Why Google Outperformed Microsoft and Meta After Earnings Reports

The big difference in stock market reactions among tech giants like Google, Microsoft, and Meta comes down to spending. Google appears to have an edge when it comes to managing its expenditures.

These three companies are often grouped together as part of the "Magnificent Seven," especially in the growing field of artificial intelligence (AI). As these companies compete fiercely for leadership in AI technologies, the focus shifts to how their financial results, particularly their earnings and spending on AI, are shaping their futures.

Investors are paying close attention to the earnings reports of each these companies, concentrating on two main aspects: their spending habits and the returns from those investments.

In the third quarter, Google’s parent company Alphabet (GOOG), along with Microsoft (MSFT), and Meta Platforms (META), showed robust growth in AI sectors. However, while Google’s shares surged around 3% after its earnings report, both Microsoft and Meta experienced declines of about 5% and 4%, respectively, the following day.

Growth in AI Segments

On a positive note, both Alphabet and Microsoft recorded growth in their cloud services, an important segment for AI development:

Cloud Segment	June 2024 Growth (YOY)	September 2024 Growth (YOY)	Improvement
Google Cloud	28.8%	35%	6.2 points
Microsoft Azure	29%	33%	4.0 points

Meta also reported revenue growth from AI-powered ads, albeit at a slower rate than before, from a 22% growth in the June quarter to 19% in September. Despite this slowdown, Meta's performance still exceeded analysts' expectations.

Overall, all three companies demonstrated notable growth in their most AI-driven sectors, with Google and Microsoft showing acceleration in cloud services, while Meta's core business remained strong.

Key Differences in Spending

Even though each company reported solid growth, the contrast in their capital expenditure figures likely explains the varied stock market responses.

Meta forecasted its capital spending for the year to reach between $38 billion to $40 billion, up slightly from an earlier estimate. However, CFO Susan Li highlighted that the company anticipates a "significant acceleration" in infrastructure expenses next year, which raised concerns among investors who felt that such an outlook was overly ambitious.

When comparing the capital spending between Alphabet and Microsoft for the September quarter, notable differences emerged:

Capital Spending	June 2024	September 2024	QOQ Growth	September YOY Growth
Alphabet	$13.2 billion	$13.1 billion	(0.9%)	62.1%
Microsoft	$13.9 billion	$14.9 billion	7.6%	50.5%

Although Alphabet's cloud growth outpaced Microsoft’s, its capital expenditures showed a slight decline compared to the previous quarter, even though they were up 62.1% year over year. In contrast, Microsoft recorded a consistent increase in spending, reflecting its ongoing investment in AI infrastructure.

During its earnings call, Alphabet's new CFO, Anat Ashkenazi, indicated that spending would remain stable in the fourth quarter while also hinting at potential rises in 2025. Microsoft, on the other hand, forecasted further increases in spending in the upcoming quarters and significantly in 2025.

Understanding the Advantages

One reason for Google's seemingly stronger position may be that both Microsoft and Meta are somewhat lagging in creating their own custom AI chips, while Alphabet has been designing its custom tensor processing units (TPUs) since 2015.

Building custom chips in-house is significantly more cost-effective than purchasing expensive chips from third parties like Nvidia, which Microsoft and Meta are largely relying on at this time. The high cost of Nvidia chips has even led some analysts to express skepticism about Microsoft's share performance.

As Alphabet seems to be in a stronger position now, Microsoft and Meta are also setting plans in motion to manufacture their custom chips. Investors will want to keep an eye on announcements related to the development of custom AI chips from each company, as this could significantly influence their capital spending strategies.

The encouraging news is that the demand for AI solutions remains robust across all three companies at present.

spending, growth, AI