Microsoft Soars, Meta Plummets on Earnings

In a significant earnings season update, Microsoft is showing impressive gains fueled by robust cloud growth and the growing traction of its AI offerings, particularly Copilot. Conversely, Meta Platforms is experiencing a sharp decline in its stock price, as investors react to a disappointing forecast and the company's substantial investments in AI development that have yet to yield significant returns.

The broadcast, hosted by Ed Lello from San Francisco, covered key earnings reports and market trends affecting major tech players. Microsoft's stock saw a nearly 15% jump, marking its biggest single-day increase since October 2008. This surge is attributed to the company's highest cloud growth in years, moderating spending, and a notable increase in Copilot seats, reaching 30 million installed seats by the end of the quarter. Brady Fors, a Bloomberg reporter, highlighted that Microsoft is demonstrating a return on investment for the significant capital being poured into hyperscale computing, indicating an end in sight for escalating spending levels.

Microsoft's AI Momentum Validated

Gabriella Borges, a Managing Director and Senior Software Equity Research Analyst at Goldman Sachs, maintained a buy rating on Microsoft, raising her price target to $640. She emphasized Azure's growth as a key metric for understanding the return on investment in AI infrastructure. Borges noted that while external visibility into component pricing and capital expenditures is high, Microsoft's ability to monetize these investments through its Azure business is now becoming clearer. She pointed to instances like GitHub's consumption-based monetization for power users, where increased customer value directly translates to increased revenue for Microsoft, showcasing the company's diverse monetization strategies.

The full discussion can be found on Bloomberg Podcast's YouTube channel.

Comparing Microsoft's approach to Alphabet's, Borges highlighted how Microsoft is providing concrete metrics for its AI progress. The increase in Copilot installations from 20 million to 30 million in just one quarter was cited as a strong indicator of AI adoption. Borges also touched on improvements to Copilot, such as the Work IQ integration and the Co-work edition, which brings advanced frontier models into the Microsoft ecosystem, benefiting from its security and reliability. She stated, "Industry feedback is getting better on Copilot. And then to see it in the numbers just sort of reinforces that positive feedback loop on, okay, we're starting to move in the right direction and there's momentum that's picking up."

Microsoft CEO Satya Nadella commented on the company's ability to bring capacity online faster than ever, reducing GPU delivery times by nearly 50% and adding a gigawatt of capacity this quarter, with plans to double overall capacity in two years. Borges noted that the company's accounting change regarding depreciation schedules was straightforward to model.

Meta's AI Bets Face Investor Skepticism

In contrast, Meta Platforms reported a starkly different picture. The company's stock fell 8%, its biggest drop since October, as its forecast disappointed investors. CEO Mark Zuckerberg acknowledged that AI investments are accelerating core business functions but stressed the development of new personal agents as the foundation for future products and revenue streams. Bloomberg's Riley Griffin reported that while revenue increased by 28% year-over-year, expenses rose by 55%. Griffin highlighted that funding from Meta's core business might not be sufficient to sustain its AI ambitions, and investors are seeking clarity on the return on investment and future revenue lines.

Shredded Kajura, Managing Director of Global Internet at Wolf Research, interpreted Zuckerberg's comments about building a layer on top of rented GPUs as a strategy to extract maximum value, similar to AWS Bedrock. He believes Meta aims to make its models available, remain vertically integrated, and offer value to both large enterprises and SMBs, though investor skepticism about the enterprise side remains.

Meta's capital expenditure guidance remained at $145 billion for the year, but the low end was raised to $130 billion, with no figures provided for next year. Kajura noted that while this year's numbers are less impactful, next year's projections of $230 to $260 billion are significant relative to operating cash flow. He raised concerns about a potential need for a capital raise or JV partnerships, which could cast a shadow over the stock. Despite decelerating advertising revenue, Meta's advertising business continues to grow at a mid-to-high 20% range, attributed to AI integrations that improve targeting and recommendations. However, this growth is not yet offsetting the company's high spending.

ARM Faces Smartphone Headwinds, Eyes Data Center Growth

Qualcomm's earnings report also presented challenges, with a weak profit forecast citing component shortages and rising costs, particularly impacting the smartphone market. Qualcomm President and CEO Cristiano Amont discussed the unprecedented memory prices and shortages that are driving down smartphone unit volumes by an estimated 20% between fiscal years 2026 and 2027. He noted that while the premium tier shows resilience, consumers are opting for older models due to higher prices. Amont also confirmed that Apple's exit from Qualcomm's modem business is accelerating due to supply situations.

The conversation then shifted to Qualcomm's diversification strategy, with Amont projecting that non-handset revenue will constitute nearly 50% of the business by fiscal year 2027, and only one-third will be from handsets by fiscal year 2029. Automotive is identified as the primary driver for this growth, with Qualcomm exiting fiscal year 2027 at a billion dollars higher than anticipated. Data center ramp-up is also expected, with a stated $5 billion in data center revenue projected for fiscal year 2027. IoT growth is also anticipated, driven by AI on the edge and industrial applications. Amont expressed excitement about the acquisition of Modular, which strengthens Qualcomm's software capabilities and its commitment to providing an open platform for AI from edge to cloud.

Apple's Transition and Market Sentiment

The segment also looked ahead to Apple's earnings report, which marks Tim Cook's final earnings call as CEO. Mark Gurman, Bloomberg's Consumer Tech and Apple Managing Editor, expects continuity and a smooth transition under incoming CEO John Turnis. Gurman anticipates that Apple's numbers will likely beat expectations, with the iPhone remaining the central product in the company's universe. He noted that Apple's strategy is somewhat separate from the broader market themes of AI spending and disruption, positioning it as an "AI safety play" or "safety trade." However, concerns about rising input costs, like memory prices, persist, though Apple's hardware dominance is expected to help it weather these challenges.

The discussion concluded with a brief mention of other tech news, including Stack Infrastructure seeking a large syndicated loan for data center projects in Melbourne and concerns about SpaceX's Starship heat shield potentially impacting reusability. Disney's new strategy to position Disney+ as the company's primary fan gateway was also highlighted.