Alphabet Impresses, Microsoft Does Enough In Tech Relief
Tension was running high on Thursday afternoon in the US following a rough day for Meta, which unnerved investors with its cost outlook and capex plan, both of which underscored just how expensive building the future's likely to be.
That was the set up for results from AI bellwethers Microsoft and Alphabet.
Naturally, both companies suggested the sky's the limit for their AI-enabled products and services. At Microsoft, Copilot is "driving better business outcomes across every role and industry
GOOG revenue growth +15%, a +200bp acceleration from 4Q growth. Search +14%, much higher growth in YouTube +21% and Cloud +26%. Search is still ~60% of revenues but company says YouTube + Cloud will exit 2024 at combined $100BN annual run-rate.
Testing AI content in Search, claims good results and that cost will be manageable, claims advertisers supposedly using AI tools to strong effect. Gross and EBIT margins up, much emphasis on consolidating teams and “durably re-engineering cost base” to accommodate “headwinds” of higher depreciation and technology investment. Speaking of, capex $12BN doubled YOY and will stay at or above $12BN/qtr this year – so GOOG sees and raises META’s $35-40BN with at least $48BN of its own. The company doesn’t explicitly guide, but CFO seemed to emphasize will lap increasingly tough comps, including twice noting Search growth led by “APAC-based retailer” starting 2Q last year.
So – growth accelerated this quarter, tougher comps coming, monster AI spend growing . . . but GOOG wisely said “efficiency” a lot, played the dividend card, and investors are grateful to hear no musing about multi-year investment cycles and revenue-light product scaling. Not so long along, some were saying GOOG looked like AI roadkill; those cat-calls are probably silenced, and least I checked, GOOG was the “cheapest” valued of the Mega names.
Nice plug…..
MSFT rev +17%, slight deceleration from Dec qtr but comps were +500bp tougher. Azure +31% with +700bp growth from AI, claims Azure ubiquitous “for pretty much anybody who is doing any AI project”, similar to GOOG’s rhetoric.
Unclear to me – maybe others know the details better – exactly where else AI growth is showing up, but I think mostly in commercial Office. Cloud is the largest and fastest-growing segment, Productivity is growing well (“mature” Office is growing low-teens), Personal Computing’s underlying growth is low excluding Activision but that segment is a collection of businesses investors don’t care as much about. Maybe we briefly cared about Search and Ad but its revenue incl TAC has not accelerated off +LSD so Bing, not eating Google’s lunch after all, has retreated to “don’t care” status (my view).
Under the covers, gross margin looks (to me) under some pressure in each segment, but that is offset by mix shift to higher-margin segments and leveraging opex, so overall margins are improving – but are guided to decline -100bp in FY2025. Capex $14BN and will increase “materially” sequentially in Jun F4Q24 then increase again in FY2025 as company is still capacity-constrained – so MSFT’s CY 2024 capex plan looks equal or higher to GOOG’s?
Guidance implies a June qtr revenue slowdown to +13-15% with slightly lower margins. MSFT faces much harder revenue comps starting Sep F1Q25. The valuation here is – well, none of these names look set to tolerate a marked slowdown, and I’d think MSFT is no exception.