U.S. stock indices recently experienced their largest single-day drop in nearly two months, with the Nasdaq falling by 2.76% and the S&P 500 declining by 1.86%. Among the hardest hit were major tech stocks, including Microsoft (MSFT, Financial) and Meta (META), which dropped by 6.05% and 4.09% respectively. The decline was partly due to investor concerns about future growth, despite both companies reporting strong earnings.
Microsoft reported a 16% year-over-year increase in revenue to $65.685 billion for its first fiscal quarter ending September 30, 2024. Net income also grew by 11% to $24.667 billion. The company's strong performance was driven by its cloud computing and Office software businesses, with Azure cloud revenue up by 33%. Despite exceeding expectations, Microsoft's forecast for the next quarter fell short of analyst estimates, with anticipated revenue between $68.1 billion and $69.1 billion, compared to the expected $69.83 billion.
Additionally, Microsoft faces new competition in the search engine market. OpenAI's launch of ChatGPT as a search tool presents a direct challenge, despite Microsoft's $14 billion investment in OpenAI and integration of its AI models. These factors, along with concerns about the company's substantial AI investments, have affected investor sentiment.
Similarly, Meta's third-quarter earnings showed a 19% increase in total revenue to $40.589 billion and a 35% rise in net income to $15.688 billion. The company attributed its success to the widespread application of AI across its platforms. However, despite exceeding expectations, investors remain worried about Meta's slowing profit growth and heavy investments in AI and the metaverse.
Meta's Reality Labs, which focuses on metaverse technologies, posted a $4.4 billion operating loss for the third quarter. The company plans to increase its capital expenditure in AI, raising spending estimates for 2024 to $38-40 billion. Investor concerns are focused on balancing long-term investments with short-term returns, as AI commitments require time to yield results.
Although Meta's stock dropped 4% recently, it has risen over 60% year-to-date, making it one of the better-performing stocks in the S&P 500 index.
