26 July 2023
If you are covering Alphabet’s and Microsoft’s latest financial results, please find below a comment from Ben Barringer, equity research analyst at Quilter Cheviot:
Alphabet
“Alphabet delivered stronger than expected results as its three-pronged artificial intelligence strategy appears to be paying off at a time when digital advertising is improving. Importantly, competitors don’t appear to be stealing any significant market share in the search or video markets, with YouTube managing to fight off the march of TikTok for now and Google holding off a Chat GPT-powered Bing.
“Not only that, but Alphabet’s cloud business is also taking market share itself, especially from new AI startups that are springing up. As a result, it is reasserting itself as a winner when it comes to AI and is well placed to continue to capitalise. It has managed costs very well in recent years and this has allowed it to begin deploying significant amounts of capital into AI projects. Consequently, we are beginning to see more AI capabilities in its advertising platform and cloud business, and with Bard thrown in for good measure, Alphabet is well primed for whatever the future of the tech industry looks like.
“The stock is not that expensive so for investors it remains an appealing proposition that appears to only be getting stronger. Alphabet has the capability to be the most AI-centric business out there and as we have seen to date the opportunities in this space appear endless.”
Microsoft
“Microsoft had incredibly high expectations to meet and in the most part reached these and in some cases slightly exceeded them. Software sales remain strong with Office 365 up 11%, however, the market is slightly disappointed by the growth of the cloud business and the guide of a small slowdown next quarter to 25-26%. Furthermore, Bing is not yet seeing a large surge of users despite the capabilities of Chat-GPT, and this will be one to keep an eye on going forward, especially as the likes of Google match those services.
“However, Microsoft remains an incredibly well run business and it is beginning to see the benefits of its recent headcount reductions. It has a large amount of capital to spend and is beginning to put this to work in the cloud computing business to look to turbo charge that growth at a time when demand is soaring. Furthermore, we are yet to see the full effects of the Office 365 Co-Pilot product, which priced at $30 per month should appeal to businesses looking for productivity gains.
“The Activision Blizzard deal has been pushed back to October and remains a headwind for the business, however, we think Microsoft remains incredibly well placed to take advantage of current trends and become a real AI powered business. The stock reaction after hours was somewhat of an overreaction and investors shouldn’t worry yet that growth is not materialising at the rate that it should be.”
