KEYTAKEAWAYS
- Google, Meta thrive in AI with strong advertising rebound; Meta beats Q2 expectations by 21%, Google's search, cloud perform well.
- Microsoft's AI hurdles: Azure growth slows, Copilot's impact limited on productivity.
- AI investments unfold: Google, Microsoft show early efforts, long-term potential for revenue growth and market standing.
CONTENT
INTRODUCTION
The battle among tech giants in the AI sector continues, with Google and Meta showing impressive financial performances in their latest reports, thanks to a rebound in advertising business. However, Microsoft’s recent price hike for its Office products has yet to be reflected in its financials.
- Meta’s AI and advertising efforts pay off: Second-quarter revenue achieves the highest year-on-year growth in a year and a half, with earnings per share (EPS) rebounding and exceeding market expectations by 21%. Advertising and app revenue surpass estimates, increasing by nearly 12% compared to the previous quarter.
- Google remains unshaken against GPT. Second-quarter search business revenue accelerates its growth, and the cloud business exhibits unexpected strength. Notably, the advertising business’s performance improves, putting an end to two consecutive quarters of decline. The cloud business also maintains a robust growth trajectory, defying fierce competition from AWS and Microsoft’s ChatGPT.
- Microsoft’s steady performance: In contrast to Google’s excitement, Microsoft’s strong growth this year seems tepid. The AI sector did not perform as expected, and Azure’s performance in this quarter did not satisfy the market.
Additionally, Supermicro, the AI server manufacturer, is expected to hold an earnings call on August 8th. However, the news of an early announcement of an upwardly revised earnings forecast has already been released, with revenue increasing from the original range of $1.7-1.9 billion to $2.15-2.18 billion and EPS growth reaching an impressive 25–29%.
META’S AI AND ADVERTISING EFFORTS PAY OFF
Meta’s second-quarter financials show that revenue rebounded significantly due to adjustments in advertising spending and the easing impact of Apple’s iOS privacy changes. The quarterly revenue reached $32 billion, with YoY growth of about 11%, surpassing market expectations of $31.12 billion and achieving double-digit growth for the first time since the end of 2021. The third-quarter forecast projects revenue to be in the range of $32–34.5 billion, maintaining double-digit growth. The advertising market is expected to rebound, and the company’s profitability will improve after large-scale layoffs, with operating profit at $9.392 billion, YoY growth of approximately 12%, and EPS at $2.98, YoY growth of about 21%.
On the capital expenditure front, the total capital expenditure for 2023 has been adjusted to the range of $27–30 billion, reflecting cost-saving measures. However, investments in data centers and AI will continue. After the financial report was released, the stock price surged approximately 8% in after-hours trading.
Management’s outlook for the future includes a deepening of AI product layout. “We have the most exciting roadmap I’ve seen in a while with Llama 2, Threads, Reels, new AI products in the pipeline, and the launch of Quest 3 this fall,” said Mark Zuckerberg, Meta founder and CEO. The reasons for the downward adjustment of capital expenditure include cost savings, especially in non-AI server areas, and a shift of expenses into 2024 due to project and equipment delivery delays, rather than a decrease in overall investment plans. With increased investment in data centers and AI expected in 2024, expenses are also expected to rise. Encouragingly, the advertising market is expected to rebound, and the company’s profitability will improve after large-scale layoffs.
The revenue of Meta’s Reality Labs, which includes AR and VR, was approximately $276 million for the second quarter, while the loss was about $3.74 billion. Due to ongoing product development and further ecosystem expansion investments in AR and VR, the unit loss may continue to increase substantially.
GOOGLE REMAINS UNSHAKEN AGAINST GPT
Alphabet’s Q2 performance has mostly exceeded market expectations, benefiting from improvements in the online advertising environment. The second-quarter revenue reached $74.6 billion, a YoY growth of 7%, exceeding market expectations by 2%. Operating profit was $21.8 billion, also surpassing market expectations, with EPS at $1.44. Among them, search engine business revenue grew 5% YoY, YouTube business revenue increased by 4%, reversing the declining trend of the previous three quarters, and Google Cloud business achieved an excellent performance with revenue growth of 28%.
Since the rise of ChatGPT, Microsoft’s Bing has launched a fierce attack on Google search, and Google has responded with the corresponding product, Bard. As Bard rapidly strengthens and is integrated into the Google search engine, the appeal of the Bing and ChatGPT combination has been continuously diminishing. In May of this year, Bing’s market share further declined to 2.77% from 2.86. From the financial results of the second quarter, Google’s search and other related businesses’ revenue was $42.628 billion, a YoY growth of 4.8%, noticeably faster than the previous quarter’s 1.9% growth, indicating that Bing’s new strategy has not had a substantial impact on Google’s search business.
In the cloud business, Microsoft Azure has made significant efforts with ChatGPT. First, it promoted that ChatGPT was trained on Microsoft Azure, and it launched the Azure OpenAI service later in March. While this AI trend has somewhat boosted cloud demand, the market’s sluggishness in the second quarter remains unchanged. Microsoft Azure, ranked second in global cloud market share, saw its annual growth rate decline from 27% in the first quarter to 26% in the second quarter. Microsoft attributed the decline to uncertain economic conditions, leading customers to cut their spending. In contrast, Google Cloud achieved growth against the odds, with the YoY growth rate in the second quarter remaining stable compared to the previous quarter, supporting the steady growth of Google’s cloud business amid a downturn in the market. Overall, despite Microsoft’s formidable efforts with ChatGPT, it seems to have not impacted Google significantly. From various indications, the true AI battle may not have commenced yet.
MICROSOFT
In the last quarter, Microsoft’s revenue reached $56.2 billion, with an 8% YoY growth, showing a continuous recovery in revenue growth mainly driven by cloud and productivity businesses. Benefiting from cost containment measures, the company maintains a high level of profitability with a gross margin of 70%. Operating profit was $24.3 billion, a YoY growth of 18%, and EPS was $2.69, a 21% increase from the same period last year.
Regarding the breakdown of business segments, cloud revenue was $24 billion, with a YoY growth of 15%, primarily driven by Microsoft Azure and other cloud businesses. Productivity and Business Processes revenue reached $18.3 billion, a 10% increase, including 15% growth in Office 365 commercial revenue, 3% growth in Office consumer products and cloud services revenue, and 26% growth in Dynamics 365 revenue. This quarter’s productivity business did not reflect the impact of Copilot. However, management mentioned in their guidance for the next quarter that the performance would slow down, including Azure, indicating that AI’s short-term contribution to the company’s performance is limited.
Overall, Microsoft’s performance in the last quarter slightly exceeded market expectations, but the guidance for this quarter indicates a slowdown. In the short term, the company expects productivity and business process revenue growth to slow to 9–11% and cloud business revenue growth to remain flat at around 15%–16%, with Azure revenue growth slowing to 25%–26%.
Looking at the long term, as AI’s penetration rate gradually increases and applications like Copilot grow, it will positively affect Microsoft’s performance. With the expansion of Azure AI and full-scale adoption of Copilot, AI-driven revenue growth is expected to show gradual progress and is predicted to contribute significantly to revenue growth in the first half of 2024.
FINAL THOUGHTS
From the financial reports of Microsoft and Google, it is evident that their investments in AI are just beginning. Although Google’s overall AI applications are weaker than Microsoft’s, its existing businesses have delivered financial reports that exceed market expectations. The most crucial advertising and cloud businesses have shown satisfactory results. While the future of AI looks promising, the current valuation already reflects future revenue estimates. However, the long-term trend of AI is certain, which leaves room for speculation for tech giants in the U.S. stock market and AI concept stocks in the Taiwan stock market. In addition, Nvidia and AMD will also release their financial reports in August, and it will also be worth paying attention to see if the leading GPU chip giants can continue to ride the AI wave.
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