Shares of cloud and artificial intelligence (AI)-related software stocks C3.ai (NYSE: AI), Salesforce (NYSE: CRM), and Datadog (NASDAQ: DDOG) were plunging today, down 6%, 3.6%, and 6.5%, respectively, as of 3:03 p.m. ET.
There wasn't any material news for these individual stocks today, although two of them did receive lukewarm reviews from analysts earlier this week. Of note, macroeconomic concerns are front and center, with war in the Middle East and higher interest rates weighing on sentiment.
Moreover, these stocks flew higher earlier this year on enthusiasm for artificial intelligence applications. But as results from Alphabet and Microsoft showed last night, the AI spoils aren't being distributed evenly nor broadly just yet.
AI customers are gravitating to Microsoft, cautious on everyone else
Last night, Alphabet and Microsoft released earnings, with somewhat differing cloud computing revenue trajectories. While Microsoft's Azure revenue was strong, accelerating to 29% growth relative to the 26% growth from the prior quarter, Alphabet's Google Cloud growth decelerated markedly to 22.5% growth from 28% in the prior quarter.
Last year's debut of OpenAI's ChatGPT chatbot has ushered in a rush of AI investment. However, from the looks of it, it appears that Microsoft, which has invested heavily in OpenAI and has exclusivity with their capabilities, may be the only one reaping the benefits right now. On Alphabet's conference call, CEO Sundar Pichai noted the cloud slowdown was due to continued optimizations as customers looked to cut costs.
Still, it appears that the market today is reacting more to Alphabet's weaker results than Microsoft's stronger ones. While artificial intelligence applications are definitely getting attention from customers, it appears Microsoft's lead in this race is getting most of the attention. Alphabet is still working on its ChatGPT competitor model called Gemini, which should be out later this year, and which may be why it is getting less attention from cloud customers today.
For companies like C3.ai and Salesforce, their software actually goes up against Microsoft in key areas of business intelligence and enterprise resource planning. But since they don't have their own internal models, it's possible they could lose share to Microsoft's offerings, or even Alphabet's if Alphabet develops more cloud software in-house following the release of Gemini. Meanwhile, Datadog's trajectory is still highly levered to cloud spending in general, and it appears that spend is still muted outside of Microsoft.
Earlier this week, analysts at Piper Sandler downgraded Salesforce to neutral from overweight due to the uncertainty around Salesforce's ability to monetize AI features. Meanwhile, Datadog was initiated at Guggenheim earlier this week with a neutral rating, with analysts there citing the muted macroeconomic environment, as well as channel checks suggesting customers were complaining about unreasonable bills from the company. That could suggest price cuts or more churn ahead.
And of course, no big move in the market would be complete without a discussion of Treasury bond rates. After two days of declines as Treasury yields backed off from the 5% mark, Treasury yields were up again today, rising 11 basis points to 4.95% as of this writing.
It has been like clockwork that tech stocks tend to move in the opposite direction of bond yields these days. So, it's no surprise Treasury yields' bounce off the recent decline is negatively impacting tech stocks today.
AI is becoming a "show me the money" story
While the initial AI rush propelled a broad range of technology stocks higher this year, investors are now looking for financial impacts from this exciting new technology. However, as Microsoft and Google's results show, the benefits aren't being shared broadly among all tech names.
Moreover, with C3.ai and Datadog still inking net losses and Salesforce trading at a relatively high trailing P/E ratio, it's no surprise to see these stocks selling off as bond yields rise. Moreover, the benefits of AI may be in the early stages, but it's also a possibility that AI winners may ultimately be a smaller group than thought earlier in 2023.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Billy Duberstein has positions in Alphabet and Microsoft. His clients may own shares of the companies mentioned. The Motley Fool has positions in and recommends Alphabet, Datadog, Microsoft, and Salesforce. The Motley Fool recommends C3.ai. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
