Google & Microsoft – Offence & defence

Two sides of the same story in search.

• Google and Microsoft both reported good results but took very different lines on what AI is doing to search with Google saying all is well and Microsoft saying that everything is about to change.

Microsoft FQ3 23 – Offense.

• Microsoft reported excellent results and promises of good growth and tight cost control allowed the shares to rally strongly in after-hours trading
• Microsoft reported excellent results and stuck the knife further into Google by claiming leadership in AI and being the place to come for generative AI services.
• FQ3 2023 revenues / EPS were $52.9bn (up 7% YoY) / $2.45 nicely ahead of expectations of $51.0bn / $2.23 as enterprise revenues more than offset softness in the business lines that face the consumer.
• Productivity and Business Processes grew 11% YoY, Azure by 27% YoY while Office 365 consumer was flat and More Personal Computing fell by 9% YoY.
• This is the theme of 2023 where investments in IT can help companies improve productivity in a difficult macro environment while consumers are tightening their belts.
• Microsoft went on to promise “healthy revenue growth” and “disciplined spending” and said that it was having conversations with customers around AI that it had never had before implying that it was best positioned at the start of this new cycle.
• It also strongly hinted that it had Google in the ropes with record installations of its new Bing chat app and that Bing had gained share in the US search market.
• I think that this is a factor everyone testing it out t see what the new service can deliver and does not necessarily represent a shift that is here to stay.
• However, Microsoft still has Google badly rattled and the ball remains very much in Google’s court in terms of demonstrating that it remains the leader in AI.
• With the shares up 9% after hours on top of a 15% rally this year, I still struggle to find value in the shares and would be inclined to chase this rally.
• Instead, I am waiting on the sidelines for Google to really underperform and then take a position as I think reports of Google’s demise are vastly overstated.

Google Q1 2023 – Defence.

• Google reported good results as advertising held up better than expected and its cloud business made money for the first time.
• Q1 2023 revenues / EPS were $69.8bn (up 3% YoY) / $1.17 ahead of estimates of $68.8bn / $1.07 which was a lot better than the 2% YoY decline it reported in Q4 2022.
• To be fair, the comparison with Q1 2022 where life was already getting difficult is much easier than it is with Q4 2021 as the Covid lockdown, everything is digital party was still in full swing.
• Either way, it is a good result for Google which has really been struggling this quarter against the AI-hype wave which seems to think that Google is behind on generative AI which has allowed Microsoft to finally get under its skin.
• Unfortunately, the good results were somewhat marred by the fact that the costs of generative AI are starting to tell with Google warning that is going to have to spend more to support all of these newfangled AI services that are supposed to change the world.
• This is the first sign of just how expensive generative AI costs to create and run and I expect we are going to see more of this going forward.
• All of this leads straight to Nvidia where I don’t like the valuation, but the shares are still likely to only one way for now.
• Google used the return to positive territory as evidence that its position in search is as robust as ever which is something my testing does bear out.
• Bard is a better system than Bing chat at finding things and this is because although Microsoft says Bing is powered by GPT-4, it is still Bing search at its heart.
• I think Microsoft is still very far from challenging Google in search and as such, if there is further underperformance from Google relative to its peers, this would represent an opportunity.
• We are still far from what I would consider attractive territory, but it remains one I am keeping an eye on.