Microsoft and Google Increase AI Investments
Microsoft and Alphabet, the parent company of Google, indicated on Tuesday that significant investments into Artificial Intelligence (AI) technology will continue before substantial returns can be realized. These tech giants anticipate a lucrative payoff from these AI investments down the line.
Rising Expenditure for Microsoft in Pursuit of AI
Microsoft reported a notable surge in costs associated with the construction of new data centers to support AI technology. This rising expenditure, propelled by chip purchases from Nvidia Corporation to power the said data centers, will continue in the foreseeable future.
Microsoft Stock Takes a Hit, Alphabet Shares Surge
In response to these revelations, Microsoft shares witnessed a drop of more than 3% on Wednesday. In contrast, Alphabet shares saw a nearly 7% increase on the same day.
Microsoft's Two-Fold Investment Strategy in AI
Microsoft's increased AI costs come from two primary areas. Firstly, to power its upcoming products, including the much-anticipated $30-a-month Copilot AI assistant, and secondly, to meet the demand of businesses eager to use its Azure cloud computing services for their AI products. Microsoft expects these services to contribute significantly to its revenue by the end of its 2024 fiscal year.
Alphabet Keeps AI Costs Down, for Now
Alphabet managed to keep costs under control in the short term. Ruth Porat, Alphabet's CFO, attributed the lower-than-expected capital expenditure in Q2 to delays in data center construction. However, Porat, who will soon transition into the role of president and chief investment officer, acknowledged that Alphabet's spending on AI, which exceeds $200 billion in the past decade, often goes underappreciated by users and investors.
Google's Unique Advantage: The Tensor Processor Unit
Analysts highlight Google's competitive edge, the Tensor Processor Unit (TPU). This custom chip designed for AI applications enables Google to lower costs. However, Google will continue to purchase chips from other companies in addition to using its TPUs, potentially putting a drag on profit and growth.
Tech Giants in Sync on AI Investment Approach
Gene Munster, managing partner at Deepwater Asset Management, noted a similar inflection point in the AI investment strategy of both Microsoft and Google. The difference, he said, was that Microsoft investors were expecting more tangible results.