Microsoft experienced a 6% stock decline on Thursday as investors reacted to the company’s less-than-stellar cloud revenue growth, despite substantial investments in artificial intelligence (AI). Conversely, Meta Platforms saw a 4% stock increase following CEO Mark Zuckerberg’s assurances of a strong growth trajectory for the year, driven by AI initiatives.
Both CEOs defended their significant AI investments on Wednesday, just days after Chinese AI firm DeepSeek’s announcement of a breakthrough in affordable AI technology sent ripples through the industry. While Meta demonstrated robust advertising revenue growth, justifying its AI spending according to Evercore analyst Mark Mahaney, Microsoft’s core cloud offering, Azure, exhibited a slowdown.
Microsoft’s Azure revenue growth missed market projections, and the company’s Q3 forecast for the business fell short of expectations. This occurred despite the company’s earlier promise of a rebound in the second half of its fiscal year. Barclays analyst Raimo Lenschow noted that the anticipated second-half acceleration for Azure hasn’t materialized, suggesting that Microsoft’s prioritization of AI workloads might have come at the expense of core Azure development. This shift in focus, Lenschow argues, could delay the expected Azure growth spurt.
In contrast, Meta’s better-than-anticipated 21% revenue jump alleviated investor concerns regarding Zuckerberg’s ambitious $65 billion AI investment plan for this year, even with a tempered Q1 forecast. Rosenblatt analyst Barton Crockett highlighted Meta’s strong commitment to AI and its potential to reap significant benefits from these investments.
At least 15 brokerages subsequently raised their price targets for Meta, which currently boasts a 12-month forward price-to-earnings ratio of approximately 26.22. Following a remarkable 65% surge in 2023, the most significant gain among its Big Tech counterparts, Meta was poised to add over $80 billion to its market capitalization on Thursday. MoffettNathanson analysts emphasized the rare ability of Meta to leverage AI for sustained growth in both engagement and pricing.
Conversely, Microsoft faced a potential $182 billion reduction in market capitalization, with several brokerages lowering their price targets. The company’s stock performance lagged behind its peers last year, with only a 12% increase. J.P. Morgan analyst Mark Murphy pointed to a less confident reiteration of Microsoft’s Azure second-half outlook compared to 90 days prior, suggesting that the narrative of Azure acceleration is faltering.
In conclusion, while both Microsoft and Meta are heavily investing in AI, their contrasting fortunes highlight the challenges and opportunities presented by this transformative technology. Microsoft’s struggle to translate AI investment into immediate cloud revenue growth underscores the complexities of integrating AI into existing business models. Meanwhile, Meta’s success in leveraging AI for advertising revenue growth demonstrates the potential for significant returns on AI investments when aligned with core business strengths. The diverging paths of these tech giants underscore the critical importance of strategic execution in the rapidly evolving AI landscape.
