Microsoft is about to stress test Wall Street's appetite for huge AI bills

Investors reacted poorly to Google $GOOGL and Tesla $TSLA’s hefty AI expenditures last week. The Nasdaq $NDAQ had its worst day of 2024 after the two members of the “Magnificent Seven” reported second-quarter earnings. Tesla investors reacted to the fact that its profit margins sank (a lot) in large part because of its big AI spending. Google investors offloaded the stock after seeing sluggish growth in its YouTube division — and over worries about how long it will take for the company to reap the upsides of its AI costs. The selloff came even as Google executives repeatedly argued that integrating its Gemini AI tools helped power Google Cloud’s revenue to a record high, while its AI Overviews for Search helped drive Search revenue.

All this to say — investors are getting a little more cautious about the massive costs of AI infrastructure. There’s irony in that caution, though. Analysts at big banks have repeatedly said that building out AI infrastructure will send tech companies’ stocks soaring to new heights.

Microsoft CEO Satya Nadella will do well to heed the warning Google’s earnings offered. Google CEO Sundar Pichai gave vague answers to questions about its AI bill, simply saying the “risk of under-investing is dramatically greater than the risk of over-investing.” Microsoft could do better if Nadella addresses such questions head on.

Luckily, Microsoft is a step ahead of other companies in terms of its monetization of AI. “Microsoft remains one of the few tech companies seeing tangible benefits of enterprise GenAI investments,” said Deutsche bank researchers in a note to investors last week. Its latest AI innovation has been its AI PC, released in May at its annual developer conference, Microsoft Build.

Analysts at Deutsche Bank, Jefferies, and Bank of America $BAC reiterated their Buy ratings for Microsoft stock last week and said they expect another solid quarterly earnings report from the tech giant. Microsoft’s positive report will be driven by strength in its cloud computing division, Azure. Bank of America analysts said they expect Azure revenue to jump more 31% from the prior year, with 8% of that increase coming from Microsoft’s integration of AI. Overall, Wall Street analysts polled by FactSet see Microsoft’s revenues hitting $64.4 billion, a 14.6% increase from the same period last year.

Microsoft shares have risen more than 200% from five years ago and over 20% in the past year. Shares stood around $430 on Friday. Bullish Jefferies analysts see the stock rising to $550 over the next 12 months, while Bank of America’s price target for Microsoft shares is $510 and Deutsche Bank’s is $475.