By Jacob Sonenshine

Microsoft and Meta Platforms' robust earnings proved growth stocks are the place for smart investors to keep their money.

Investors should own growth stocks beyond these two tech heavyweights, such as companies that supply the data centers critical for their operations, as well as software companies that are benefiting from a similar trend that Microsoft is enjoying.

That's because the overall growth picture at Microsoft and Meta looks strong, and signals more spending on data-center products and software ahead. Both companies reported better-than-expected sales and earnings and offered solid guidance.

Microsoft projects that its fastest-growing cloud product, Azure, will see second-quarter revenue growth to close to 35% year over year. The product includes artificial intelligence, which makes customers more efficient and is therefore priced higher than many of its other products. That's driving the company's guidance for total sales growth of about 14% in the current quarter.

While analysts had begun to worry that software customers would scale back their technology budgets amid tariffs and an uncertain economic outlook, Microsoft's report proves companies have enough confidence to invest.

Ultimately, software companies are growing faster -- despite the economic backdrop -- because their customers are shifting away from traditional ways of storing and analyzing data and toward the new, AI-enhanced offerings. Stock in Salesforce was up 1%, while Oracle shares rose 5%, and ServiceNow rose 1.5%.

These stocks have room to rise more, as analysts expect these companies post continued earnings growth. The iShares Expanded Tech-Software Sector Exchange-Traded Fund trades at just over 33 times expected earnings, in aggregate, for the coming 12 months, below its peak of 40 times in the past two years. Analysts are likely to revise Microsoft's -- and potentially other software companies' -- earnings forecasts higher.

Meanwhile, Meta's guidance called for second-quarter sales of $44 billion, implying 13% year-over-year growth. Brands are continuing to increase their advertising spend on Instagram and Facebook, as the company reported strong user engagement, growth in ad impressions, and higher ad prices.

That's why other internet and advertising-related names were up Thursday. Alphabet's stock gained 0.9%. The platforms that dominate people's time and attention are winning, as internet companies' AI investments are enabling them to show each user the right content and ads, moving more ad spending onto their platforms. Clearly, brands aren't pulling back on marketing budgets enough to derail this trend.

Elsewhere, Pinterest was gaining over 3%, and Trade Desk up 1.5%.

The other major positive from the earnings reports was capital investment. Meta said it would grow capital expenditures this year by just over 80% to about $64 billion at the midpoint of the range. That comes just after Alphabet said it, too, will grow capex by double-digits, in percent terms, to $75 billion. Microsoft wants to slow the rate of growth of its capital investments, but analysts still expect growth overall. These companies are building data centers to support their AI capabilities.

This is key for all the companies that make products that build data centers. Shares Nvidia, which sees the majority of its sales come from datacenter customers, rose 4% Wednesday. Chip maker Broadcom, which also sells into datacenters, climbed just over 3%. Micron Technology, which is still ramping up its datacenter memory business, edged up just over 2%.

Arista Networks, which sells switches to Microsoft and Meta, jumped more than 6%.

Vertiv Holdings, which see the majority of its cooling and power equipment sales from datacenters, spiked almost 9%. Peer Eaton, which sees a little less of its revenue from datacenters, gained around 3%.

As long as the datacenter and AI trend keeps growing, this laundry list of companies will continue to see earnings growth and stock gains.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 01, 2025 13:41 ET (17:41 GMT)

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