Last week, Google and Microsoft both reported good results but took very different lines on what AI is doing to search. Google says all is well, while Microsoft says 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. The company also stuck the knife further into Google by claiming leadership in AI and being the place to come to for generative AI services.
FQ3 2023 revenues / EPS were $52.9 billion (up 7% YoY) / $2.45, nicely ahead of expectations of $51 billion / $2.23, as enterprise revenues more than offset softness in the business lines that face the consumer. Productivity and Business Processes grew 11% YoY and Azure by 27% YoY. 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.
Bing gains ground, but for how long?
It also strongly hinted that it had Google on the ropes with record installations of its new Bing chat app, and that Bing had gained share in the US search market.
I think this is at least partly the result of everyone testing it out to see what the new service can deliver. Hence, it doesn’t 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 $69.8 billion (up 3% YoY) / $1.17, ahead of estimates of $68.8 billion / $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 and ‘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 in turn 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 it’s 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. I expect we are going to see more of this going forward.
Google still king of the search hill
All of this leads straight to Nvidia, where I don’t like the valuation, but the shares are still likely to go 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. 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. 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.
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