If you are covering the latest earnings from Microsoft and Alphabet, please find below a comment from Ben Barringer, head of technology research at Quilter Cheviot:
"In a busy update for tech companies, the two big names, Microsoft and Alphabet, had diverging fortunes as the AI landscape continues to change at pace. Microsoft is building out its architecture in a measured way and as such contains fewer surprises. The Azure cloud business continues to see strong revenue growth of 49%, with the potential for this to cross above 50% in the next quarter. Meanwhile capital expenditure was guided down marginally, but much of this is due to timing and the lumpiness of this investment.
"Where Microsoft is winning is in its ability to adapt to what customers need, providing different models for different needs. This 'orchestration' is a key differentiator and helps to underscore Microsoft's reputation as a trusted partner. The business did discuss the potential for a capital raise to help fund its investment needs, but crucially it is not in a position where it needs to react to what rivals are doing - it remains free cash flow positive and has cash on the balance sheet, so it is keeping its options open and staying at a measured pace. With the valuation looking very reasonable for the level of growth, Microsoft is giving investors a good dose of confidence where others aren't.
"Alphabet, by contrast, saw its share price hit after hours as a result of a fairly messy set of results and a poorly handled earnings call. Search and YouTube both missed on their expectations as disruption in search continues apace. Its cloud business did do well, but it now includes sales of Google's custom built chips, so it is difficult to ascertain where the demand is.
"The problem for Google is it faces an innovator's dilemma and doesn't know whether to protect its core business or look to join the disruption. As such, Google has lost its edge with Gemini and is behind peers on agentic AI. Now it could catch up again like it did previously when it looked like it would fall quickly behind in the AI race, but this is a habit that investors won't like to see repeated often.
"As the AI trade matures, investors will be looking for businesses that can keep the growth going in what is a rapidly changing environment. We are still early days in the disruption AI can cause, yet it appears Microsoft has understood the playbook required much more than others."
