Interactive Investor

AI optimism drives Magnificent Seven upgrade

It’s a big week for the Magnificent Seven and Wall Street’s lofty expectations on AI’s rapid growth potential. Have results from these two tech giants punctured the optimism?

31st January 2024 13:22

by Graeme Evans from interactive investor

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The AI bull stance of a leading investment bank remained in place today, despite Wall Street’s mixed reaction to results by the $5 trillion-valued pair of Microsoft Corp (NASDAQ:MSFT) and Alphabet Inc Class A (NASDAQ:GOOGL).

UBS Global Wealth Management continues to like the tech sector given an above-average tilt to quality and potential for rapid growth in global AI revenues to $420 billion (£331bn) by 2027.

Its confidence comes in a significant week for the Magnificent Seven that peaks with tomorrow night’s results by Apple Inc (NASDAQ:AAPL), Inc (NASDAQ:AMZN) and Meta Platforms Inc Class A (NASDAQ:META), accounting for 13% of the S&P 500 index.

Alphabet and Microsoft represent another 11.5% but their performances in results posted last night were not enough to give another leg up for their valuations following a strong run in 2023 and the start of this year.

The Google and YouTube parent company dropped 3% in after-hour dealings as revenues in its search advertising businesses disappointed in fourth-quarter results, while Microsoft’s second-quarter sales and earnings beats were not as strong as previous quarters.

Advanced Micro Devices Inc (NASDAQ:AMD) fuelled expectations of a weak start to today’s session for the tech-led Nasdaq when it forecast first-quarter revenues below Wall Street estimates.

UBS Global Wealth Management told clients this morning: “While markets have reacted to misses in the headline numbers, underlying demand for artificial intelligence remains strong and gives us confidence that the AI bull case is intact.

“Both Microsoft and Alphabet reported accelerating cloud growth compared to previous quarters, and their commitment to AI investments, including in AI computing, remain strong.

“Without taking any single name views, we think this shows that AI monetisation is improving, with increasing AI capital expenditure supporting our positive near-term view on AI infrastructure.”

Microsoft chief executive Satya Nadella said yesterday his company had moved from talking about AI to applying AI at scale. 

He added: "By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”

This was highlighted by the performance of Azure cloud computing, where 28% revenues growth at constant currency benefited from a six percentage points contribution from AI.

The company now has 53,000 Azure AI customers, with over one-third of these new to the cloud platform over the past 12 months. It also pointed out that more than half the Future 500 use Azure OpenAI, including Coca-Cola Co (NYSE:KO) and Rockwell Automation Inc (NYSE:ROK).

Morgan Stanley improved its share price target from $450 to $465 after it said last night’s second-quarter results highlighted the company’s leading position in Generative AI and unique ability to monetise this technology.

It added that one of the biggest surprises by the Office365 owner concerned third-quarter operating margin guidance significantly ahead of expectations, leaving Microsoft on course to deliver an eighth consecutive year of expansion.

The US bank said: “With this innovation cycle just getting started and investors already getting rewarded with 23% year-on-year earnings per share (EPS) growth in the second quarter and further positive EPS revisions for 2024, we remain firmly overweight.”

AI investment and innovation have also benefited Alphabet in the most recent quarter, leading to revenues 13% higher and ahead of Wall Street expectations at $86.3 billion (£67.88 billion). Google Cloud contributed revenue growth of 26% to $9.19 billion (£7.24 billion).

But in a reflection of how far shares have risen since October, Alphabet’s slight miss in search and YouTube advertising after an 11% increase in revenues to $65.5 billion (£51.6 billion) triggered a sell-off during last night’s post-close dealings.

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