Is the AI Trade Back on After Meta and Microsoft Earnings?

The recent earnings reports from Meta and Microsoft have reignited debates about the viability of the AI trade. Both companies reported significant AI-driven growth, but underlying challenges—from regulatory hurdles to infrastructure bottlenecks—suggest investors must tread carefully. Let’s dissect the data to determine whether the AI narrative is truly resurgent or merely a flicker in a volatile market.

Meta: AI as a Growth Engine, but Regulatory Clouds Loom

Meta’s Q1 2025 results underscore AI’s role in driving revenue and user engagement. Its AI assistant now boasts nearly 1 billion monthly active users, with WhatsApp and Facebook benefiting from AI-optimized recommendation systems. Ad revenue surged to $41.4 billion, up 16% year-over-year, fueled by advanced AI models like Llama 4 and Behemoth, which improved conversion rates. CEO Mark Zuckerberg emphasized AI’s long-term potential, even as CFO Susan Li warned of risks: the EU’s Digital Markets Act (DMA) could force changes to Meta’s “subscription for no ads” model, potentially harming 16% of European revenue.

The company’s capital expenditure soared to $13.69 billion for the quarter, reflecting investments in AI infrastructure like data centers and servers. This spending, however, highlights a key trade-off: short-term costs for long-term AI dominance.

Microsoft: Azure’s AI Surge Masks Structural Challenges

Microsoft’s earnings paint a clearer picture of AI’s commercialization. Azure revenue grew 35% year-over-year, with AI workloads contributing 16 percentage points to this surge. Azure OpenAI services, which power tools like GitHub Copilot (now used by 15 million developers) and Cosmos DB, are central to this growth. Microsoft processed over 100 trillion AI tokens in Q1, a 5x increase from 2023, signaling rising demand for scalable AI infrastructure.

Yet, challenges linger. Azure faces capacity constraints, with demand outpacing supply in key regions. CFO Amy Hood acknowledged this, noting infrastructure investments would hit $64–72 billion annually. Meanwhile, the Intelligent Cloud segment’s gross margin dipped to 71%, reflecting the cost of scaling AI infrastructure.

The AI Trade: Back, but Not Without Risks

Together, Meta and Microsoft’s results suggest the AI trade is far from dead. Both companies are doubling down on AI-driven revenue streams:
- Meta’s ad revenue growth (16%) and Microsoft’s Azure expansion (35%) directly link to AI adoption.
- Copilot’s 55% quarterly enterprise adoption (Microsoft) and Meta’s AI glasses tripling sales highlight tangible product successes.

However, risks loom large:
1. Regulatory Overhang: The EU’s DMA ruling against Meta could set a precedent for stricter oversight of AI-driven business models.
2. Execution Hurdles: Azure’s capacity limits and Meta’s infrastructure costs underscore the capital intensity of AI.
3. Market Saturation: As AI tools proliferate, differentiation will be critical—witness $13 billion annualized Azure AI revenue, but rising competition from AWS and Google Cloud.

Conclusion: The AI Trade is Alive, but Investors Must Be Discerning

The data is unequivocal: Meta and Microsoft are betting big on AI, with measurable top-line results. Azure’s 35% growth and Meta’s 16% ad revenue rise prove AI’s commercial viability. Yet, the path forward is fraught with regulatory and operational risks.

Investors should prioritize companies with scalable AI revenue models and defensible IP, like Microsoft’s Azure OpenAI ecosystem or Meta’s multimodal AI tools. Meanwhile, the $64–72 billion capex plans highlight the need for patience—the ROI on AI infrastructure may take years to materialize.

In short, the AI trade is back, but it’s not a sprint. Success hinges on companies navigating execution and regulation while maintaining the pace of innovation. For now, the sector’s fundamentals suggest cautious optimism—but investors should proceed with eyes wide open.