Microsoft (MSFTus）withGoogle (googl..)us）Arguably the best-performing tech stock so far in 2024.
If you don't consider the after-hours performance on January 30, Microsoft's stock price has accumulated **8 since the beginning of this year66%, with a market capitalization of 304 trillion dollars, has been surpassedApple (AAPL..)us）, becoming the world's largest listed company by market capitalization. Google is not inferior, Google-a has accumulated **8 this year43%, Google-c (goog..)us) then accumulate **860%, both surpassing the high at the end of 2021, setting a new record, and the market value is further approaching two trillion US dollars.
However, after the release of their results for the fiscal quarter ended December 2023, the shares of Microsoft and Google weakened in the after-hours trading session.
Google reported diluted earnings per share of 1$64, higher than the market expectation of 1$60; Microsoft's quarterly earnings per diluted share were 2$93, also higher than the market expectation of 2$76, see table below.
Since earnings per share were higher than expected, why did the share prices of the two giants fall after the results?
Google: Ad revenue isn't performing as expected
In the fourth quarter of 2023, Google's total revenue increased by 1349% to 863$100 million, the most significant of which was Google Ads revenue grew 10 percent year-over-year97% to 655$1.7 billion, or 75.5 percent of total revenue91%, below market expectations of $65.9 billion. By contrast, Microsoft's search and news advertising business grew 8% year-over-year in the December quarter.
Search accounted for the majority of Google's advertising revenue, with Q4 revenue up 12. year-over-year71% to 480US$200 million, mainly driven by strong demand in retail verticals, especially in the Asia-Pacific region, which started in Q2 2023 and continued through the end of the year.
However, in terms of growth drivers, YouTube advertising is the main driver of its advertising business growth. During the period, YouTube advertising revenue increased by 15% year-on-year53% to $9.2 billion, driven mainly by direct response and brand advertising, but also slightly below the consensus of 92$100 million.
Online advertising revenue decreased by 210% to 82$9.7 billion.
In addition to the advertising business, Google's services also include subscriptions, platforms and devices, mainly YouTube subscription fees, Google's service fees**, hardware equipment, etc. In the fourth quarter, the business contributed 107US$9.4 billion, up 22.2 percent year-on-year71%。
Including advertising and subscriptions, platforms and devices, Google's services revenue totaled 763US$1.1 billion, up 12. year-on-year49%, YouTube is the main contributor to its subscription revenue, Google management pointed out that this is a business with annual revenue of $15 billion, especially since YouTube Music and Premium, which have been launched in more than 100 countries and regions, are real growth drivers, and YouTube TV is also doing well.
The segment's operating profit for the fourth quarter increased by 32% year-on-year, driven by the growth of Google's services revenue18% to 267$300 million, segment operating margin increased from 29.9 in the year-ago quarter81% to 3503%。
Another of Google's businesses that has attracted a lot of attention is Google Cloud. In the fourth quarter, Google Cloud revenue grew by 25% year-on-year66% to 91$9.2 billion, an increase that was 30% lower than Microsoft's Azure quarterly growth, or 28% at constant exchange rates. Management mentioned in the earnings conference that the proportion of AI's revenue contribution to its cloud business is increasing.
Over the course of 2023, Google Cloud has made thousands of product upgrades, including more generative AI capabilities for its AI infrastructure, the Vertex AI platform, and its new DuVet AI**, Google management said. In the fourth season, Google won and expanded its cooperation with Hugging Face, McDonald's (MCD.).US), Motorola Mobility and Verizon. Google Cloud offers enhanced performance and cost advantages for training and serving models by providing AI supercomputing, breakthrough supercomputing infrastructure that combines TPU and GPU, AI software, and multi-slice and multi-host technologies. Customers such as Anthropic, Character AI, Essential AI, and Mistral AI are building and serving models on Google Cloud.
It is worth noting that since the turnaround in the first quarter of 2023, Google Cloud's segment operating margin has continued to improve, and its segment operating profit in the fourth quarter reached 8$6.4 billion, equivalent to the previous three quarters combined, and segment operating margin also reached 940%, higher than in the previous three seasons. 92% and 316%。
As for Google's other venture capital businesses, management revealed that Waymo has completed more than 1 million fully autonomous driving miles. Isomorphic Labs has partnered with Eli Lilly (Lly).US) and Novartis (NVSUS) has reached a strategic cooperation to apply AI to fight diseases, which has great potential. Q4 revenue was 6US$5.7 billion, up 190. year-on-year71%, and segment loss shrank by 3023% to 8$6.3 billion.
Looking ahead, Google will continue to integrate AI into its current major products, including search marketing services, YouTube, Google Cloud, etc., and at the same time, Google Cloud will benefit from the trend of global enterprises embracing AIGC and is an important platform for these customers to deploy AI.
Management revealed that the current combination of Gemini and its search engine has achieved good results, making the search generation experience (SGE) faster for users, especially the latency of American English has been greatly improved (shortened by 40%), and will fully promote the generative search function in seven languages. In addition, AI empowers advertisers to use Gemini to speed up the creation of advertising and marketing content. Google also said that it will soon launch Gemini Ultra, and that Google is currently working hard to promote a new generation of large models that will be integrated with search engines.
In addition, there is conversational AI Bard-assisted search. Powered by Gemini Pro, it's more efficient at understanding, summarizing, explaining, programming, and planning, and is now available in more than 40 languages and in more than 230 countries. Going forward, Google will launch a more advanced version for users, powered by Gemini Ultra.
Google offers Vertex AI, an integrated enterprise AI platform for developers creating Gen AI applications. Helped customers such as Deutsche Telekom and Moody's discover, customize, augment, and deploy more than 130 Gen AI models. Samsung recently announced the Galaxy S24 Series Intelligence** with the Imagen 2 featuring Gemini and Google text-to-image models.
In terms of search engines, retail vertical advertising remains the main driver of revenue growth, and Google says it sees a good start to the year.
Heading into 2024, Google said it will remain focused on maintaining healthy growth. It is expected that the capital expenditure investment will be significantly larger than in 2023, or mainly used for the research and development and advancement of AI.
As for other investments, Google says it has been trying to focus on its investment priorities while capitalizing on compelling technological breakthroughs across its portfolio. Last week, for example, Google announced that it would spin off more projects into independent companies through outside capital, giving it the opportunity to focus more on the breakthrough technology it is developing.
Microsoft: The outlook is not optimistic
Microsoft's fiscal year deadline is June 30, so the results just announced for the month ended December 31 are its fiscal 2 quarter results for fiscal 2024.
In the second quarter of fiscal 2024, Microsoft's revenue increased by 1758% to 620A record high of $200 million, mainly driven by the continued strong growth of Microsoft Cloud, which exceeded $33 billion, an increase of 24%, with Azure continuing to gain market share during the quarter, benefiting from its AI advantage. Azure offers top-of-the-line training and inference capabilities, and has the most diverse set of AI accelerators, including those from AMD (AMD.).US) and Nvidia (NVDAUS) and its self-developed chip, Azure Maia.
Currently, Microsoft has 5Of the 30,000 Azure AI customers, one-third are new to Azure in the last 12 months. Its latest "Model as a Service" makes it easier for developers to use its partners such as Cohere, Meta (META) through Azureus) and mistral without having to manage the underlying architecture.
Microsoft revealed that more than half of the Fortune 500 companies are using Azure OpenAI, including United Auto Finance, Coca-Cola (KO.).US) and Rockwell Automation.
Microsoft CEO Satya Nadella believes that AI will transform the way work is done in the future, revealing that research and external research have shown that the use of generative AI for specific work tasks can increase productivity by 70%. The emergence of the Copilot ecosystem has accelerated the shift in the way businesses work, with demand for Microsoft 365, Office 365, and more remaining strong.
He also expects that in 2024, AI will be the top configuration of every PC. Copilot for Windows is already available on more than 75 million Windows 10 and Windows 11 computers. The all-new Copilot key is Microsoft's first major change to the Windows keyboard in 30 years, providing one-click access.
In the fiscal second quarter, Microsoft's Productivity and Business Processing segment, which includes Office, LinkedIn and Dynamics, quarterly revenue increased by 13 percent year-over-year22% to 192$4.9 billion; Segment operating profit increased by 25% year-on-year80% to 102$8.4 billion; Segment operating margin improved by 534 percentage points to 5343%。
Management revealed that the strong growth of this segment was mainly driven by LinkedIn's better-than-expected performance, and in addition, the customer base and long-term contracts such as Office 365 Business Edition offset the negative impact of cloud migration on the office software licensing business.
Intelligent Cloud's quarterly revenue grew by 20% year-over-year33% to 258$800 million; Segment operating profit increased by 39.-on-year95% to 124$6.1 billion; Segment operating margin increased by 675 percentage points to 4815%。Revenue from Azure and other cloud services grew 30% year-on-year (28% in constant currency), with AI services contributing 6 percentage points.
In terms of other personal computing businesses, Microsoft completed the acquisition of Activision Blizzard on October 13, 2023, and the results were consolidated into this division. Segment revenue, which includes Activision Blizzard, increased 18. year-over-year in the fiscal second quarter64% to 168$9.1 billion; Segment operating profit increased by 2913% to 42$8.7 billion; Segment operating margin improved by 206 percentage points to 2538%。
Overall, Microsoft's fiscal 2nd quarter results came in higher than expected, and the market was disappointed by the guidance it provided.
Looking ahead to the third quarter, management expects that the Azure long-term contract should drive strong growth in the commercial booking business; Microsoft Cloud's gross margin may decline by 1 percentage point year-on-year, and if the impact of accounting estimation rules is excluded, the cloud gross margin should be relatively flat in the third quarter, mainly because the improvement in Office 365 and Azure will be offset by the impact of an increase in the proportion of Azure sales and the expansion of AI infrastructure investment.
Productivity & Business Processing segment revenue is expected to be $19.3 billion to $19.6 billion, an increase of 10% to 12%; Intelligent cloud revenue may be in the range of $26 billion to $26.3 billion, an increase of 18%-19%, and revenue will be driven by Azure, which is expected to grow stronger in Q3 than in Q2, driven by the contribution of Azure consumer business and AI; The Personal Computing segment revenue is expected to be in the range of $14.7 billion to $15.1 billion, an increase of 11% to 14%.
Overall, Microsoft expects its fiscal Q3 revenue to be in the range of $60 billion to $61 billion, with a median of $60.5 billion, below the consensus of $60.9 billion.
For the full year, the first half of the year saw strong growth, and strong demand for Microsoft Cloud in the second half of the year will continue to drive its performance in the second half of the year. We will expand our investment in cloud and AI. For the whole year, the operating profit margin will increase by 1-2 percentage points, of which AI capital investment will drive the growth of operating costs.
Summary
Overall, Microsoft and Google's December quarter performance was not bad, but slightly different from market expectationsFinet believes that the stock prices of the two giants have risen sharply since the beginning of this year, and they have repeatedly hit new highs, making the market find fault with their performance, which is the main reason for triggering their stock prices after performance - not that the results are not good, but that the market has higher requirements for them
From the latest fiscal quarter results of the two giants, it can be seen that their outlook and investment have become cautious, and layoffs and throttling have become the main theme of improving efficiency, which has released some negative signals and made the market conservative in its outlook.
On the other hand, both giants have accumulated large sums of available cash. As of December 31, 2023, Google's total cash and courises were 1,109$1.6 billion; Microsoft's total cash and short-term investments were 810$1.7 billion. This means that they have strong financial strength.
In addition to rewarding shareholders through dividends and buybacks, both giants said that they will vigorously invest in AI in 2024, and AI will become an arena for future tech giants. Google and Microsoft are both working hard to integrate AI into their existing products, one is to enrich the end-user experience, the second is to improve their own operational efficiency, and the third is to develop innovative AI products to win the future, but their actual performance is not reflected in the current market, will be determined by time, their future stock price performance, will depend on whether the actual benefits of AI can match their investment.
Author: Mao Ting.