Microsoft and Google’s stock price surge from their focus on generative AI (GenAI) has been brought into question after the two tech giants warned that costs to develop AI will continue to grow. 

Microsoft and Google’s parent company, Alphabet, failed to convince investors that its AI growth will be enough to keep up with rising costs, despite the two tech giants reporting strong overall quarterly results on Tuesday (30 January).

Shares in Microsoft fell one percent, despite strong sales in its AI-integrated Azure cloud computing sales. Alphabet’s shares fell as much as six percent after its search business missed estimates. 

Microsoft made $62bn in revenue and a net income of $21.9bn during the second quarter of its 2024 financial fiscal results. Its revenue rose 18% with net income increasing by 33%. 

Alphabet announced Q4 revenues of $86.31bn, up 13% compared to last year. Operating income for the quarter reached $23.7bn, an increase from $18.16bn in Q4 2021. 

Amy Hood, Microsoft chief financial officer, said the company expected capital spending to “increase materially” pushed on by investments in cloud and AI infrastructure. 

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By GlobalData

AI and GenAI require huge amounts of power which fuels the need for more costly data centres and servers. 

David Bicknell, senior analyst at research company GlobalData told Verdict that while the cost of AI is going to continue to rise, he believes Microsoft and Alphabet are prepared to pay. 

“Yes, the cost of AI is going to grow markedly in terms of data centers and servers,” Bicknell said, “but I think those costs are priced in, by both Microsoft, Alphabet and by others.”

“I think both Microsoft and Alphabet are committed to AI-ifying their business, from top to bottom, from cloud, to advertising, to security, and probably to gaming,” he said. 

Alphabet CEO Sundar Pichai said the company have “wound down some non-priority projects” across different teams to “which will help us invest and operate well in our growth areas”.

Alphabet’s core search business fell short of analyst expectations totalling $48bn, which missed projections of $48.14bn. 

Google’s search engine, which has been integrated with the company’s Gemini GenAI, has faced uncertainty as market leader since the GenAI race began.

The release of OpenAI’s ChatGPT in November 2022 has brought new demand for answering questions in a conversational interactive style.

Sam Pascoe, VP of product & delivery at digital creative agency Poppins told Verdict that Alphabet is falling behind OpenAI and Microsoft in the short term. 

“But we’ve seen in the past how quickly this can shift, and we’re very much at the peak of inflated expectations for large language models,” Pascoe added.