Microsoft Slips, Chipmakers Surge as AI Market Faces Uncertainty

On Wednesday, Microsoft shares dropped 2% in premarket trading due to a slowdown in its cloud business growth, while Nvidia and other chipmakers saw gains following a positive quarterly report from Advanced Micro Devices (AMD).

This contrast highlights a divide in the AI sector, with investors questioning if Wall Street's AI enthusiasm has become overblown.

If the losses hold, Microsoft could lose over $70 billion in market capitalization.

"Microsoft reported a slowdown in its core cloud business and a significant increase in capital expenditure, effectively transferring wealth from Microsoft shareholders to Nvidia shareholders," noted Gil Luria, senior software analyst at D.A. Davidson.

In its latest report, Microsoft announced that revenue from its Intelligent Cloud unit, which includes the Azure cloud-computing platform, rose 19% to $28.5 billion, slightly missing analysts' expectations of $28.7 billion.

"Since Microsoft accounts for about 20% of the demand for Nvidia's top-tier AI chips, the increased capital expenditure at Microsoft is positive news for Nvidia," said Kathleen Brooks, research director at XTB. "As the leading hardware producer for AI technology, higher spending by Nvidia's major customers bodes well for its future performance."

Microsoft's capital expenditure, including finance leases, surged 78% to $19 billion in the quarter. The company stated it needs to expand its global data center network to meet AI demand and overcome capacity constraints.

Other major tech companies, including Meta Platforms, Amazon, Apple, Alphabet, and Tesla, showed modest gains in premarket trading after declining on Tuesday following Microsoft's results.

Daniel Morgan, senior portfolio manager at Synovus Trust, commented, "Investors are eager to see tangible results from massive AI investments. The stocks had risen in anticipation of these reports, which is now causing some disruption."

The rising costs of the AI race have added to investor concerns, particularly after Alphabet reported a larger-than-expected increase in capital expenditure last week to support its generative AI technology.

Technology companies have faced high expectations this earnings season. According to LSEG data, analysts predict technology companies in the S&P 500 will see an average earnings growth of nearly 10%.

AMD surged over 9% in premarket trading after forecasting third-quarter revenue above market estimates, driven by strong demand for its AI chips.

Nvidia, whose processors are considered the benchmark in AI computing, rose 5.6%. Broadcom, another seller of AI-related chips, advanced 4.4%, while Intel gained 1.86% and Qualcomm increased by 3.5%.

"We're still in a challenging macro environment. AI is undeniably significant but requires substantial investment, as reflected in the capital expenditure numbers," said Rishi Jaluria, an analyst at RBC Capital Markets.

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