Tag: Alphabet Inc. (GOOGL)

Analyzing Microsoft’s (MSFT) Soaring Success – What’s Next?

Posted on by The INO.com Team

Shares of Microsoft Corporation (MSFT) have been performing exceptionally well lately, with the stock surging more than 12% over the past month. Moreover, it hit a new 52-week high of $376.35 in the previous session. The stock has gained more than 20% over the past six months and nearly 55% over the past year.

The rally in the stock kicked off a couple of days after Microsoft reported upbeat fiscal 2024 first-quarter results. Since then, the stock has added more than $350 billion to its market capitalization. MSFT is the second-largest component in the S&P 500 with a market cap of $2.796 trillion, behind only Apple Inc. (AAPL) at $2.951 trillion.

Market research firm Bespoke Investment said that MSFT has joined AAPL as the second individual company with a larger market cap than the companies that comprise the Russel 2000 index.

Now, let’s discuss the factors that could impact MSFT’s performance in the upcoming months:

Solid Financial Performance in the Last Reported Quarter

For the fiscal 2024 first quarter that ended September 30, 2023, MSFT reported revenue of $56.52 billion, beating analysts’ estimate of $54.55 billion. This compared to the revenue of $50.12 billion in the same quarter of 2022.

Microsoft’s Intelligent Cloud segment, which comprises Azure, public cloud, SQL Server, Visual Studio, Nuance, Windows Server, GitHub, and enterprise services, was up 19.4% year-over-year.

MSFT’s Productivity and Business Processes segment posted $18.59 billion, up 13% from the previous year’s period. This business unit comprises Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software. The software company’s gross margin grew 16% year-over-year to $40.22 billion.

In addition, the software maker’s operating income came in at $26.90 billion, an increase of 25% year-over-year. Its net income rose 27% year-over-year to $22.29 billion. MSFT posted an EPS of $2.99 versus the consensus estimate of $2.65. This was up 27.2% from the same period last year.

As of September 30, 2023, the company’s cash and cash equivalents stood at $80.45 billion, compared to $34.70 billion as of June 30, 2023. Its total current assets totaled $207.59 billion, compared to $184.26 billion as of June 30, 2023.

For the fiscal 2024 second quarter, Amy Hood, MSFT’s finance chief, expects the company’s revenue to come in the range of $60.40 billion to $61.40 billion, which implies approximately 15% year-over-year growth.

Robust Historical Growth

Over the past three years, MSFT’s revenue grew at a CAGR of 14.1%. Its EBITDA and net income improved at CAGRs of 16.7% and 17.5%, respectively, over the past three years. Also, the company’s EPS increased at a CAGR of 18.5%. Its levered free cash flow improved at 15.9% CAGR over the same timeframe.

Further, the company’s tangible book value and total assets increased at CAGRs of 25.7% and 14% over the same period, respectively.

Rebound In Cloud Spending

Revenue from Microsoft’s Azure cloud business surged 29% year-over-year during the September quarter, compared with 26% growth in the fourth quarter. Moreover, Microsoft is pulling ahead of its major competitors, Amazon.com, Inc. (AMZN) and Google parent Alphabet Inc. (GOOGL), in the race to recover from a two-year slowdown in cloud spending.

When multi-decade inflation hit last year, the Fed hiked interest rates, and companies responded by lowering their tech spending as a part of their cost-reduction measures. The inflation has fallen sharply from its peak of 9.1% hit in June last year. The Consumer Price Index (CPI), the most widely used measure of inflation, further showed signs of easing in October.

The core CPI, excluding volatile food and energy prices, increased 0.2% for the month and 4% year-over-year, lower than the estimates of 0.3% and 4.1%, respectively. Also, the annual level was the lowest in nearly two years and down from 4.1% in September. With declining inflationary pressures, organizations’ cost-cutting efforts have begun to wane, which should bode well for MSFT.

According to the latest forecast from Gartner, worldwide end-user spending on public cloud is projected to grow by 20.4% to a total of $678.80 billion in 2024, up from $563.60 billion in 2023. Growing business needs and emerging technologies like GenAI drive cloud model innovation.

MSFT is “still helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” CEO Satya Nadella said in the latest earnings release.

Significant Advancements in AI

MSFT has been making several initiatives to infuse generative AI into its software and services.

In January this year, Microsoft announced a multiyear, multibillion-dollar investment in ChatGPT-maker OpenAI. The agreement marked the third phase of the partnership between the two companies after MSFT’s prior investments in 2019 and 2021. The company is providing its Azure cloud computing infrastructure for OpenAI.

Also, Microsoft is adding OpenAI models to its consumer and enterprise software products.

In February, the company launched a new, AI-powered Bing search engine and Edge browser with built-in support for OpenAI’s ChatGPT. The new Bing search version could deliver better search, more accurate answers, a new chat experience, and the ability to generate content.

Further, on March 16, the software maker announced the addition of AI tools to its Office productivity applications and introduced a feature called Microsoft 365 Copilot. The Copilot feature uses next-gen AI to automate and simplify tasks and offer suggestions. MSFT announced that Microsoft 365 Copilot in Windows will be available on September 26.

Starting November 1, Microsoft 365 Copilot will be generally available for enterprise customers. In addition, this AI-powered Copilot is added to the company’s cybersecurity offerings and GitHub service for software developers.

On November 8, MSFT-owned GitHub introduced a Copilot assistant that can assist developers in working with their employers’ internal code, priced at $39 per person a month. The new launch might help the company boost revenue in its cloud business unit by taking enhanced advantage of partner OpenAI’s technology.

Recovery in the PC Market

MSFT reported a 4% growth in sales of Windows operating system licenses to device makers in the last reported quarter, putting an end to a streak of five quarters of year-over-year declines. Amy Hood stated that the PC market has started to stabilize.

As per the estimates from Gartner, worldwide PC shipments totaled 64.3 million units during the third quarter of 2023, a decline of 9% from the third quarter of 2022. A 9% decrease in the third quarter compared to a 30% decline in the first quarter.

After eight straight quarters of decline, the PC market is expected to begin recovery in the fourth quarter of this year. For 2024, Gartner projects the global PC market to witness 4.9% growth, driven by both the business and consumer segments.

“The good news for PC vendors is that the worst could be over by the end of 2023,” said Mikako Kitagawa, Director Analyst at Gartner. “The business PC market is ready for the next replacement cycle, driven by the Windows 11 upgrades. Consumer PC demand should also begin to recover as PCs purchased during the pandemic are entering the early stages of a refresh cycle.”

In September, MSFT introduced new Surface computers and revealed details about the release of this year’s version of Windows 11. The company unveiled the Surface Laptop Studio 2 and the Surface Laptop Go 3; both computers will have Microsoft’s revamped Windows 11 OS, which includes its Copilot software. The company could capitalize on the PC market’s expected recovery with these new launches.

Favorable Analyst Estimates

Analysts expect MSFT’s revenue for the second quarter (ending December 2023) to grow 15.6% year-over-year to $60.96 billion. The consensus EPS estimate of $2.75 for the ongoing quarter indicates an 18.7% year-over-year rise. Moreover, the company has topped the consensus revenue in three of the trailing four quarters and EPS estimates in all the trailing four quarters.

Additionally, for the fiscal year (ending June 2024), Street expects MSFT’s revenue and EPS to increase 14.5% and 14.1% year-over-year to $242.69 billion and $11.19, respectively. Also, the software company’s revenue and EPS for the fiscal year 2025 are expected to increase 13.8% and 15.1% from the previous year to $276.22 billion and $12.88, respectively.

Bottom Line

Microsoft’s revenue and earnings beat analysts’ expectations in the last reported quarter, fueled by its cloud business strength, with Microsoft Cloud revenue up a staggering 24% year-over-year. Further, the software giant continues to make numerous advancements in AI, helping it regain tech leadership.

"With copilots, we are making the age of AI real for people and businesses everywhere," said Satya Nadella. “We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” he added.

According to Brent Thill, Jefferies analyst, the tailwinds of AI have begun to kick in for MSFT.

MSFT’s stock notched a new 52-week high in the previous trading session. The software maker’s early dominance in the realm of AI has been the primary driver of the stock’s impressive gains so far this year, and the stock is expected to surge higher in the upcoming months.

According to Bloomberg Intelligence (BI) research, the generative AI market could grow at a CAGR of 42% to reach $1.3 trillion by 2032.

Given MSFT’s solid financials, high profitability, and optimistic growth outlook, it could be wise to invest in this software stock now.

Wall Street Giants Alphabet (GOOGL), Meta Platforms (META), and Microsoft (MSFT) Report Earnings this Week – Here’s the Game Plan

Posted on by The INO.com Team

U.S. tech giants could indicate an end to the approximately year-long slowdown in their cloud businesses as recent signs of economic resilience encourage consumers to boost their tech spending. Also, a surge in digital ads would drive profits.

Wall Street’s leading tech companies, Google-parent Alphabet Inc. (GOOGL), Meta Platforms (META), and Microsoft Corporation (MSFT), are scheduled to report earnings this week, which will be a test to their elevated valuations and the broader market rally these tech giants have driven, thanks to optimism over artificial intelligence’s (AI) growth potential.

The Overall Consensus Estimates of Each Stock.

Analysts expect GOOGL’s revenue for the second quarter (ended June 2023) to come in at $72.80 billion, indicating an increase of 4.5% year-over-year. The consensus EPS estimate of $1.34 for the to-be-reported quarter reflects a 10.7% year-over-year improvement.

Furthermore, analysts expect GOOGL’s revenue and EPS for the fiscal year (ending December 2023) to increase 6.2% and 16.9% from the previous year to $300.31 billion and $5.33, respectively.

In the case of META, analysts expect revenue to increase 8% year-over-year to $31.12 billion for the second quarter that ended June 2023. The tech company’s EPS for the to-be-reported quarter is expected to rise 18.3% year-over-year to $2.91.

Additionally, META’s revenue and EPS for the fiscal year (ending December 2023) are expected to grow 8.9% and 37.5% year-over-year to $126.96 billion and $11.81, respectively.
For the fourth quarter that ended June 2023, analysts expect MSFT’s revenue to increase 7% year-over-year to $55.47 billion. The company’s EPS for the same quarter is expected to rise 14.4% year-over-year to $2.55. Moreover, it has topped the consensus EPS estimates in three of the trailing four quarters, which is impressive.

For the fiscal year 2023, the consensus revenue and EPS estimates of $211.34 billion and $9.67 indicate increases of 6.6% and 5% year-over-year, respectively. In addition, the company’s revenue and EPS for the next fiscal year 2024 are expected to grow 11.7% and 14.1% from the prior year to $236.10 billion and $11.03, respectively.

How Should Investors Approach These Stocks?

While the search engine is GOOGL’s flagship product, the company operates in key areas such as hardware, cloud computing, advertising, and software.

The tech giant, scheduled to report second-quarter 2023 results on July 25, surpassed analysts’ earnings estimates in the first quarter. GOOGL’s revenue of $69.78 billion beat analyst expectations of $68.90 billion, according to Refinitiv. Also, the company reported earnings of $1.17 per share versus $1.07 per share expected, according to Refinitiv.

In addition, GOOGL’s YouTube advertising revenue was $6.69 billion, compared to $6.60 billion expected, according to StreetAccount. The beat on the top and bottom lines breaks a string of four consecutive quarters in which the company missed the consensus estimates.

The company finally generated profit in its cloud-computing business during the first quarter. Its Google Cloud revenue grew 28.1% from the year-ago value to $7.45 billion. The unit reported an operating income of $191 million, following a $706 million loss in the same quarter of 2022.

“We are pleased with our business performance in the first quarter, with Search performing well and momentum in Cloud. We introduced important product updates anchored in deep computer science and AI. Our North Star is providing the most helpful answers for our users, and we see huge opportunities ahead, continuing our long track record of innovation,” commented Sundar Pichai, GOOGL’s CEO.

Due to intense pressure from the popularity of the AI-based chatbot ChatGPT, launched in November last year by Microsoft-backed Open AI, GOOGL launched its own AI chatbot called Bard during the first quarter of 2023.

GOOGL is making numerous efforts to incorporate “generative AI” into its products. On June 8, the company introduced the Secure AI Framework (SAIF), a conceptual framework for secure AI systems. SAIF is designed to help mitigate risks specific to AI systems, such as stealing the model, data positioning of training data, extracting confidential information in the training data, and injecting malicious inputs.

On May 25, GOOGL announced Search Labs, a new generative AI-powered program that enables users to access early experiments like SGE, Code Tips, and Add to Sheets. In the same month, the company unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator to provide help to developers.

Furthermore, on May 18, GOOGL unveiled the private preview of Duet AI for Google Cloud, an always-on AI collaborator powered by generative AI. It offers real-time code suggestions, chat assistance, and customizable features designed for enterprise requirements.

Alphabet’s second-quarter results are expected to reflect profits from its strengthening cloud service offerings. The company’s growing investments in infrastructure, data management, analytics, security, and AI are the primary catalysts. While the Google Cloud segment would turn into a profit in the second quarter, the growth could slow down.

According to analysts polled by Refinitiv, GOOGL will likely report its lowest-ever growth for the cloud computing business at 24.4%. On the other hand, the recovery in the digital ad market would aid GOOGL significantly.

META is another tech giant set to report second-quarter earnings on July 26 after market close. With a $754.11 billion market cap, Meta, formerly known as Facebook, Inc., develops innovative products that allow people to connect and share with friends and family through mobile phones, PCs, virtual reality (VR) headsets, and wearables globally.

Meta’s products and services include Facebook, Instagram, WhatsApp, Messenger, and Quest 2.

Tech conglomerate reported better-than-expected revenue and earnings for the first quarter of 2023. META’s sales increased by 3% year-over-year during the first quarter, reversing a trend of three consecutive quarters of revenue declines and topping analysts’ estimates of $27.65 billion, according to Refinitiv.

Also, the tech company reported earnings of $2.20 per share, compared to the $2.03 per share expected by analysts, according to Refinitiv.

In addition, META’s user growth was relatively strong compared to previous quarters. META’s family daily active people (DAP) were 3.02 billion on average, up 5% year-over-year. Similarly, its family monthly active people (MAP) rose 5% from the prior-year quarter to 3.81 billion. Also, Facebook's daily active users (DAUs) were 2.04 billion as of March 31, 2023, up 4% year-over-year.

In the last quarterly release, Meta’s founder and CEO, Mark Zuckerberg, commented, “Our AI work is driving good results across our apps and business. We’re also becoming more efficient so we can build better products faster and put ourselves in a stronger position to deliver our long-term vision.”
Further, the company stands to benefit from its upcoming product launches, including Meta Quest 3, a cutting-edge virtual and mixed reality headset featuring higher resolution, improved performance, breakthrough Meta Reality technology, and enhanced comfort.

Also, on July 18, META introduced the availability of Llama 2, an open-source large language model, with Microsoft as its preferred partner. The companies believe that an open approach is the right one for developing today’s AI models, especially those in the generative space where the technology is advancing rapidly.

This month, Facebook owner Meta announced Threads, an app built by the Instagram team for sharing via text. Threads provide a new, separate space for real-time updates and public conversations. Creators and influencers are increasingly exploring this new app to bolster their online presence and help them reach bigger audiences.

Threads became the fastest-growing social media platform to hit 100 million users, a serious threat to the dominant microblogging Twitter app. This resulted in several analysts upgrading the META stock. If the application manages to retain users, Threads could achieve $5 billion in annual ad revenue, Bernstein said in a note on July 18.

On July 11, Morningstar analysts stated that Threads could add between $2 billion and $3 billion to META’s revenue annually between 2024 and 2024.

As a result of continued technological breakthroughs and innovative product launches, META issued a relatively bullish forecast for the second quarter of fiscal 2023, projecting total revenue of between $29.50 billion and $32 billion, exceeding analysts’ sales estimate of $29.50 billion, according to Refinitiv.

For META, revenue in the fiscal 2023 second quarter is projected to grow at its fastest pace in six quarters, driven by a significant pickup in the digital ad market as consumer spending remains robust.
Along with GOOGL, leading tech company MSFT is set to release its fourth-quarter and fiscal year 2023 earnings report on July 25. The company reported better-than-expected results for the first quarter of fiscal 2023.

During the third quarter, MSFT beat Wall Street’s revenue and earnings estimates, driven by growth in its cloud computing and Office productivity software businesses, and the software giant added that AI products were stimulating its sales.

MSFT’s revenue in the third quarter increased 7% year-over-year to $52.90 billion, surpassing analyst expectations of $51.02 billion, according to data from Refinitiv. The company reported earnings of $2.45 per share, beating analyst estimates of $2.23, according to Refinitiv.

During the quarter, the company’s growth at its cloud business Azure was 27%, exceeding analyst expectations for 26.6% growth, according to the consensus of 23 analysts polled by Visible Alpha.

Microsoft’s CEO, Satya Nadella, told investors on a conference call that the company will continue to focus on three priorities. First is assisting customers in using the depth of the Microsoft Cloud to get the most value out of their digital spend; second, investing to take the lead in the new AI wave across its solution areas. And third is driving operating leverage, aligning its cost structure with its revenue growth.

Satya Nadella added that the company has the most powerful AI infrastructure, which is being used by its partner Open AI and NVIDIA Corporation (NVDA), and other leading AI startups, including Adept and Inflection, to train large models. MSFT’s Azure OpenAI bright together advanced models like ChatGPT and GPT-4 with the enterprise capabilities of Azure.

The company has more than 2,500 Azure-Open AI service customers, and AI is integrated into a wide range of products, MSFT’s CEO said.

On July 18, MSFT announced that the company’s new corporate AI tools that work with Office software, Microsoft 365 Copilot, would cost $30 per user per month in addition to what most business customers already pay.

The pricing, announced at MSFT’s partners' conference, reflects solid demand for corporate AI products and the cost of running them. According to Chief Financial Officer Amy Hood, its new AI products might become the tech company’s fastest business to hit $10 billion.

While the company will likely surpass analysts’ earnings estimates in the to-be-reported fourth quarter, as it did in the first three quarters of 2023, however, Microsoft Intelligent Cloud, home to Azure, is estimated to grow at 13.7%, the slowest rate since 2017. Enterprises are optimizing their IT spending due to lingering macro challenges, thus impacting Azure and other cloud providers.

Meanwhile, last Friday, Goldman Sachs analyst Kash Rangan reiterated a Buy rating on MSFT and increased the price target to $400 from $350 after the company announced pricing and other details related to its Microsoft 265 Copilot offering.

Bottom Line

These tech giants have been at the forefront of cutting-edge research and developments in AI, Cloud, among others, integrating these powerful technologies into their products and services. With these companies flexing their muscles in Cloud and AI, they are well-posied for significant long-term growth.

Is AI Fueling the Next Tech Bubble? 5 Stocks to Watch

Posted on by The INO.com Team

Artificial Intelligence (AI) is an umbrella term that denotes a series of programs and algorithms designed to mimic human intelligence and perform cognitive tasks efficiently with little to no human intervention. Reinforcement through Machine Learning (ML) changes the game by enabling the models and algorithms to keep evolving based on outcomes.

Unlike other next-big things, such as nuclear fusion, quantum computing, and flying cars, which are practically (and literally) pies in the sky, AI has been around for quite some time, influencing how we shop, drive, date, entertain ourselves, manage our finances, take care of our health, and much more.
However, the technology came into the limelight late last year with the release of ChatGPT, which in its own description, is “an AI-powered chatbot developed by OpenAI, based on the GPT (Generative Pretrained Transformer) language model. It uses deep learning techniques to generate human-like responses to text inputs in a conversational manner.”

The Euphoria

The easily accessible chatbot, believed to be capable of eventually disrupting how humans interact with computers and changing how information is retrieved, took the world by storm by signing up 1 million users in five days and amassing 100 million monthly active users only two months into its launch. To put this in context, TikTok, the erstwhile fastest-growing app, took nine months to reach 100 million users.

ChatGPT is one of the several use cases of generative AI, the subset of algorithms that creates and returns content, such as human-like text, images, and videos, on the basis of written instructions (prompts) provided by the user.

Including this subset, AI in its various forms and applications is capable of analyzing large volumes of data generated during the entire course of our increasingly digital existence and identifying trends and exceptions to help us develop better insights and make more effective decisions.
Given its massive importance, it’s hardly surprising that Zion Market Research forecasts the global AI industry to grow to $422.37 billion by 2028. Hence, this field has understandably garnered massive attention from investors who are reluctant to miss the bus on such a watershed development in the history of humankind.

Although OpenAI, the creator of ChatGPT, is not a publicly listed company, Microsoft Corporation (MSFT) has bet big on the company with a multiyear, multibillion-dollar investment deal. CEO Satya Nadella discussed, at the World Economic Forum held in Davos this year, how the underlying technology would eventually be ubiquitous across MSFT’s products. The process has already begun with updates to its Bing search engine.

MSFT’s rival, Alphabet Inc. (GOOGL), is in hot pursuit. With AI-enabled technology ubiquitous across its platforms, the company has unveiled its response to ChatGPT, called BardAI, with which the company is eager to reclaim its reputation as an early bird in the domain of conversational AI.

Chinese tech giant Baidu, Inc. (BIDU) has also followed suit with Ernie Bot. Amazon.com, Inc. (AMZN) and Meta Platforms, Inc. (META) are also among the notable players in this dynamic domain.

However, more recently, the company which made headlines when its stock got its moonshot due to the widespread public interest in AI is NVIDIA Corporation (NVDA). Post its earnings release on May 24, the Santa Clara-based graphics chip maker has stolen the thunder by becoming the first semiconductor company to hit, albeit briefly, a valuation of $1 trillion.

NVDA’s A100 chips, which are powering LLMs like ChatGPT, have become indispensable for Silicon Valley tech giants. To put things into context, the supercomputer behind OpenAI’s ChatGPT needed 10,000 of Nvidia’s famous chips. With each chip costing $10,000, a single algorithm that’s fast becoming ubiquitous is powered by semiconductors worth $100 million.

The Catch

Notwithstanding all the transformative qualities of AI, investors, who poured a record $8.5 billion of cash into tech funds last week, would be wise to be aware of the limitations and loopholes of investing in technology before FOMO drives them to inflate a "baby bubble" growing in plain sight.

While the technology is powerful (and useful, unlike most cryptocurrencies), the adoption is fast becoming so widespread that it remains unclear how it could help a specific business differentiate itself by developing enduring competitive advantages (read moats) and generating consistent profitability.
Moreover, LLM-based generative AI chatbots such as ChatGPT and BardAI are simply auto-complete on steroids that have been trained on a vast amount of data. While they are really good (and continually getting better) at predicting what the next word is going to be and extrapolating it to generate extensive literature, it lacks contextual understanding.

Consequently, the algorithms struggle with nuances such as sarcasm, irony, satire, analogies, etc. This also leads to the propensity to “hallucinate” and generate responses even if those are factually and logically incorrect.

Additionally, with the widespread adoption of LLMs and other forms of generative AI, a massive amount of content will be ingested and regurgitated as canned responses echoed in infinite permutations and combinations. This oversupply could dilute the value and increase demand for qualitatively superior insight and discernment, which (still) requires human intervention.

(Relatively) Safe Havens

Just as we have learned during the dot-com, cryptocurrency, real estate, and numerous other bubbles through the ages, markets can stay irrational longer than investors can stay solvent.

Therefore, even if the next big thing comes along and changes the world (and electricity, automobiles, personal computers, and the Internet really did), it’s the fundamentals that determine whether a business can survive to capitalize on those windfalls.

Hence, it could be wise and safe for investors to stick to big tech mega caps (mentioned earlier in the article), which are involved in providing the infrastructure and computing horsepower required to make the data and power-hungry AI algorithms work.

Moreover, since AI is well-embedded into their business operations and market offerings and AI as a service is (still) a small portion of their revenue, concentration risks can be more easily managed.

Bottom Line

Rather than getting too carried away and stretching a worthwhile and useful innovation to frothy excesses with unrealistic expectations, it could be useful to remember that legendary investor and polymath Charlie Munger doesn’t think that AI is the silver bullet that can solve mankind’s pressing problems all by itself.

Even AAPL co-founder Steve Wozniak, who knows more than a thing or two about technology, agrees with the ‘A’ and not the ‘I’ of Artificial Intelligence.
We hope this discourse will help investors cultivate discernment, discretion, and, if necessary, dissent while investing in this revolutionary technology since those are the ultimate indicators of intelligence.