Microsoft and Google fail to show at the AI party

A ChatGPT app — an artificial intelligence chatbot developed by OpenAI and launched in November 2022.

Artificial intelligence is the buzziest of buzz words for analysts. Apart, that is, for the two firms that are seen to be at the cutting edge of the technology.

While the likes of Nvidia and lesser-known AI plays have soared on the back of excitement over the potential boost to their business, Microsoft and Google parent Alphabet have underperformed this year.

Their stock lethargy reflects both payback from AI investment that will likely be slower than for others, as well as the tougher backdrop for tech shares more broadly as central banks aggressively raise interest rates to combat inflation. 

Both Microsoft and Alphabet are up roughly 5% this year, not even half the gain of the Nasdaq 100 Index and far behind the nearly 60% surge in Nvidia, which is expected to see a more immediate impact as its graphics chips are used in powering AI applications. 

“If you’re only buying Microsoft and Alphabet for AI, you might be disappointed by how slowly it rolls out and translates to revenue growth,” said Gregg Abella, chief executive of Investment Partners Asset Management. “The rate environment is less favourable, and while earnings are robust, they’re not as exciting as they used to be in terms of growth,” he said.

Applications development

Microsoft and Alphabet are focusing on AI’s applications in search, which while it could be a long-term growth driver, is also expensive to develop. The former is investing $10bn in OpenAI, and recently unveiled a new version of its Bing search engine and Edge browser that incorporate the technology. Google is also integrating AI into search.

“These companies are walking a delicate tightrope as developing AI will require enormous investments at a time when companies are getting credit for slowing down capex, not stepping it up,” said Mr Abella, who sees AI investments as necessary for long-term growth.

In their latest quarterly results, Microsoft warned of a slowdown in cloud and business software sales, while Alphabet pointed to lower demand for search advertising.

The AI market is expected to grow rapidly. UBS analysts estimate the broad AI hardware and services market will reach $90bn by 2025, up from $36bn in 2020, and say this may prove conservative.

While both megacaps are seen as leaders in the space, sentiment has largely favoured Microsoft, especially after an underwhelming demonstration of Google’s AI chatbot. 

Much of Alphabet’s year-to-date weakness followed that event, and according to Bank of America analysts, OpenAI’s ChatGPT has led to a surge in interest for Microsoft’s Bing, though “we are not aware of any slowing in Google search revenues”.  

Bloomberg