Microsoft and Google Taught a Valuable Lesson: Investing in AI Pays Off

Tech giants including Microsoft and Alphabet have stated that while they anticipate significant benefits from artificial intelligence in the future, they acknowledge that substantial investments will be required before these gains are reflected in their financial performance.

Microsoft said costs rose sharply as it built new data centers to support artificial intelligence and that capital costs will continue to rise as it buys chips from data centers such as Nvidia Corp.

Microsoft is bearing the cost of AI in two ways, analysts said: to power its own products, such as its upcoming $30-a-month Copilot AI assistant, and to serve companies that want to use its Azure cloud services to create AI products.

Microsoft executives said the service will start generating most of its revenue in the second half of 2024, which ends June 30.

“They’re buying a bunch of H100s,” said Ben Bajarin, CEO and principal analyst at Creative Strategies, referring to Nvidia’s flagship for artificial intelligence.

“You’re probably going to see the same with Amazon, if not this quarter, then next quarter, because both are clouds that most of the market is using for education (AI systems) right now.”

However, Alphabet kept costs under control, though not for long. CFO Ruth Porat, who will become CEO and chief investment officer, said data center construction delays are the reason second-quarter capital expenditures were lower than expected.

“When it comes to AI, Google may have spent more than $200 billion on AI investments over the past decade, but users and investors may not appreciate that much,” said Scott Kessler, global head of technology media and industry. telecommunications on Third Bridge.

One advantage Google has, analysts said, is that it has its own custom chip to handle AI work called the Tensor Processor Unit (TPU), which helps keep costs down.

Microsoft may “aggressively buy Nvidia chips because Microsoft doesn’t have its own silicon as an alternative,” said Atlantic Equities analyst James Cordwell.

But Google acknowledged that it buys chips from other companies as well as uses its own, and Porat said that spending could slow profits and growth.

“The tipping point message was the same,” said Microsoft and Google, said Gene Munster, CEO of Deepwater Asset Management, “but the difference was that Microsoft investors wanted to see more.”