The resilient Google ads sales from Alphabet Inc (GOOGL) and a solid outlook from Microsoft Corp (MSFT) sparked a relief rally as they reassured investors that both the tech giants would be able to withstand any possible economic downturn in the future. Alphabet shares jumped more than 7% after the company reported strong year-on-year search revenue growth in the recent quarter. On the other hand, Microsoft shares climbed over 6% after the company gave strong guidance for the year ahead.
Alphabet’s results give investors a ray of hope
Alphabet recently reported second-quarter earnings, and it barely missed estimates, showing that its market-leading Google search and advertising business may be able to withstand big economies potentially going through a recession or any headwinds in the digital ad industry.
Google-parent reported a 13% rise in revenues during the June quarter, taking the figure to $69.7 billion, while its net income stood at $16 billion or $1.21 per share.
The results may not be eye-popping but are a huge relief for the investors after poor quarterly results were reported from the other two ad-dependent companies, Snap Inc (SNAP) and Twitter Inc (TWTR).
Exhibit 1: Alphabet 2Q2022 Earnings Highlights
Source: Company Financials, July 2022
Exhibit 2: Alphabet’s Quarterly Revenue
Source: Chartr, July 2022
Google’s ad revenues defy all odds
Google’s ad revenues remained resilient and defied concerns about the slowdown in the digital ad market, specifically after poor quarterly results were reported by Snap and Twitter. Its ad business accounted for 81% of the quarterly revenue, with its sales increasing by 12% to $56.29 billion, rising from $50.44 billion in the same quarter last year. It topped analysts’ estimates of $56.14 billion.
Exhibit 3: Alphabet’s Total Ad Revenue (in $ billion)
Source: Company Financials, July 2022
Google Search, which still makes up more than half of Alphabet’s overall revenue, saw ad sales jump by 14% in the most recent quarter, outpacing YouTube, which only experienced a 5% increase as a result of TikTok’s increased competition with YouTube. Travel and retail queries were a major factor in Google Search’s growth. The revenue for Google Services, however, fell short of forecasts, coming in at $62.84 billion as compared to $63.34 billion. Sales in the Google Cloud sector increased 36% over the same period last year to $6.3 billion.
Alphabet’s strong performance last year weighs on growth rate
Ruth Porat, CFO of Alphabet, described the company’s second-quarter performance as “strong,” with revenues rising by 16% on a constant currency basis. During the call with analysts, she stated that any apparent weakness could be explained by the demand spike from the year before, when Google profited from the coronavirus-induced work-from-home trend after the first shock of the virus outbreak. “The very strong revenue performance last year continues to create tough comps that will weigh on year-on-year growth rates of advertising revenues for the remainder of the year”, she said.
Exhibit 4: Alphabet’s Quarterly Ad Revenue Year-on-Year Growth
Source: Company Financials, July 2022
Future outlook
Google did not provide any future outlook but CEO Sundar Pichai assured investors that the group would continue to make significant, long-term investments and that it was a good time for Alphabet to sharpen their focus. He also said that the company will be slowing down the hiring for the rest of the year and would completely halt the onboarding of new employees for the next two weeks as individual teams “prioritise their roles and hiring plans for the rest of the year.” This came in as a response to an uncertain and challenging economic environment.
Exhibit 5: Alphabet Stock Price Performance History
| CMP | YTD | 1-year | 3-year | 5-year |
| $113.06 | -22.0% | -16.9% | 81.6% | 136.0% |
Source: MSN Money, Data as of last close on 27 July, 2022
Exhibit 6: Current Value of $100 Invested in Google’s IPO
Source: Stockal Research, Data as of 27 July, 2022
Exhibit 7: Analyst Ratings on Alphabet stock
Source: Marketbeat.com, Data as of 27 July, 2022
Microsoft misses earnings estimates, gives an upbeat outlook
The fourth quarter of the fiscal year 2022 was not a very impressive one for Microsoft as the tech giant reported revenue and income below market expectations. Net income, for the three months ended 30 June, was reported at $16.74 billion, or $2.23 a share, compared to $16.46 billion, or $2.17 per share, a year ago.
Exhibit 8: Microsoft Earnings Highlights for the Quarter ended 30 June, 2022
Source: Company Financials, July 2022
Factors behind Microsoft’s slowest revenue growth since 2020
Worsening PC market
Covid-related production shutdowns in China coupled with a deteriorating personal computer market dragged down Microsoft’s revenue from device makers by $300 million. As a result, Windows OEM revenue or sales of Windows licences to device manufacturers reduced 2% in the quarter ended 30 June.
Slowdown in advertisement spending
Marketing budgets currently face tremendous pressure with inflation rising unabated. This is reflected in Microsoft taking an over $100 million hit on its LinkedIn and Search and news advertising revenue due to a reduction in customer advertising spend. Nevertheless, higher search volume and revenue per search drove search and news advertising revenue (excluding traffic acquisitions costs) 18% up.
Exhibit 9: Microsoft Product and Services Revenue Growth
(Year-on-year change by fiscal quarter)
Source: Gabriel Cortes / CNBC, July 2022
Shrinking gaming revenue
Gaming revenue, for the quarter, declined 7% as a softer consumer demand hurt Xbox revenues. While Xbox hardware revenue dropped 11%, Xbox content and services revenue fell 6% due to lower engagement hours and monetisation in first-party and third-party content.
Strong U.S. dollar
With about half of Microsoft’s revenue coming from outside the United States, a stronger greenback hurt the tech company’s revenue by $595 million and earnings by 4 cents per share in the quarter ended 30 June. The U.S. dollar index climbed more than 2% in the quarter and nearly 12% this year.
Cloud – a bright spot for Microsoft
Microsoft’s Intelligent Cloud segment grew 20% to $20.9 billion in quarterly revenue – well above Wall Street’s expectations of $19.1 billion. This indicates that companies continue to move work online even after most of the pandemic-related restrictions are lifted. Revenue from Azure, one of the world’s most popular cloud computing platforms, jumped 40% in the three months ended 30 June. However, Azure’s growth was lesser than the 43% analyst target and the 51% reported last year at the same time.
Microsoft sees double-digit revenue growth in FY23
Microsoft forecast double-digit revenue growth for the fiscal year 2023 as it expects to continue benefiting from booming cloud demand. Microsoft’s strong outlook comes as a positive sign for the cloud sector in a rather dark economic landscape. The company sees its Intelligent Cloud segment generating revenue between $20.3 billion and $20.6 billion in the first quarter ending 30 September, 2022. However, headwinds from a stronger U.S. dollar will continue to impact Microsoft’s revenues.
Exhibit 10: Microsoft 1Q23 Outlook vs 1Q22 Reported
Source: Company Financials, July 2022
According to CEO Satya Nadella, “We are seeing larger and longer-term commitments and won a record number of $100 million-plus and $1 billion-plus deals this quarter. We have more data centre regions than any other provider and we will launch 10 regions over the next year.”
Exhibit 11: Microsoft Stock Price Performance History
| CMP | YTD | 1-year | 3-year | 5-year |
| $268.74 | -19.7% | -6.2% | 90.1% | 267.9% |
Source: MSN Money, Data as of 27 July, 2022
Exhibit 12: Current Value of $100 Invested in Microsoft’s IPO
Source: Stockal Research, Data as of last close on 27 July, 2022
Exhibit 13: Analyst ratings on Microsoft stock
Source: Marketbeat.com, Data as of 27 July, 2022
