Microsoft shares fell 2% on Wednesday after the technology giant reported a massive increase in artificial intelligence expenditure, while Nvidia surged 11% after AMD ratcheted up its 2024 forecast for its AI chip sales.
The gains in chip makers and losses in Microsoft underscored a divide in the AI landscape, with investors questioning whether Wall Street’s AI rally may have become overextended.
The stock market value of Nvidia, whose processors are the gold standard in AI computing, surged almost US$300-billion. Microsoft’s stock market value dipped by $60-billion.
“Microsoft reported some deceleration in its core cloud business, but a huge increase in capex. That represents a transfer of wealth from Microsoft shareholders to Nvidia shareholders,” said Gil Luria, senior software analyst at DA Davidson.
Microsoft said revenue from its Intelligent Cloud unit — home to the Azure cloud computing platform — jumped 19% to $28.5-billion, but missed analysts’ estimates of $28.7-billion.
“Since Microsoft makes up approximately 20% of demand for Nvidia’s highest-quality AI chips, increasing capex spend at Microsoft is good news for Nvidia’s bottom line,” said Kathleen Brooks, research director at XTB.
“Since Nvidia remains the leading hardware producer for AI technology, increasing capex spend by its biggest customers bodes well for Nvidia’s results.”
Capacity constraints
Its capital expenditure, including finance leases, surged 78% in the quarter to $19-billion, with Microsoft saying it needs to expand its global network of data centres and overcome capacity constraints to meet AI demand.
Shares of heavyweight companies racing with Microsoft to dominate emerging AI technology also climbed, with Meta Platforms and Amazon up over 2%.
The growing cost of the AI race shook investor confidence after Alphabet last week reported a bigger-than-expected rise in capital expenditure to support its generative AI technology.
Technology companies have faced high expectations going into this earnings season. Analysts on average see technology companies in the S&P 500 growing their aggregated earnings by almost 10%, according to LSEG data.
AMD surged more than 4% after it forecast third-quarter revenue above market estimates on Tuesday, banking on demand for its AI chips staying strong. Broadcom, which also sells AI-related chips rallied 10%. Intel added 2% and Qualcomm rose 5%.
“We’re still in a tough macro environment. AI is absolutely real, but requires a lot of investment and that is visible in the capex numbers,” said Rishi Jaluria, an analyst at RBC Capital Markets. — Noel Randewich, with Anna Tong, Aditya Soni, Yuvraj Malik, Kanchana Chakravarty and Zaheer Kachwala, (c) 2024 Reuters
