Google’s Earnings Surge: What Set It Apart from Microsoft and Meta

The so-called “Magnificent Seven” tech giants may often seem like they are in close competition, yet as the race for artificial intelligence (AI) dominance intensifies, each of these leading corporations is striving to outdo the others in their quest for supremacy in the AI sector.

This competitive landscape is why investors are meticulously analyzing the details of each company’s earnings reports, particularly focusing on whether their substantial investments in AI are yielding tangible results. Evaluating these outcomes necessitates examining two critical aspects: the level of investment spending and the subsequent financial returns.

Recent third-quarter earnings have suggested impressive growth in AI initiatives among leaders like Alphabet (GOOG -0.02%) (GOOGL 0.10%), Microsoft (MSFT 0.99%), and Meta Platforms (META -0.07%). However, it was only Alphabet that experienced a notable post-earnings share price increase of approximately 3% on Wednesday, following its report on Tuesday. In contrast, both Microsoft and Meta witnessed declines of about 5% and 4%, respectively, by Thursday midday after releasing their earnings reports the previous night.

This disparity in stock performance seems to stem from specific underlying factors.

Unlocking AI-Powered Revenue Growth Opportunities

To start with the positive developments, both Alphabet and Microsoft demonstrated a notable acceleration in their cloud computing revenue, which is crucial as it indicates how effectively they are leveraging AI technologies.

Data source: Company press releases. YOY = year over year.

In contrast, Meta’s growth from its AI-driven advertising revenue slowed from 22% in June to 19% in September. However, its overall financial performance still surpassed analysts’ expectations, demonstrating resilience in its business model.

In summary, all three companies exhibited robust growth in their most AI-centric divisions. Microsoft and Google’s cloud services are accelerating, while Meta’s core operations continue to exceed market expectations, showcasing the diverse ways in which AI is being harnessed for revenue enhancement.

Although Microsoft and Google are integrating AI technologies across various business sectors, it is somewhat challenging to pinpoint the exact impact of AI on specific products like Google Search, YouTube, Microsoft Office, or Dynamics. Nevertheless, the performance of their cloud services serves as a reliable indicator of the current returns on AI investments.

Capital Spending: The Key Distinction in Stock Performance

Despite all three companies reporting commendable growth, the variations in their respective capital spending figures are likely the primary reason behind the divergences in their stock performances.

To begin with Meta, it has revised its capital spending forecast for the year to a range of $38 billion to $40 billion, slightly elevated from the previous estimate of $37 billion to $40 billion. However, CFO Susan Li’s remarks regarding the spending outlook for 2025 were notably assertive. She indicated that, “We expect a significant acceleration in infrastructure expense growth next year as we recognize higher growth in depreciation and operating expenses related to our expanded infrastructure fleet.”

Meta is already investing heavily in AI infrastructure to support its social media platforms, Llama generative AI models, and Reality Labs segment. Thus, the expectation of a “significant acceleration” was perceived as overly aggressive by investors, raising concerns about the sustainability of such spending levels.

Furthermore, there was a striking difference between the capital spending reports of Alphabet and Microsoft in the September quarter, which is noteworthy for understanding market dynamics.

Data source: Company press releases. YOY= year over year. QOQ = quarter over quarter.

This scenario is particularly intriguing. Despite Alphabet’s cloud growth accelerating at a faster pace than Microsoft’s, Alphabet’s capital expenditures saw a slight decline from the previous quarter, though they still represented a significant year-over-year increase of 62.1%. This indicates that Alphabet is currently moderating its capital spending levels. In contrast, Microsoft experienced a steady increase of 7.6% in capital expenditures compared to the previous quarter, suggesting ongoing growth in its investment in AI infrastructure.

During its earnings call, Alphabet’s new CFO, Anat Ashkenazi, mentioned that the fourth-quarter spending would remain approximately flat compared to the previous quarter. She also indicated that while spending would likely increase in 2025, she refrained from providing specific projections. Conversely, Microsoft announced that it plans to see another sequential rise in capital spending for the December quarter and anticipates even more significant increases in 2025.

Factors Influencing Future Performance in AI Investments

One potential explanation for the differences in performance could be that both Microsoft and Meta are relatively late in developing their proprietary custom AI accelerators. In contrast, Alphabet has been at the forefront, designing its custom tensor processing units (TPUs) since 2015.

Producing custom in-house chips is considerably more cost-effective than purchasing Nvidia GPUs, which is predominantly what Microsoft and Meta rely on currently. As a result, these companies are incurring higher costs for their respective AI infrastructures. In fact, the inflated prices for Nvidia chips recently prompted an analyst to downgrade Microsoft shares to a neutral rating.

This skepticism appears to be validated by the latest earnings reports. While Alphabet seems to enjoy a competitive edge at present, Microsoft and Meta are now actively working towards developing their own custom chips as well. Consequently, investors should closely monitor each company’s announcements related to custom AI chips and observe how their capital spending strategies evolve over time.

The optimistic takeaway is that the demand for AI solutions remains robust across all three companies, indicating a promising outlook for future growth in this transformative technology.