Google & Microsoft – Big is beautiful

Alphabet Q2 2022 – Taken share.

• Alphabet reported weaker than expected results but crucially they were not as bad as feared and the company spoke reasonably optimistically about its outlook.
• Q2 2022 revenues-ex TAC / EPS were $57.5bn / $1.21 compared to estimates of $58.0bn / $1.32.
• Despite the miss and the lack of concrete guidance, the market saw this as good news and the shares rallied 5% in after-hours trading.
• This is a clear sign of what I alluded to on Monday (see here) where the larger companies due to their greater reach and diversity of businesses and customers fare better than the smaller, niche offerings like Twitter and Snap.
• Hence, I suspect that the underlying market performance is somewhere between what Google is reporting and the stagnation being seen by Twitter and Snap.
• This leads to the conclusion that the underlying market will probably grow somewhere between 5% and 10% YoY this year which is a far cry from where expectations were a year ago.
• Google Cloud which is supposed to be the engine of growth disappointed again with 36% YoY growth and increasing losses.
• This is slower than its much larger rival Microsoft (see below) and is another sign that Google continues to fail when it comes to securing its place in the cloud computing industry and closing the gap on its rivals.
• The outlook for Alphabet is reasonable compared to the macroeconomic outlook but everything increasingly comes down to the valuation of the shares.
• The shares have fallen by 25% this year, reflecting the macro-driven slowdown which leaves me pretty indifferent to owning the shares (which I don’t).

Microsoft FQ4 2022 – Azure to the rescue.

• Microsoft asserted its counter-recession credentials with a forecast for the next 12 months where it expects that revenue will grow by at least 10% YoY.
• FQ4 2022 revenues / EPS were $51.9bn / $2.23 compared to estimates of $52.4bn / $2.29 which like Alphabet was lower than expected but crucially better than feared.
• This came as a great relief and the shares rallied by 5% in after-hours trading.
• The key to this forecast is obviously the cloud which grew by 40% YoY in FQ4 2022 supporting the idea that usage of the cloud will be proof from macro shocks and inflation.
• This makes some sense as companies are now scrambling to cut costs in the face of lower demand and the cloud represents a cost-effective way of making one’s IT expenses more flexible.
• Moving to the cloud changes the fixed cost of having IT in-house to variable as one pays only for what one uses.
• This works very well for small and medium-sized enterprises and so in the coming 12 months, this is where I expect the economic resilience to come from.
• Microsoft Azure is now big enough that a good fiscal year of growth will help offset softness elsewhere which I suspect is what has given Microsoft the confidence to make this forecast.
• In the current climate, this is excellent news but Microsoft is still very far from being a value stock anymore.
• It has been relatively defensive in the recent correction, and I still think that it will fall by less than the higher multiple end of the sector if the sell-off continues.
• However, there are cheaper places to invest that are growing by more than 10% YoY and so I can’t say I would be enthused to take a position in the shares here.
• Like Alphabet, I remain pretty indifferent to Microsoft’s shares.