In the past few quarters, Microsoft has been the superior performer compared to Alphabet. Year-to-date, Microsoft’s share price surged by 46.5%, while Alphabet trailed slightly with a gain of 37.13% during the same period.
However, the dynamics have shifted now. Microsoft observed a 3.7% drop in its share price after the release of its quarterly results during after-market hours, whereas Alphabet experienced an impressive gain of 6.6%. As a result of these developments, Alphabet’s share performance has now surpassed that of Microsoft’s.
Now, let’s examine their respective results more closely.
CNBC has a useful chart which we will use to discuss Microsoft’s product performances and their trends:
Microsoft: The Good
Growth reaccelerating. Microsoft’s positive aspects include a noteworthy 8% year-on-year revenue growth, with the growth rate showing signs of reacceleration. In the previous two quarters (2Q and 3Q), Microsoft achieved growth rates of 2% and 7% respectively, making the current 8% growth a promising improvement and potentially indicating that the worst may be behind them. The company’s guidance for the next quarter suggests a continuation of this 8% growth rate year-on-year.
Azure continue to grow fast. Azure, Microsoft’s cloud computing platform, proved to be a standout performer with an impressive 26% year-on-year growth, outpacing other product and service segments. The surge in growth was attributed to the increased demand for computing power from AI applications.
Enterprise demand reaccelerated. Encouragingly, the enterprise customers showed more resilience compared to retail customers. Microsoft’s Dynamics products and Office for commercial use experienced double-digit percentage growth, significantly faster than the retail segment. This customer loyalty differentiates Microsoft from Alphabet, as companies are more likely to continue using Microsoft software while cutting back on ad spend during an economic slowdown.
Gaming reversed its revenue declines. Regarding gaming, Microsoft managed to halt the decline in revenue for two consecutive quarters, although the growth rate remained modest at 5%. The anticipated acquisition of Activision Blizzard holds the potential for rejuvenating this segment in the future.
Microsoft: The Bad
Bing + ChatGPT did no damage. The integration of Bing with ChatGPT didn’t live up to expectations, as it failed to make a significant dent in Google Search’s market share. The growth in Microsoft’s search ads has been decelerating, with only 8% growth in the last quarter, compared to the previous double-digit percentage growth.
Windows OEM dragged by weak PC demand. The demand for PCs has considerably weakened and is yet to recover. As a consequence, the demand for Windows licenses, which come pre-installed in PCs, has been declining year on year for five consecutive quarters, negatively impacting Windows OEM revenue.
Consumers delaying purchases. The growth in Office Consumer subscriptions has been sluggish, showing a mere 3% increase in the last quarter. This slow growth might be attributed to consumer spending shifting towards necessities due to inflationary impacts. Consumers might be prioritizing essential expenses, delaying PC replacements, and reducing non-essential software purchases.
Here’s a summary of Alphabet’s results when compared to a year ago:
Alphabet: The Good
Revenue growth reaccelerating. Alphabet’s overall revenue grew by 7% year on year, and the growth is reaccelerating. This performance exceeded expectations, especially considering concerns about lackluster ad revenue and potential competition from Microsoft’s AI initiatives. The growth rate improved from 1% and 3% in the previous two quarters.
Cloud is growing fast and profitable. Google Cloud exhibited impressive growth, expanding by 28% year on year, and successfully capturing the demand for AI computing. The segment’s growth momentum has been remarkable, outpacing both Microsoft and Amazon in terms of growth rate. Additionally, Google Cloud reported two consecutive quarters of operating profits, demonstrating its profitability.
YouTube reversed revenue declines. YouTube’s growth trajectory improved after three consecutive quarters of decline. The platform achieved a modest 4% growth, indicating a potential recovery trend.
Alphabet: The Bad
Google Network revenue continue to decline. Google Network advertising continued to weigh down on the company’s revenue growth year on year, presenting a concerning decline. However, it’s important to note that Google Search and YouTube have shown growth during the same period.
Other Bets burning cash. The Other Bets segment demonstrated high revenue growth of 48%, but its overall revenue contribution to Alphabet remains relatively small and insignificant. Despite the growth, this segment continues to incur losses, leading to cash burn for the company.
In conclusion, both Big Tech companies have delivered commendable results. While the market’s reaction to Microsoft’s performance may have been negative, the overall growth of 8% and the indication of reacceleration show that the results are not as bad as perceived.
On the other hand, Alphabet’s search business remained strong despite concerns about Bing + ChatGPT competition, and its ad revenue is displaying signs of recovery.
Both companies continue to be dominant giants in their respective fields, and there is no reason to sell or predict their downfall at this point in time. From my perspective, they are a hold.
