By Noel Randewich and Anna Tong
(Reuters) – Disappointing quarterly results from Microsoft sent the company and other heavyweights losing $340 billion in stock value on Tuesday, while Nvidia and other AI chip vendors rose after results from Advanced Micro Devices.
Chipmakers’ gains and their biggest customers’ losses underscored the divisions in the AI landscape, prompting investors to wonder whether Wall Street’s AI rally had gone too far.
“Microsoft reported some slowdown in its core cloud business, but a huge increase in capex, representing a transfer of wealth from Microsoft shareholders to Nvidia shareholders,” said Gil Luria, senior software analyst at DA Davidson.
Microsoft said in its after-market report that revenue from its Intelligent Cloud division, which focuses on its Azure cloud computing platform, rose 19% to $28.5 billion in the quarter ended June 30. However, revenue fell short of analysts' estimates of $28.7 billion, data from LSEG showed.
Capital expenditures, which include finance leases, rose 78% to $19 billion in the quarter. Microsoft said it needs to expand its global network of data centers and overcome capacity constraints to meet demand for AI.
Meta Platforms fell about 3%, while Amazon lost 2.8% after Microsoft's results. Apple, Alphabet and Tesla each fell about 0.5%.
Investors can’t wait to see more results from the massive investments in AI, said Daniel Morgan, senior portfolio manager at Synovus Trust.
“That's what threw the whole thing off. The stocks were trading heavily in anticipation of these reports,” Morgan said.
The rising costs of the AI arms race fueled investor fears after Alphabet last week also reported a larger-than-expected increase in capital spending to support its generative AI technology.
Tech companies have had high expectations for this earnings season. Analysts on average expect tech companies in the S&P 500 to grow their total earnings by nearly 10%, according to LSEG I/B/E/S.
Concerns that the cost of building AI infrastructure has skyrocketed and that revenue growth has been less than expected have sent the Nasdaq down 8% on Tuesday from its July 10 record high.
The Nasdaq lost more than 1% on Tuesday ahead of Microsoft's report.
While Microsoft’s results dragged down other big tech companies, AMD rose more than 6% after it forecast third-quarter revenue that topped market estimates. The company said it was counting on continued strong demand for its AI chips.
Shares of Nvidia, whose processors are the gold standard in AI computing, rose 2.6%. Broadcom, which also sells AI-related chips, rose 1.4%. Intel and Qualcomm each rose nearly 1%.
“We’re still in a tough macro environment. AI is absolutely real, but it requires a lot of investment and that’s visible in the capex numbers,” said Rishi Jaluria, an analyst at RBC Capital Markets.
(Reporting by Noel Randewich in San Francisco; additional reporting by Anna Tong in San Francisco and Aditya Soni and Yuvraj Malik in Bengaluru; Editing by David Gregorio)
