Microsoft and Alphabet’s core businesses remain strong despite the anticipated costs of AI implementation.

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This includes updates from Microsoft and Alphabet, Google’s parent company, who both reported stronger resilience than anticipated in their core businesses during the second quarter. Despite cautioning about increased spending on AI, their strong performance in areas such as Google’s digital advertising and Microsoft’s cloud business exceeded expectations and boosted their stock prices. Additionally, a round of job cuts earlier in the year increased their profit margins.

In after-market trading, Google’s shares rose by 6%, bringing their year-to-date gain to 46%. On the other hand, Microsoft’s stock fell nearly 4% due to profit-taking, even though it had previously experienced significant stock price gains similar to other Big Tech companies.

Both companies acknowledged the need for higher spending in the upcoming quarters as they expand their data centers to support the anticipated increase in demand for generative AI services. However, they did not provide specific figures for the expected capital spending or the potential revenue uplift from AI.

Microsoft revealed that generative AI technology contributed to 1 percentage point of growth in its Azure cloud platform in the latest quarter and is expected to account for 2 additional points in the current period. CEO Satya Nadella stated that these numbers are significant considering the size of Microsoft’s cloud business, which generated over $111 billion in revenue in the fiscal year that ended in June.

Although chief financial officer Amy Hood mentioned that revenue lift from new AI services, like the “co-pilot” features being added to Office software, won’t be evident until next year, she also emphasized that capital spending will rise each quarter over the next year to align with the expected revenue growth from AI.

Alphabet’s CFO Ruth Porat acknowledged the need for increased investment in technical infrastructure, particularly due to AI. She stated that the company expects elevated investment levels in technical infrastructure throughout 2023 and even into 2024 as they add data center capacity and invest in their own TPU accelerator chips. Despite this, both Alphabet and Microsoft emphasized their commitment to cost discipline after recent job cuts.

In terms of financial performance, Alphabet witnessed a 5% increase in Google’s search and other advertising, resulting in a 7% overall revenue growth to $74.6 billion, surpassing Wall Street estimates. Microsoft also reported revenue and earnings above expectations, despite a slowdown in Azure’s growth rate due to customers optimizing their spending in uncertain economic times.

In constant currency terms, Azure’s growth rate slowed to 27% in the latest period. This reflects customers’ efforts to optimize their cloud spending amidst economic uncertainty. However, Microsoft’s revenue from Office 365 increased by 17%, surpassing expectations. Overall, Microsoft recorded a revenue of $56.2 billion, up 8% from the previous year, and earnings per share rose by 21% to $2.69, exceeding Wall Street estimates.