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

By Jeran Wittenstein, Bloomberg

Investors wondering about payoffs from the pile of cash being spent on artificial intelligence should get some clues when Microsoft Corp. and Meta Platforms Inc. post earnings after the close Wednesday.

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 $505 billion in combined capital expenditures, up from roughly $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.

The fear is starting to show up in the stock prices. Microsoft’s shares have slumped 11% since the companies last reported earnings on Oct. 29, while Meta’s are down around 10%. The S&P 500 is up 1.3% over that span.

“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 $480 billion in assets and owns substantial positions in Microsoft and Meta.

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.

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 center owners looks strong through calendar 2027 and multiple cloud customers are discussing demand growth projections for 2028.

Seagate’s outlook sent the stock up 10% in premarket trade Wednesday, and lifted peers including Western Digital Corp. and Sandisk Corp.

“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.”

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% in the second quarter from a year ago, compared with 39% in the first quarter.

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.

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.

“The Street is very negative on software and they’re going to be really digging in to say what’s going on here, how durable is your growth?” said Michael Bailey, director of research at Fulton Breakefield Broenniman.

Meta is under even more pressure to show that AI is improving growth. The stock tumbled 11% on Oct. 30 after the Facebook owner pledged to boost capital spending in 2026 without detailing when and how those outlays would pay off.

Meta’s fourth-quarter earnings per share are expected to rise 2.1% to $8.19. Revenue is projected to jump 21% to $58.4 billion in the fourth quarter, but slow to 18% in 2026.

Unlike Microsoft, Meta doesn’t have a cloud-computing business. Instead, Chief Executive Officer Mark Zuckerberg says that growth will come from AI helping to improve ad targeting and engagement on its social media platforms. But that hasn’t been good enough to satisfy investors.

“They’re in the hot seat this quarter to really explain this spending better,” said Bailey. “Is it driving growth?”

Tech Chart of the Day

ASML Holding NV’s orders in the fourth quarter far exceeded analysts’ expectations, as the rapid development of artificial intelligence infrastructure boosted demand for its cutting-edge chip-making machines.

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Earnings Due Wednesday

• Earnings Premarket:
  • Amphenol Corp. (APH US)
  • Avnet Inc. (AVT US)
  • Corning Inc. (GLW US)
  • Extreme Networks Inc. (EXTR US)
• Earnings Postmarket:
  • Calix Inc. (CALX US)
  • International Business Machine (IBM US)
  • Lam Research Corp. (LRCX US)
  • Meta Platforms Inc. (META US)
  • Microsoft Corp. (MSFT US)
  • Plexus Corp. (PLXS US)
  • ServiceNow Inc. (NOW US)
  • Viavi Solutions Inc. (VIAV US)

–With assistance from Subrat Patnaik and David Watkins.

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