Major tech companies are reporting solid quarterly results, mainly thanks to their investments in artificial intelligence. However, investors do not seem particularly impressed.
Despite strong results from Alphabet, IBM, ServiceNow, and others, investors are responding with mixed or even negative reactions. Concerns are mainly focused on the pace and scale of AI investments, which could come at the expense of margins and profitability in the short term.
Even strong performance and ambitious growth expectations, such as at SAP, cannot prevent a fall in share prices.
Alphabet: concerns about AI investments
Alphabet outperformed analysts’ expectations in the second quarter, but investors reacted cautiously due to concerns about sharply rising investments in artificial intelligence. Google’s parent company announced that it would increase capital investments this year by $10 billion to $85 billion, mainly through additional spending on AI infrastructure and top talent.
The quarterly results themselves were strong. Earnings per share, excluding certain costs, came in at $2.31, compared with expectations of $2.18. Revenue rose 14 percent to $96.43 billion, which was also above market expectations. However, the initial share price gains evaporated after the investment plans were announced.
According to CFO Anat Ashkenazi, the higher spending is necessary due to increasing demand for cloud services and AI products. Google Cloud’s revenue grew by 31 percent to $13.62 billion. The company also announced a partnership with OpenAI, which will use Google’s infrastructure for ChatGPT.
The use of AI applications such as AI Overviews in the search engine and the Gemini app continues to grow rapidly. However, analysts are wondering when the substantial AI investments will pay off. This is putting pressure on short-term profitability, which is making investors nervous.
Investors expected more from IBM
IBM performed better than expected in the second quarter, but investors reacted cautiously, causing the stock to fall more than 5 percent in after-hours trading. Despite strong figures, investors had hoped for more convincing results, especially given the company’s recent AI-related product launches and acquisition drive.
Quarterly earnings came in at $2.80 per share, above the expected $2.64. Revenue rose 8 percent to $16.98 billion, helped by strong sales of the new z17 mainframe, designed for AI and financial applications. The infrastructure division posted revenue growth of 14 percent to $4.14 billion.
The software division grew by 10 percent to $7.39 billion, but fell slightly short of expectations. According to CEO Arvind Krishna, customers are shifting their investments toward hardware, especially with a view to expanding AI infrastructure.
IBM’s hybrid cloud, including Red Hat, grew by 16 percent. The company’s AI activities now represent $7.5 billion in revenue and future bookings. Consulting services also grew slightly, as companies seek help with AI integration.
The company is maintaining its target of $13.5 billion in free cash flow for 2025. Further growth should come partly from acquisitions, as the company sees room for mergers again in a more stable regulatory environment.
Positive outlook for ServiceNow
ServiceNow has announced its second-quarter results and once again clearly outperformed expectations, thanks to strong demand for its agentic AI solutions. The company reported adjusted earnings of $4.09 per share, well above analysts’ forecasts of $3.57. Revenue climbed 23% to $3.22 billion, once again exceeding expectations.
Net income rose 47% to $385 million, with the majority of revenue coming from subscriptions – $3.11 billion, well above the $3.03 billion forecast. CEO Bill McDermott emphasized that this proves how crucial AI platforms have become for businesses. According to him, business processes in virtually every sector are being “rebuilt” by this agentic AI approach.
An important indicator, CRPO (Current Remaining Performance Obligations), grew 25% to $10.92 billion, pointing to solid future revenue. The company also announced that additional AI tools will be available soon to support agent management and security workflow. After publication, the share rose by more than 7%.
SAP disappoints investors
SAP failed to reassure investors with its second-quarter figures. Although earnings per share were €1.50 higher than the expected €1.43, revenue remained at €9.03 billion. While this represents a 12% increase compared to last year, it is below analysts’ expectations of €9.09 billion. The share lost more than 2 percent in after-hours trading.
The failure to achieve the expected cloud revenue of €5.18 billion – SAP ended up at €5.13 billion – was particularly disappointing. Cloud growth remains a crucial focus for the company, which is trying to accelerate the migration of customers to its cloud platforms. On a positive note, the Current Cloud Backlog was slightly above expectations at €18.05 billion, up 28 percent compared to a year earlier.
Net profit came in at €1.75 billion, a significant increase compared to €1.3 billion a year ago. Operating profit rose to €2.57 billion. CEO Christian Klein emphasized the role of AI innovations in strengthening SAP’s portfolio, including the expansion of AI assistant Joule.
The company is maintaining its outlook for 2025, with expected cloud revenue between €21.6 billion and €21.9 billion. CFO Dominik Asam said he remains cautiously optimistic despite geopolitical uncertainties.
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