Google & Microsoft – Tale of two cities.

Microsoft FQ3 22 – Enterprise offers inflation haven.

• Microsoft reported excellent results as Azure fought off competitive threats and the enterprise demand remained immune to inflation pressure.
• FQ3 22 revenue / EPS were $49.4bn / $2.22 nicely ahead of estimates of $49.0bn / $2.19.
• Azure (cloud) was once again the star of the show turning in 49% YoY growth which is particularly relevant as Azure is now growing faster than some of its smaller rivals.
• Google Cloud (see below) grew at just 44% YoY despite being smaller meaning that it lost market share.
• The cloud market is beginning to standardise around the two leaders and services that run on top of them (such as Snowflake) offer the option for clients to choose which cloud provider they want to use.
• Many fewer services are likely to offer a wider option of cloud providers meaning that players like Google Cloud may find it harder and harder to compete.
• This is excellent news for Microsoft but it also means that Google needs to reaccelerate its growth if it wants to become a relevant player.
• Microsoft is also benefitting from the continued migration from shrink-wrapped software to cloud services as Office 365 also saw revenues grow a healthy 17% YoY.
• Microsoft is emerging as a potential safe haven from inflation which is likely to have the biggest impact on consumer expenditure, where Microsoft has only a small level of exposure.
• That being said, one could hardly describe Microsoft being in value territory as at 26.2x 2023 PER, it is now trading at a premium to Netflix which is on 19.0x 2023 PER assuming it makes its numbers.
• This is reflected in the after-hours reaction to these excellent numbers which was pretty mixed with the shares bouncing back and forth between red and green.
• I remain pretty ambivalent to Microsoft and think that there are much better places to hide from inflation.

Alphabet Q1 22 – Cacophony of headwinds.

• Alphabet reported difficult Q1 22 results as YouTube missed expectations against a backdrop of weaker advertising, greater competition and inflation hurting consumer expenditure.
• Q1 revenues-ex TAC / EPS were $56bn / $24.62 slightly behind expectations of $56.1bn / $26.29.
• YouTube and Europe were two areas of weakness, but this was made up by continued strong growth in advertising in North America and elsewhere.
• YouTube generated revenues of $6.87bn compared to forecasts of $7.4bn while revenues in Europe grew more slowly than average and fell by 19% compared to Q4 2021.
• That being said total revenue from Europe still grew by 19% YoY but would have done better had the EU not hobbled its business with new advertising restrictions.
• As far as I am concerned the most problematic area was Google Cloud which is supposed to be the new emerging competitor that is gobbling up market share.
• It is much smaller than Azure, and almost a rounding error compared to Amazon Web Services,  and so should be more nimble and able to grow far faster.
• However, it grew slower than Azure in Q1 2022 meaning that it lost share to its larger rival.
• This is weak performance that needs to be quickly addressed before Azure and AWS close ranks and cement their duopoly.
• Alphabet, like Netflix, is beginning to knock on the door of value territory and there is less risk that Google will fail to make its estimates.
• Alphabet is now trading on 19.7x 2022 PER which is much cheaper than before and much cheaper than Microsoft, but it still has some distance to go before one could argue that it is a value play.
• Furthermore, as inflation begins to bite and consumers tighten their belts, there may well be a knock-on effect on advertising making the enterprise or commodities a better place than consumer to ride out the current environment.
• I am also pretty ambivalent to an investment in Alphabet and think that there are far better options elsewhere in the sector.