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Nvidia shares rallied on Wednesday after Microsoft indicated it could proceed to speculate heavily in artificial intelligence tech infrastructure, highlighting investor sensitivity to the spending plans of a handful of major technology firms.
Chip stocks including Nvidia, Arm and AMD fell sharply on Tuesday ahead of the discharge of Microsoft's latest earnings report. Concerns in regards to the sustainability of last 12 months's huge AI rally had intensified after Google's quarterly earnings release last week, making for a volatile few days for technology investors that shaved nearly $500 billion off Nvidia's value in little greater than every week.
Microsoft shares fell 1.3 percent in New York on Wednesday after the Seattle-based company narrowly missed high expectations for cloud growth. However, comments from executives that demand for its AI services continues to outstrip available computing power, an issue that’s resulting in further investments in data centers, improved market sentiment toward their semiconductor suppliers.
Nvidia climbed greater than 11 percent on Wednesday, while AMD – which reported strong demand for its AI chips on Tuesday evening – rose 6 percent. Shares in U.K.-based chip designer Arm rose 7 percent.
The gains helped the Nasdaq index get better from Tuesday's slump, rising 2.5 percent.
Microsoft said revenue from its widely followed cloud computing platform Azure rose 29 percent within the quarter ended June 30 compared with the identical period last 12 months, missing forecasts for an increase of between 30 and 31 percent and falling in need of last quarter's growth rate of 31 percent.
Microsoft's capital spending totaled $19 billion within the quarter ended June 30, up nearly 80 percent from the identical period a 12 months ago and beating Wall Street forecasts. “Almost all” of that was cloud and AI-related spending, Chief Financial Officer Amy Hood said, and people investments would repay within the second half of the 12 months as Azure's growth “accelerates.”
Analysts at TD Cowen said Wednesday they raised their forecasts for Microsoft's capital spending for fiscal 2025 to $84 billion from $70 billion.
Hood said half of Microsoft's investments went into land, buildings and leases that “will actually generate income over 15 years or more,” while the opposite half went into technical equipment reminiscent of chips and servers that “are based on demand signals.”
Deutsche Bank analysts said in a note on Wednesday: “We imagine this recent disclosure will go a good distance toward allaying investor concerns in regards to the timeliness of converting capital expenditures into revenues.”
Technology firms like Google, Amazon, Microsoft and Meta are investing tens of billions of dollars annually in data center capability to support what they imagine can be a large wave of AI applications, due to the rapid adoption of OpenAI's ChatGPT app since its launch nearly two years ago.
Analysts at CFRA expected Amazon to “ramp up” its capital spending this 12 months to support each its logistics network and the infrastructure that underpins AI, predicting the overall for 2024 would likely be around $64 billion, in comparison with $52.7 billion in 2023.
Nvidia CEO Jensen Huang said during an on-stage conversation with Meta CEO Mark Zuckerberg that the social media company had installed around 600,000 of its latest AI chips. “They operate on a bigger scale than almost anyone else,” he said, to which Zuckerberg replied with a smile: “We are good customers.”
But while leading technology firms boast about their AI prowess, investors have turn out to be increasingly cautious in recent weeks in regards to the short-term returns on those investments.
“The market is coming to the conclusion that earnings growth at these big technology firms is nearly definitely going to slow,” said Manish Kabra, head of U.S. equity strategy at Société Générale. “Is the Nasdaq going to rise greater than 35 percent yearly? Maybe, but probably not. So the market is wobbly, and traders are switching between stocks like Nvidia and switching back again.”
Chip stocks received an additional boost from a Reuters report on Wednesday that recent U.S. export restrictions on semiconductor manufacturing equipment to China would exempt allies reminiscent of the Netherlands and Japan, home to major suppliers ASML and Tokyo Electron. ASML shares rose 5 percent after the report.
