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Microsoft, Alphabet Struggle to Meet Lofty AI Expectations: What's Next?

Published 01/31/2024, 08:37 PM
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  • Tech shares experienced a retreat on Wednesday following earnings reports from Alphabet, Microsoft, and AMD.
  • Despite recent rallies that led these tech giants to record levels, their latest financial outcomes struggled to meet the high expectations of the market.
  • Despite making significant investments in AI, Microsoft, and especially Alphabet, are yet to feel a Nvidia-like financial boost.
  • Technology shares dipped on Wednesday following underwhelming results from Microsoft (NASDAQ:MSFT), Alphabet (NASDAQ:GOOGL), and Advanced Micro Devices (NASDAQ:AMD), which didn't demonstrate the significant gains from AI anticipated by investors.

    Moreover, the market is in anticipation of the Federal Reserve's upcoming monetary policy decision, expected overnight, which is crucial for insights into the potential timeline of a highly anticipated US interest rate reduction.

    This decision by the Fed is expected to influence market sentiment for February, as investors also look forward to further measures from Beijing to stimulate the Chinese economy and equity market.

    Microsoft Delivers Solid Results Given High Bar

    Microsoft's shares saw a decline of up to 2% in early Wednesday trading after the company released its fiscal second-quarter results that exceeded analyst expectations. This drop came despite the strong performance, largely due to the company's projection of lighter revenue for the upcoming quarter.

    Microsoft reported it earned $2.93 per share in its second fiscal quarter, which was better than the analyst consensus of $2.78. Revenue rose 17.6% year-over-year to $62.02 billion, nearly a billion higher than the Street’s expectations for $61.12 billion in FQ2 sales. The company was expecting to post revenue between $60-61 billion. Net income was $21.87 billion, a significant increase from the $16.43 billion reported for the year-ago period.

    The revenue strength was driven by another Azure outperformance, with the cloud segment growing 28% vs. 27% expected. Microsoft’s Intelligent Cloud segment generated $25.88 billion in sales, up 20% YoY and higher than the $25.29 billion consensus.

    Overall, the cloud revenue was $33.7 billion, up 24% YoY, which was driven by “strong execution by our sales teams and partners,” according to Amy Hood, executive vice president and chief financial officer of Microsoft.

    On the earnings call, Microsoft CEO Satya Nadella highlighted significant growth in Azure's customer base, noting that it now includes 53,000 Azure AI customers, a third of whom are new to Azure in the past year.

    Moreover, he mentioned an increase in commitments for Azure, with more customers agreeing to spend in excess of $1 billion on the platform.

    "We’ve moved from talking about AI to applying AI at scale. By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector,” he said in a press release.

    Microsoft's Productivity and Business Processes unit, which encompasses Office productivity software, LinkedIn, and Dynamics, reported revenue of $19.25 billion. This figure marks a 13% increase and exceeded the consensus estimate of $18.99 billion.

    The More Personal Computing segment, which includes Windows, Surface, Bing, and Xbox, contributed $16.89 billion in revenue, up 19% annually and just ahead of the consensus.

    Alphabet Fails to Deliver on AI Promises

    Google’s parent Alphabet saw its stock drop as much as 6% in early Wednesday trade after the company reported lower-than-expected revenue for its core ad business. Top-line came in at $86.31 billion, about $1 billion higher than the consensus. On the bottom line, Alphabet said it earned $1.64 per share, just ahead of the consensus of $1.59.

    Overall, revenue rose 13% despite the weakness in the ad business. The company said this segment generated $65.52 billion in sales, just below the expected $65.94 billion. Google Cloud rose 26% YoY to $9.19 billion in fourth-quarter sales, better than the expected $8.94 billion. YouTube generated $9.2 billion, in line with the analyst expectations.

    Sundar Pichai, CEO, said: “We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come.”

    Google's advertising and cloud-computing segments are under increased scrutiny following recent earnings reports. This attention comes as the company strives to dispel the notion that it is lagging behind competitors in the artificial intelligence space. At the same time, Google is focused on sustaining its business growth amidst these evolving market dynamics and technological advancements.

    Along these lines, Alphabet reported significant expenses related to workforce reductions last year, with severance and related charges amounting to $2.1 billion for 2023. The company also incurred costs from exiting some of its offices, leading to charges of $1.2 billion for the quarter and a total of $1.8 billion for the year. All these developments had an impact on the company’s fourth-quarter performance.

    During the earnings call, Alphabet's CFO Ruth Porat announced that severance-related expenses for the first quarter are expected to be around $700 million. Despite these substantial charges, Alphabet’s net income surged 52% in the fourth quarter to $20.7 billion. The company's operating margin also improved, expanding to 27% from 24%.

    Pichai said on the call that the company's annual subscription revenue has reached $15 billion, marking a significant increase of fivefold over the same number of years. This strong growth includes revenues from services such as YouTube TV, an online cable bundle, and Google One, which offers consumer cloud storage solutions.

    ***

    Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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