Investors are worried about how much companies are spending on artificial intelligence, but the tech giant is sure that its efforts will pay off.
By Andrew Ross SorkinRavi MattuBernhard WarnerSarah KesslerMichael J. de la MercedLauren Hirsch and Ephrat Livni
July 31, 2024
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Big Tech’s big spending
The technology sector is facing another rough patch, after Microsoft reported mixed quarterly earnings and its shares tumbled. The company’s results are fueling more concern among investors about whether hefty spending on artificial intelligence will pay off, and how long that might take.
But analysts say that Microsoft is on better footing than its rivals, and that investor enthusiasm for all things A.I. will remain strong over the long term.
Microsoft missed earnings expectations for its cloud business by a hair. The company said on Tuesday that its Azure division grew 30 percent in the most recent quarter, just short of the 31 percent that the company had forecast.
Shares in the tech giant were down 3 percent in premarket trading on the results, echoing a similar market reaction to Alphabet last week, when Google’s parent company disclosed the scale of its ever-growing A.I. bills.
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Other A.I.-related stocks are down, too. Shares in Nvidia, the dominant A.I. chipmaker, closed down 7 percent on Tuesday, wiping about $250 billion off its market value, while those in Arm, the SoftBank-controlled chip design company, fell 6 percent.
The costs of the A.I. boom are hanging over Big Tech. Microsoft has invested $13 billion in OpenAI, the company behind ChatGPT, and a number of other partnerships with A.I. start-ups to meet soaring demand. On Tuesday, the company revealed more mind-boggling numbers behind its effort to win the A.I. race:
- It spent almost $19 billion in capital expenditure last quarter, up almost 80 percent year-on-year and more than twice as much as it invested two years ago.
- Spending on new building and data center improvements rose to $35.4 billion for the fiscal year that just ended, up from $13.5 billion in the previous year.
Microsoft isn’t going to pull back. Satya Nadella, the company’s C.E.O., told analysts the investments were key to “capture the opportunity of A.I.” Amy Hood, its C.F.O., said that spending would rise this year, adding that the investments in data centers would be monetized “over 15 years and beyond.”
Rishi Jaluria, an analyst at RBC Capital Markets, told The Times that Microsoft had won more leeway with investors on A.I. because it has provided more detail on how those investments are paying off. It helps that Microsoft said it could have sold even more A.I. services if it had the computing capacity.
Investors aren’t about to abandon their long-term A.I. bets. Tech stocks are down on Microsoft’s cloud miss, but “the AI trade is intact,” Gene Munster, a managing partner at Deepwater Asset Management, wrote on X.
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What’s next: Meta reports on Wednesday, and Apple and Amazon tomorrow.
- In other tech news: The Biden administration will exempt companies from Japan, South Korea and the Netherlands from new export restrictions on chip making equipment to China, according to Reuters.
HERE’S WHAT’S HAPPENING
Oil prices rise after a top Hamas leader is assassinated in Iran. Brent crude, the international oil benchmark, was up more than 2 percent after the death of Ismail Haniyeh, a top leader in the militant organization, was announced on Wednesday. Iran and Hamas blamed Israel for the killing, which threatened to engulf the region in further conflict.
Prominent tech investors and workers publicly back Kamala Harris. More than 100 venture capitalists, including Vinod Khosla and Reid Hoffman, pledged both political and financial support for the vice president against Donald Trump, and a letter by tech entrepreneurs and workers gathered more than 550 signatures in two days. Meanwhile, the Harris campaign said she would hold a rally with her running mate next week — in Philadelphia, the hometown of Gov. Josh Shapiro of Pennsylvania, a leading contender for the role.
The Bank of Japan raises interest rates, again. The country’s central bank increased borrowing costs for only the second time in nearly two decades, taking its target policy rate to 0.25 percent, up from zero to 0.1 percent. The closely watched decision came as the yen slid against the dollar, raising the costs of imports for Japanese consumers.
Meta reaches a $1.4 billion settlement with Texas over privacy violations. The agreement by Facebook’s parent company ends a fight over whether the tech giant ran afoul of state law by automatically tagging users’ faces on its site. Tuesday’s settlement is the largest by a state over privacy violations, according to Ken Paxton, Texas’s attorney general.
CrowdStrike’s stock tumbles on word that Delta may sue over the global I.T. outage. Shares in the cybersecurity provider fell 9.7 percent on Tuesday after CNBC reported that Delta had hired David Boies, the prominent litigator, to seek damages. CrowdStrike has blamed a software glitch for taking down millions of Windows PCs; Delta is still struggling to recover.
Warren urges the Fed to “follow the data”
As top Fed officials meet again on Wednesday to discuss whether to cut interest rates — the consensus is that they won’t yet — a trio of Democratic senators, led by Elizabeth Warren of Massachusetts, is urging the central bank to move faster.
In a letter sent on Tuesday to Jay Powell, the Fed chair, that DealBook is first to report on, the lawmakers say that avoiding a cut now would give in to calls from some Republicans to refrain from taking such an action before the election in November.
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“We are writing to urge you to follow the data” in cutting rates on Wednesday, Warren, John Hickenlooper of Colorado and Sheldon Whitehouse of Rhode Island write. They point to consecutive decreases in the Personal Consumption Expenditures index, the Fed’s preferred inflation gauge, as well as to more troubling economic trends.
Disclosure:
The New York Times Company has sued OpenAI and Microsoft, claiming copyright infringement of content related to artificial intelligence systems. The companies have sought to dismiss some of the claims. Times reporters have no involvement in the case and remain independent in their coverage.
“The one-two punch of rising unemployment and slowing wage growth risks erasing the post-pandemic economic gains,” they write.
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The letter adds to the fraught political backdrop for the Fed. Markets and economists expect that the central bank will start cutting rates in September, but some Republicans say doing so would be a political move meant to help Democrats. Donald Trump told Bloomberg Businessweek recently that the Fed was aware that cutting rates before the election was “something that they know they shouldn’t be doing.”
Powell and other Fed officials are adamant that their decisions are based on inflation and labor market data, not on politics. But Warren and her colleagues write that not cutting in response to strong economic data would “indicate that the Fed is giving in to bullying, and is putting political considerations ahead of its dual mandate to ‘promote maximum employment and stable prices.’”
That said, some fear that Trump would threaten the Fed’s independence if he wins. As president, he loudly criticized decisions by the central bank that he didn’t like. How far he might go in a second term — leaving aside the uncertainty of whether a president can fire a Fed chair — is a big question.
By contrast, President Biden generally hasn’t commented on monetary policy. And while Vice President Kamala Harris has said little about inflation and monetary policy, she would most likely continue Biden’s approach, The Times reports.
Falling sales, and a critical Schultz, weigh on Starbucks
Shares in Starbucks are up in premarket trading after the company reported another tough quarter, suggesting that Laxman Narasimhan, the coffee chain’s C.E.O., has won himself some breathing room.
But the scale of the challenges he and Starbucks face remains huge, including declining sales, falling profits, a restive work force and pressure from a major activist investor — and from Narasimhan’s predecessor, Howard Schultz.
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The results: Global same-store sales fell 3 percent in the second quarter from the same time last year, while sales in China, a key driver of growth, fell 14 percent amid tough domestic competition. Profit fell 7.6 percent year-on-year.
Starbucks blamed the broader economic environment, as other restaurant chains have struggled from reduced consumer spending. (See: McDonald’s.) “We are focused on what we can control in a consumer environment that can best be described as complex,” Narasimhan told analysts on Tuesday.
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But the chain faces other problems:
- Starbucks executives acknowledged that employees needed to fulfill orders faster and more accurately, and that customers are also looking for new food and drink offerings. Narasimhan said all of those aspects were being worked on: “We’re making real progress,” he told analysts.
- The company is still negotiating with employees, many of whom are moving to organize. Higher wages were one factor weighing on the operating margin for the quarter.
- Narasimhan confirmed reports that Elliott Management, Paul Singer’s $65.5 billion activist hedge fund, has built up a stake and is pressing for changes. “Our conversations to date have been constructive,” he said.
Perhaps the unique pressure is from Schultz. The company’s longtime leader stepped down as chairman and C.E.O. last year and handed the reins over to Narasimhan. But Schultz, who has retired and unretired from the company several times, remains a frequent, and increasingly critical, commentator.
In a LinkedIn post two months ago, he offered a detailed assessment of the company’s problems: “Senior leaders — including board members — need to spend more time with those who wear the green apron,” he wrote. And on the “Acquired” podcast last month, he said he couldn’t stay quiet if the company was drifting “towards mediocrity, and I hold leadership and the board responsible for that.”
With a nearly 2 percent stake, Schultz remains one of the biggest shareholders in Starbucks, giving his opinions weight and potentially complicating Narasimhan’s job. The Financial Times reported last week, for instance, that the former C.E.O. opposed a potential settlement with Elliott.
- In other Starbucks news: Semafor takes a close look at Schultz’s stake in the olive grower that sells the chain all of its olive oil.
THE SPEED READ
Deals
- Bill Ackman cut the fund-raising target for the I.P.O. of his U.S.-listed investment fund and is aiming to pull in $2 billion — well below the $25 billion goal he had once floated. (NYT)
- Edgar Bronfman Jr., the former chair of Warner Music, is reportedly still interested in a takeover bid for Paramount, which is soliciting potential alternative offers to its deal with Skydance Media. (Axios)
Elections, politics and policy
- The director of Project 2025, the right-wing policy endeavor that has become an electoral punching bag for Democrats, is stepping down after Donald Trump criticized the initiative. (NYT)
- How the financier Ken Griffin is donating millions to help reshape the Republican Party — but has refrained from giving to Trump’s campaign. (Bloomberg)
Best of the rest
- Norah O’Donnell is stepping down as the anchor of “CBS Evening News” after the election, the latest change for the network amid upheaval at its parent, Paramount. (NYT)
- “Will A.I. Upend White-Collar Work? Consider the Hollywood Editor.” (NYT)
- How YouTube grew to become a more popular streaming service on U.S. televisions than Netflix. (NYT)
We’d like your feedback! Please email thoughts and suggestions to dealbook@nytimes.com.
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Andrew Ross Sorkin is a columnist and the founder of DealBook, the flagship business and policy newsletter at The Times and an annual conference. More about Andrew Ross Sorkin
Ravi Mattu is the managing editor of DealBook, based in London. He joined The New York Times in 2022 from the Financial Times, where he held a number of senior roles in Hong Kong and London. More about Ravi Mattu
Bernhard Warner is a senior editor for DealBook, a newsletter from The Times, covering business trends, the economy and the markets. More about Bernhard Warner
Sarah Kessler is an editor for the DealBook newsletter and writes features on business and how workplaces are changing. More about Sarah Kessler
Michael J. de la Merced has covered global business and finance news for The Times since 2006. More about Michael J. de la Merced
Lauren Hirsch joined The Times from CNBC in 2020, covering deals and the biggest stories on Wall Street. More about Lauren Hirsch
Ephrat Livni is a reporter for The Times’s DealBook newsletter, based in Washington. More about Ephrat Livni
See more on: Microsoft Corporation, OpenAI