Microsoft, Meta to Feel AI Scrutiny as Investors Wait for Payoff

(Bloomberg) -- Ever-growing scrutiny from investors over when the billions spent on artificial intelligence will flow through to sales and profit is set to dominate when Microsoft Corp. and Meta Platforms Inc. report earnings later Wednesday.

Capital expenditure at Microsoft is estimated at about $14.6 billion in the last quarter, a jump of more than 45% from a year earlier, according to estimates compiled by Bloomberg. At Meta, spending is projected to have soared by almost 70% to $11 billion.

“There’s been an enormous amount of capital spent on developing AI — we’re actually looking very specifically to see who is monetizing it, who’s actually giving a return on investment and what does it look like,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.

Shares of Microsoft were up about 0.8% Wednesday in afternoon trading in New York. Meta shares were up about 0.3%.

Investors have turned cautious toward megacap technology names, given the enormous spending on AI, pricey valuations and slowing earnings growth that are testing the group’s status as market leaders. A gauge of the Magnificent Seven tech megacap stocks tracked by Bloomberg has struggled to regain its July highs.

“You have to show that your massive Capex investments in AI are actually driving revenues and guidance,” said Paul Marino, chief revenue officer at Themes ETFs. “And if you could do those things, I think you’re gonna be highly successful.”

The push for answers may be greater among Microsoft investors. The stock is the second-worst performer of the Mag 7, beating out only Tesla Inc. this year and underperforming the S&P 500 Index.

The shares have struggled for momentum as the market weighs the outlays on AI against slowing revenue gains for Microsoft’s Azure cloud-computing service. Revenue is tipped to creep just 1% higher from a year earlier, on a constant-currency basis. Last quarter, faltering sales growth at Azure hit Microsoft stock.

Heightened investor anxiety is “understandable” given how rapidly capex on AI infrastructure has ramped up this year, Piper Sandler analysts led by Brent Bracelin wrote in an Oct. 22 note.

Still, they see the risk that Microsoft will overspend on AI as limited by the investments it’s already made in buildings and land. Plus, its strong operating cash flow gives the company “flexibility to aggressively invest while increasing EPS and capital returns,” Bracelin said.

Citi analysts led by Tyler Radke see a mixed setup going into the quarterly report and agree that AI spending is necessary, while expecting reassuring commentary on Azure in the second half of the year. Radke said Citi would use a pullback in the shares as a buying opportunity.

Overall, analysts expect Microsoft to report $64.5 billion in revenue and $3.11 in adjusted diluted earnings per share, both a much slower clip of growth than previous quarters.

The mood going into Meta’s results is different as the stock is up roughly 68% this year, substantially outpacing the broader market. In its last report, the company showed some progress in ad sales thanks to AI, buying it more time for heavy investments to pay off.

While investors are bargaining on more evidence of AI strength, “high expectations & potential for some 4Q conservatism” carry the threat of near-term volatility, BofA Securities analysts led by Justin Post wrote in an Oct. 22 note.

Analysts expect Meta to report about $40 billion in third-quarter revenue, up around 18% on the year. Diluted earnings per share are expected to jump nearly 20% to $5.24.

“Meta has a longer road” to showing value from AI investments, said Mulberry at Zacks Investment. “It’s one of the reasons that we’ll be watching so closely what their progress is and why their real forward guidance on monetizing AI is going to be important.”

Of course, both companies risk disappointing investors by not spending enough — which could be seen as a sign that they’re set to fall behind in the AI trend.

“The CEO of a tech company is much more likely to get fired for not spending enough on AI versus spending too much,” said Shana Sissel, president and CEO of Banrion Capital Management. “Because right now, that is the deciding factor.”