Google shares climb as Microsoft stumbles on AI costs

Alphabet has rolled out a series of AI products this year and revamped its search engine with the technology as it competes with Microsoft in a race to dominate the nascent field.

Shares in Google-owner Alphabet climbed more than 5% in the latest session, adding $80bn to its stock market value — its dominant search business was faring well in an uncertain advertising market and remained unscathed in the face of competition from an AI-powered Microsoft Bing.

Alphabet shares rallied in the wake of better-than-expected quarterly earnings released on Tuesday night that showed the strong position of Google Search, steady growth in the cloud business and that Alphabet was well placed to compete with Microsoft in artificial intelligence. 

"Don't call it an AI comeback," said analysts at broker Jefferies, adding Google has been an AI-first company for seven years.

Jefferies was among the 27 brokerages that raised their price targets, with several of them saying AI had started to contribute to Google's cloud revenue and helped drive a 28% growth in the quarter that widely surpassed expectations.

Alphabet has rolled out a series of AI products this year and revamped its search engine with the technology as it competes with Microsoft in a race to dominate the nascent field.

"Contrary to fears, AI everywhere is not, at least now, causing margin indigestion, or disrupting search. On the contrary, it appears to have potential to make Google a share-gainer in cloud services," Rosenblatt Securities analyst Barton Crockett wrote in a research note. 

Microsoft

Microsoft also topped expectations in its earnings, powered by growth in its Azure cloud unit — the part of its business best situated to capitalise on the booming interest in AI. 

But its shares fell 5% at one stage in the latest session on worries that investments in the technology behind ChatGPT were driving up costs. 

Microsoft is set to shed about $100bn from its market capitalisation. Its shares had gained 46% ahead of the earnings. 

"AI will generate a lot of revenue and earnings for such firms, but a lot of investors have been buying the rumour and now that we have earnings, they are taking profits," Paul Nolte, senior wealth adviser and market strategist for Murphy & Sylvest said.

"There's still a lot of excitement around AI, but nobody quite understands what that means for the bottom line of many of these companies," he said.

Apple, the world's most valuable publicly listed company, and Amazon are set to report quarterly earnings next week. Some large tech companies, which rely heavily on borrowed money, have been pressured since the US central bank started to increase interest rates to tame inflation last year. 

• Reuters