Microsoft Has Three Trillion Reasons to Keep the Heat on Google

FILE PHOTO: Google, Microsoft and Alphabet logos and AI Artificial Intelligence words are seen in this illustration taken, May 4, 2023. REUTERS/Dado Ruvic/Illustration/File Photo (REUTERS)
FILE PHOTO: Google, Microsoft and Alphabet logos and AI Artificial Intelligence words are seen in this illustration taken, May 4, 2023. REUTERS/Dado Ruvic/Illustration/File Photo (REUTERS)

Summary

The software titan’s value has set expectations high, but the latest results show clear momentum.

It is definitely easier being Microsoft than Google these days, but hardly easy.

The two tech titans have very different core businesses, yet they face many of the same overall challenges. Both are already colossal companies that have to find tens of billions of dollars in new revenue every year just to manage low double-digit growth rates. Both are in regulators’ crosshairs for supposedly being too big already. And both are gunning hard to build significant new businesses using generative artificial intelligence technology, which was the key topic of interest in quarterly results issued by the two companies Tuesday afternoon.

Like their dueling reports three months ago, this round went to Microsoft. The software giant’s revenue and operating income of $62 billion and $27 billion, respectively, each set new quarterly records and beat Wall Street’s estimates by a healthy margin. That was despite disappointing earnings from the segment that includes the company’s Windows, gaming and device businesses. More important, Microsoft’s Azure cloud computing business saw revenue grow 30% year over year in the fiscal second quarter that ended December, a pickup from the pace seen in the September period and 2 percentage points above analysts’ expectations.

Revenue growth in Google’s much smaller cloud business improved as well, rising 26% year over year in the fourth quarter compared with 22% growth in the previous quarter. But that wasn’t enough to fully offset disappointing growth in advertising, which still accounts for 77% of parent company Alphabet’s total annual revenue. Alphabet’s operating income of $23.7 billion for the fourth quarter also missed Wall Street’s consensus target by about 1%. Its shares slipped nearly 6% in after-hours trading on Tuesday following the results.

But Microsoft now faces the particular challenge of even loftier expectations. Its stock has surged 68% over the past 12 months compared with a 56% gain by Alphabet. That made Microsoft the second U.S. company to attain a market capitalization of $3 trillion.

Microsoft’s shares also slipped a bit after Tuesday’s results, though, following a conference call with analysts that included a revenue projection that was slightly below Wall Street’s target. It should be noted that Microsoft’s shares closed Tuesday at a 49% premium to Google’s parent as a multiple of forward earnings, more than double the 22% they have averaged over the past five years, according to data from FactSet.

Investors will likely get over it. Tuesday’s reports did little to dispel the notion that Microsoft maintains a comfortable lead in the AI race—or that it is running it more profitably. The company’s cloud revenue totaled $124.3 billion in calendar 2023 and grew 23% for the year. That compares to 26% growth for Google Cloud, which is nearly one-quarter the size. Microsoft also noted that AI contributed 6 points to the growth of its Azure revenue for the recent quarter, while Google didn’t break out any specific financial contribution from its own generative AI services in Tuesday’s call.

Microsoft’s forecast implies an operating margin of 43% in the March quarter, 3 percentage points higher than Wall Street’s forecast, while Alphabet is expected by analysts to manage a 28% margin for the same period.

But the price tag is also rising sharply for both. Google’s parent dropped a record $11 billion on capital expenditures during the fourth quarter, and Chief Financial Officer Ruth Porat projected “notably larger" expenditures in 2024 compared with last year because of growing infrastructure investments to support its AI build-out. Microsoft CFO Amy Hood likewise said capex would “increase materially" in the March quarter following a 55% year-over-year jump to $9.7 billion in the just-ended period.

Supporting a $3 trillion enterprise doesn’t come cheap.

Write to Dan Gallagher at dan.gallagher@wsj.com

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