and even owns some of the world’s most popular videogame titles.

It’s a different story for the more streamlined Advanced Micro Devices. Worth a measly $234 billion, the “AI effect” on its business has been far more pronounced.

It’s been making some bold moves in the space.

In the second quarter, AMD unveiled its Ryzen AI 300 Series processor for AI PCs…

It announced a partnership with Oracle on its HeatWave GenAI project, enabling AI-powered database management…

And it teased the next generation of its CDNA processors, expected to “bring up to a 35x increase in AI inference performance” according to the company.

“The rapid advances in generative AI are driving demand for more compute in every market,” said AMD CEO Dr. Lisa Su, “creating significant growth opportunities as we deliver leadership AI solutions across our business.”

As a result, Q2 revenue rose 9%, year over year, to more than $5.8 billion.

This morning, shares were up more than 10% from yesterday’s close.

It’s a stark contrast from Microsoft’s performance, despite the fact that both companies are sprinting full bore into AI.

Either way, the artificial intelligence narrative continues to drive markets.

As we saw with the initial dot-com boom, followed by three decades of exponential growth among tech stocks, it will take time to separate the AOLs from the Googles in the AI space…

But don’t get it twisted: this is no fad.

Note: On Friday, Shah will share his take on the “AI bubble” narrative and what to do about it. Stay tuned.