Microsoft and Alphabet have demonstrated remarkable resilience in their core businesses in the second quarter of 2023, despite the economic uncertainty and the impending costs of AI investments. Their performance has bolstered the recent gains in Big Tech’s stock prices.
Strong Earnings with Microsoft Beating Records
Microsoft reported an 8% increase in revenue, amounting to $56.2 billion, and a 20% rise in net income, reaching $20.1 billion, in its Q4 2023 fiscal financial results. The company set several financial records this quarter, with gross sales and net income hitting all-time highs. Over the past year, Microsoft’s top line and bottom line have grown by 21% and 8% respectively.
On the other hand, Alphabet, Google’s parent company, also exceeded expectations in its earnings report. The company’s cloud segment, where it competes closely with Microsoft, reported $8 billion in quarterly revenue. This news boosted Google’s shares by 6% in after-market trading, raising their gain this year to 46%.
AI Investments Drive Cloud Segments
The gains for both companies were largely driven by their investments in artificial intelligence (AI). Microsoft, in particular, reported a 21% year-over-year increase in operating income in its intelligent cloud segment, which includes many of its current AI offerings. The company’s market capitalization at the end of regular trading hours on Tuesday made it the second-most valuable company in the world.
Despite these successes, Microsoft reported a 4% year-over-year decline in sales in its personal computing division, which includes Windows, Bing, and gaming. However, both Microsoft and Alphabet have indicated plans to increase spending in the coming quarters as they expand their data centers to support an expected surge in demand for new generative AI services. Despite the anticipated spending spree on AI, both companies have pledged to maintain careful control over costs following recent job cuts.
New Cost Discipline
Alphabet’s new cost discipline has increased its operating profit margin to 35%, 2 points higher than expected. Like Microsoft, Alphabet’s margins were also boosted by a change in the estimated life of its data center equipment, resulting in lower depreciation charges.
Despite a weaker PC market, Microsoft’s cloud, office, and server businesses continue to perform strongly. Microsoft 365 Consumer subscribers have grown to 67 million, up from the 65.4 million reported in the previous quarter. Microsoft’s intelligent cloud business saw revenue of $24 billion this quarter, up 15%. A big part of that was down to Azure and other cloud services revenue growing by 26% this quarter.
Google’s ad revenue rose 3.3% to $58.14 billion, up from $56.29 billion last year. YouTube ads came in above analyst expectations at $7.67 billion, up from $7.34 billion the year before. The video platform has faced heightened competition from TikTok in short-form videos.