Microsoft & Meta Earnings: Are DeepSeek Assumptions Premature?

DeepSeek news earlier in the week spooked many investors in the AI trade, with many related stocks taking nosedives as a result.DeepSeek is a Chinese artificial intelligence startup that develops open-source large language models (LLM). It recently introduced its R1 model, which rivals leading AI systems like OpenAI's ChatGPT but was developed at a fraction of the cost.The news has caused many to question the steep capital expenditures of titans like Microsoft MSFT and Meta Platforms META, both of which have committed huge amounts of capital geared around their AI infrastructure buildouts.Nonetheless, as polarizing as the news may be, it’ll be crucial to wait and see how the market absorbs the shockwave in the coming weeks. Fortunately, we heard from both Meta Platforms and Microsoft last night.Let’s take a closer look at the results and any commentary surrounding DeepSeek.Microsoft Embraces DeepSeekConcerning headline figures in its release, Microsoft posted adjusted EPS of $3.23 and sales of $69.6 billion, reflecting growth rates of 10% and 12%, respectively. Both items exceeded our consensus expectations.As usual, Microsoft’s Intelligent Cloud results were an important focus point in the release, including the Azure cloud computing platform. Intelligent Cloud revenue of $25.5 billion reflected a 19% move higher from the year-ago period.As shown below, Intelligent Cloud results have regularly fallen short of our consensus expectations over recent periods, contrasting the beats we saw primarily throughout 2023 and some of 2024. The results hold significant weight concerning the stock’s momentum, with the recent miss weighing on shares following the print.  Image Source: Zacks Investment ResearchIn the earnings call, CEO Satya Nadella was asked about DeepSeek, stating, ‘I think DeepSeek has had some real innovations.’ He continued –‘And so, therefore, for a hyperscaler like us, a PC platform provider like us, this is all good news as far as I'm concerned.’In fact, Microsoft stated yesterday that DeepSeek R1 is now available in the model catalog on Azure AI Foundry and GitHub, joining a diverse portfolio of over 1,800 models, including frontier, open-source, industry-specific, and task-based AI models.Perhaps most importantly, the company maintained its CapEx outlook for the coming periods, expecting similar levels to its Q2 ($22.6 billion) to continue fueling its AI infrastructure buildout. Shares demand a premium given investors’ growth expectations, with the current 31.7X forward 12-month earnings multiple above the five-year median and reflecting a 41% premium relative to the S&P 500.Earnings are forecasted to climb 9% on 13% higher sales in its current fiscal year (ends in June).Image Source: Zacks Investment ResearchMeta Maintains CapEx Outlook Concerning headline figures in its release, Meta Platforms posted adjusted EPS of $8.02 and sales of $48.4 billion, reflecting growth rates of 50% and 21%, respectively. Both items exceeded our consensus expectations, with the growth rates notably strong.Importantly, the company’s ad business continued to perform at a high level, with revenue of $46.8 billion again exceeding our consensus estimate. As shown below, the advertising results for META have been rock-solid over recent periods, regularly bringing sizable beats.Image Source: Zacks Investment ResearchMark Zuckerberg, asked about DeepSeek, had a very grounded take, stating, ‘I think there’s a number of novel things that they did that I think we’re still digesting. And there are a number of things that they have advances that we will hope to implement in our systems. And that’s part of the nature of how this works, whether it’s a Chinese competitor or not.I kind of expect that every new company that has an advance -- that has a launch is going to have some new advances that the rest of the field learns from. And that’s sort of how the technology industry goes.I don’t know -- it’s probably too early to really have a strong opinion on what this means for the trajectory around infrastructure and CapEx and things like that. There are a bunch of trends that are happening here all at once.’META’s valuation is more tolerable than that of MSFT, with the current 25.9X forward 12-month earnings multiple reflecting a 16% premium relative to the S&P 500 and modestly above the five-year median. EPS is forecasted to climb 6.6% on 13% higher sales in its current fiscal year (end in Dec.).Image Source: Zacks Investment ResearchBottom LineWhile the DeepSeek news has startled the AI trade, hearing from Mag 7 members Microsoft MSFT and Meta Platforms META provided a fraction of visibility.Both companies maintained their CapEx outlooks and tipped their cap to DeepSeek, easing some fears about the AI infrastructure buildout overall. Still, it’ll be some time before we get a true grasp on the situation, and investors should wait on official statements from companies before getting spooked by headlines.5 Stocks Set to DoubleEach was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2024. 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