Alphabet & Microsoft Posted Strong Results Amidst AI Face-Off

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Alphabet

The tech giant reported mostly encouraging results for the first quarter on Wednesday, highlighted by the fact that the Google Cloud segment broke into profits with Operating Income of $191 million, for the first time since the firm started reporting this metric around two years ago. The business generated Revenue of $7.454 billion, up on both yearly and quarterly basis. [1]

The Google Search division returned to year-over-year sales growth after last quarter's decline, with an increase of 1.87% y/y. This is a far slower pace compared to a year ago though, with the $40.359 billion generated also being lower than the previous quarter.

YouTube Ads meanwhile disappointed again, dropping both yearly and sequentially, to $6.693. Overall Advertisement revenue increased only marginally from the year-ago quarter, while dropping significantly from Q4. The broader advertising business has taken a hit over recent quarters, due to high inflation and recession fears, with many tech giants facing headwinds.

Microsoft

The previous report had left much to desired and the forward guidance was rather disappointing. Wednesday's latest release (Q3 FY2023) however, revealed that revenues exceed the firm's projections, in overall strong top and bottom line. [2]

Revenue of $52.9 billion & Net Income of $18.3 increased compared to both the year-ago and the previous quarter, while Microsoft expects overall sales to rise further in Q4 FY2023 in the range of $54.85-55.85 billion. [3]

The Intelligent Cloud segment, which is the main revenue engine, turned over $22.081 billion, up 16% y/y. The More Personal Computing segment, which includes Bing, lagged with Revenues of $13.260 billion, down 9% y/y, although the "Search and news advertising" business expanded 10%.

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AI Face-Off

OpenAI took the world by storm late-last year with ChatGPT, its conversational Artificial Intelligence (AI) chatbot, which generates human-like responses to questions. Microsoft has invested billions in OpenAI and was able to quickly reap the benefits of this collaboration. [4]

Back in February, it unveiled an AI-powered Bing search engine and has since leveraged the technology into its Office suite and other services. During yesterday's earnings call, CEO Satya Nadella spoke "the most powerful AI infrastructure" and highlighted "investing to lead in the new AI wave across our solution areas" as one of the firm's here priorities. [5]

Other tech giants scrambled to respond and Google-parent Alphabet (GOOG.us) introduced its own conversational AI service, named Bard [6], but Microsoft has the first-mover advantage and appears to be ahead. The fight for AI supremacy is existential for Google, because Microsoft's progress has pulled Bing out of obscurity, threatening its search engine dominance. I believe that the previously mentioned Q1 metrics of the "Google Search" division, illustrate this threat and the increased completion.

This Round Goes to Microsoft

The two tech behemoths are also rivals in the cloud computing market, which gained greater importance due to the Covid-19 pandemic that increased demand for online services. Amazon.com is the leader, with Microsoft closing the gap, according to the Synergy Research Group. [7]

Alphabet's Google Cloud comes in at a distant third place, but yesterday's results reveled progress, as the segment turned profitable. The Artificial Intelligence capabilities are going to be critical on this front as well, raising the stakes for the top contenders.

The tech sector suffered last year and these two companies were no exception, but have been trying to turn things around with cost cuts and other initiatives. Progress on Artificial Intelligence and cloud computing will be critical going forward.

The two firms reported solid quarterly results yesterday, but in my opinion this round goes to Microsoft. Its resuts were better and it appears better positioned to drive and take advantage of a potential AI revolution.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 26 Apr 2023 https://abc.xyz/investor/static/pdf/2023Q1_alphabet_earnings_release.pdf

2

Retrieved 26 Apr 2023 https://www.microsoft.com/en-us/Investor/earnings/FY-2023-Q3/press-release-webcast

3

Retrieved 26 Apr 2023 https://www.microsoft.com/en-us/Investor/earnings/FY-2023-Q3/document/viewdocument/OutlookFY23Q3.pptx

4

Retrieved 26 Apr 2023 https://blogs.microsoft.com/blog/2023/01/23/microsoftandopenaiextendpartnership/

5

Retrieved 26 Apr 2023 https://www.microsoft.com/en-us/Investor/earnings/FY-2023-Q3/document/viewdocument/TranscriptFY23Q3.docx

6

Retrieved 26 Apr 2023 https://blog.google/technology/ai/bard-google-ai-search-updates/

7

Retrieved 02 Mar 2024 https://www.srgresearch.com/articles/cloud-spending-growth-rate-slows-but-q4-still-up-by-10-billion-from-2021-microsoft-gains-market-share

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