By Nikos Tzabouras, Senior Market Specialist, FXCM
Big Tech is in the spotlight once again at the start of the current earnings season. Markets are heavily focused on artificial intelligence (AI), which has emerged as the main battlefield in Silicon Valley. Microsoft NASDAQ:MSFT and Google parent Alphabet NASDAQ:GOOGL, reported overall strong quarterly results, in the latest round of their AI face-off.
Microsoft results looked solid
The tech giant reported overall solid results last week, for Q4 FY2023 (period ended June 30), extending this year’s run, but there were also reasons for concern. Net Income surged 18% y/y to $20.081 billion and Gross Margins rose as well.
This is rather impressive, given the significant boost in capital expenditures to support cloud demand and AI infrastructure. The company expects spending to increase sequentially in each quarter of the current fiscal year, which started in July.
Microsoft revenues hit new records of $56.189, but year-over-year growth remained below 10% for another quarter. What’s more, forward guidance was disappointing, since Microsoft projects sales to fall in the range of $53.8-$54.8 billion in Q1 FY2024.
Alphabet beats expectations across the board
The Google parent reported on the same day as its rival, beating expectations across the board, with strong top and bottom lines for the second quarter of the year. Net income jumped, to $18.368 billion, while operating margins inched higher to 29%.
Alphabet revenue strengthened to $74.6 billion, although the 7% y/y growth is far from stellar. Google Search rose on both a yearly and quarterly basis, to nearly $43 billion, remaining the largest growth contributor. YouTube ads sales increased by around 4.5%, to $7.665 billion, after the recent disappointments, while Google advertising surged to more than $58 billion.
These figures are encouraging for Alphabet’s advertisement business in general, which shows signs of stabilisation after the strong headwinds of recent quarters, due to high inflation, recession fears and other factors. Pitfalls still lie ahead though for Alphabet, as the European Commission has charged the company with anticompetitive practices in the advertisement technology industry.
Cloud technology battle
The two mega-caps are rivals in the ever-important cloud business, with Microsoft occupying the second spot (23%) and Alphabet the third place (10%) in Q1, according to the Synergy Research Group. However, they are both far behind Amazon NASDAQ:AMZN, which dominates the market with a 32% share.
The Intelligent Cloud segment is Microsoft’s largest revenue generator, having expanded by 15% y/y in Q4 FY2023 to almost $24 billion. The guidance for the current quarter was underwhelming, since sales are projected to narrow to $23.3-$23.6 billion.
Things were more upbeat on the Alphabet side, since Google Cloud delivered revenue of around $8 billion, up roughly 28%. The business turned profitable in Q1 for the first time since the firm started reporting this metric and Operating Income widened to $395 million in Q2.
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Artificial intelligence face-off
Generative Artificial Intelligence (AI) has emerged as the new battlefield in Silicon Valley, with Big Tech jumping on the bandwagon. Microsoft has the first-mover advantage since it was able to quickly harness the power of its investment in OpenAI, which kick-started the AI craze late last year, with the ChatGPT conversational chatbot.
Microsoft incorporated the generative AI capabilities into its Bing search engine, pulling it out of obscurity. This poses an existential threat to Google since the technology has the potential to reshape how we internet search and undermine its market dominance.
Since then, Microsoft has expanded its AI portfolio and has already started monetising the technology. Earlier in July, it announced a subscription service for a monthly fee, where corporations will be able to use AI tools on products like Excel, Word and Teams.
The AI boom appears to have taken rival Alphabet by surprise, but the tech giant is picking up the pace, following the initial slow start. Its CEO announced the use of AI not only in the search engine, but also in other key products including Gmail and Maps, during May’s I/O event.
The importance of generative AI was evident in last week’s earnings reports. During the earnings call, Alphabet CEO Sundar Pichai highlighted the firm’s progress in the field, acknowledging “an opportunity to reimagine many of our products, including our most important product, Search”.
Cloud services is another affected segment, where Mr Pichai noted that “70% of gen AI unicorns are Google Cloud customers”, a term typically used to refer to startups valued above $1 billion.
Microsoft CEO Satya Nadella also commented on AI progress, referencing a series of companies that use its AI-enabled services and mentioned that the firm “is in the lead” when it comes to AI cloud workloads.
Microsoft still ahead
Tesla NASDAQ:TSLA and Netflix NASDAQ:NFLX kicked off the earnings season for Big Tech in July, which showed that markets are focused on forward guidance. Microsoft’s stock dropped in extended trading after the results, due to concerns about the performance of the current quarter, while Alphabet’s shares rose on better-than-expected results and future optimism.
Alphabet is finding its AI rhythm, weaving the technology into various products and services, with markets reacting positively, after the initial disappointment from the slow start. Expectations were probably higher for its rival, but Microsoft is still ahead. It commands a greater market share in the cloud business and has the lead in the race for AI supremacy, already monetising its AI capabilities and posing an existential threat to Alphabet.
