Several major US tech companies experienced a decline on Wednesday as Microsoft’s latest results revealed the high costs associated with the battle for AI supremacy. Despite the recent hype surrounding AI technology driving up their stock prices, Microsoft’s shares fell 3.6 percent in early trading as the company disclosed its aggressive spending plan for AI development. According to experts, greater investments in AI are necessary before significant gains can be realized.
If Microsoft’s losses persist until the end of trading, the company will see a decrease of approximately $100 billion in market capitalization, which amounts to around Rs. 8,20,100 crore. Despite a 46.4 percent gain in shares leading up to the announcement, investors who had speculated on AI’s potential revenue and earnings are now capitalizing on their investments.
Paul Nolte, senior wealth advisor and market strategist for Murphy & Sylvest, explained, “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.”
The NYSE FANG+ index, which includes numerous large-cap growth names, experienced a 0.2 percent decline. The index’s remarkable 76 percent increase so far this year has been driven by the AI frenzy.
It’s worth noting that Google-parent Alphabet stood out from the rest. The company’s shares rose by 5.6 percent following better-than-expected second-quarter results. This positive outcome is expected to add approximately $100 billion to Alphabet’s market capitalization.
Microsoft’s recent rally has resulted in an increased valuation. The stock is currently trading at 31 times its 12-month forward earnings, in comparison to Alphabet’s price-to-earnings (PE) multiple of 20.
Mark Haefele, global wealth management chief investment officer at UBS, noted, “The tech earnings season has started on a mixed note. The tone set by quarterly results over the next week will be crucial to the performance of tech stocks through the rest of the third quarter.”
Next week, Apple and Amazon.com, the world’s most valuable publicly listed companies, are set to report their quarterly earnings.
Fed Rate Hike Concerns vs AI Optimism
Investors approached Wednesday with caution as Wall Street’s main indexes remained muted ahead of a likely Federal Reserve interest rate hike, which could result in borrowing costs reaching their highest levels since the global financial crisis.
Large tech companies heavily reliant on borrowed money have faced pressure since the Fed began tightening its monetary policy to combat inflation.
Despite these concerns, optimism surrounding AI technology and the speculation that the Fed is nearing the end of its rate-hiking cycle have provided support for tech stocks in recent months.
Stuart Cole, chief macro economist at Equiti Capital, explained that tech stocks are particularly susceptible to sentiment surrounding central bank policies due to their reliance on robust economic growth to deliver promised returns. He added, “There are valid concerns that the US economy is weakening, but until the Fed sees sustained evidence of softening inflationary pressures, the hawkish stance will be maintained, even at the risk of tipping the economy into negative growth.”
Following Alibaba’s cloud computing division’s announcement that it is the first Chinese enterprise to support Meta Platforms’ open-source AI model Llama, Meta’s shares rose by 1.0 percent.
Amazon, on the other hand, saw a 1.3 percent drop in its shares after a news report stated that the Federal Trade Commission is finalizing an antitrust lawsuit against the company.
Snap Inc experienced a significant decline of 18.3 percent in its shares after reporting a weaker third-quarter forecast than analysts had predicted.
Bernstein stock analyst Mark Shmulik commented, “Band-Aids not fixing bullet holes yet,” in reference to Snap’s struggles to consistently grow revenue and catch up to rivals like Meta. Although Snapchat introduced an AI-powered chatbot to attract more users, Shmulik pointed out that the company has failed to keep pace with its competitors in terms of ad revenue growth. He added, “Snapchat is running to stay in the same place while peers enviously get back on the ad growth track.”
© Thomson Reuters 2023
Denial of responsibility! SamacharCentrl is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
Deepak Sen is a tech enthusiast who covers the latest technological innovations, from AI to consumer gadgets. His articles provide readers with a glimpse into the ever-evolving world of technology.
