AI’s grip on tech set for test with Microsoft, Alphabet earnings

Bets that artificial intelligence will revolutionize Corporate America and deliver riches to the biggest companies behind it will get a test Tuesday, as Microsoft Corp. and Alphabet Inc. report their first earnings since AI fever broke out.

Microsoft’s shares have soared 44 per cent in 2023, hitting multiple records in a rally that has left it on the cusp of joining Apple Inc. as the only two companies with market valuations of US$3 trillion. Alphabet’s rally stands at 38 per cent, slightly under the Nasdaq 100 Index’s 41 per cent gain. Both are among the early leaders in publicly traded tech behemoths with promising AI tools. 

The results, due after the market closes, will demonstrate whether the technology is already a big enough driver of growth to justify valuations that have become elevated by recent standards. Microsoft is trading at 31 times estimated earnings, above its long-term history and at a premium to the Nasdaq 100 Index.

“It might be too early to see any AI impact to revenue, though we will likely see higher costs as it develops and distributes the technology, which could be an issue from a profitability standpoint,” BNP Paribas Exane analyst Stefan Slowinski said of Microsoft ahead of its results. “The fundamentals are obviously quite strong for Microsoft, and it will benefit from AI, but at this valuation you have to scrutinize the risks more.”