Microsoft and Meta earnings put a focus on payoffs from AI spending

Any hint that the reigning tech giants plan to spend even more than anticipated on developing AI technology could weigh on the stocks. Photo by Michael M. Santiago/Getty Images/Postmedia files

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The tech giants are the first of Corporate America’s four biggest AI spenders to report, with results from Alphabet Inc. and Amazon.com Inc. due next week. This year alone, the quartet is expected to have about US$505 billion in combined capital expenditures, up from roughly US$366 billion estimated for 2025, according to data compiled by Bloomberg. As Wall Street grows increasingly concerned about the ability to generate profits from all this AI spending, the expenses are starting to be seen as potential risks for the high rollers.

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The fear is starting to show up in the stock prices. Microsoft’s shares have slumped 11 per cent since the companies last reported earnings on Oct. 29, while Meta’s are down around 10 per cent. The S&P 500 is up 1.6 per cent over that span.

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“Every quarter investors are going to be looking to see what the ROI is on that spend,” said Jonathan Cofsky, a portfolio manager at Janus Henderson, which has about US$480 billion in assets and owns substantial positions in Microsoft and Meta.

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Any hint that they plan to spend even more than anticipated on developing AI could weigh on the stocks, while simultaneously giving a boost to the companies benefiting from the largesse, like chipmakers Nvidia Corp., Broadcom Inc. and Micron Technology Inc.

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So far, signs are pointing to the heavy spending continuing. Late Tuesday, Seagate Technology Holdings PLC said the outlook for demand for high-capacity hard drives from data centre owners looks strong through calendar 2027 and multiple cloud customers are discussing demand growth projections for 2028.

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Seagate’s outlook sent the stock up as much as 18 per cent on Wednesday, and lifted peers including Western Digital Corp. and Sandisk Corp.

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“The general investor expectation is whenever there’s a range it’s more toward the high end of the range, at least for 2026,” Cofsky said. “That bodes well for Nvidia, Broadcom, TSMC and the broader infrastructure trade.”

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For Microsoft, all eyes will be on its Azure cloud-computing business, which is seeing brisk demand from companies developing and running AI services. In its fiscal first quarter, which ended in September, Microsoft said demand for Azure services “significantly” outpaced capacity. Revenue from the unit is projected to rise 38 per cent in the second quarter from a year ago, compared with 39 per cent in the first quarter.

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Investors will also be on the lookout for signs of increased traction for Microsoft’s Copilot-branded products, its main vehicle for selling AI software tools to office workers. Details around how much those services are contributing to Microsoft’s sales growth have been sparse so far.

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At the same time, shareholders are growing more anxious about software makers like Microsoft facing disruptions following Anthropic’s release of a new AI tool, Claude Cowork, to glowing reviews earlier this month.