Tech Newsround – GOOG, MSFT & INTC

2 hits, one miss

Alphabet: AI everywhere

• Alphabet reported strong results and spent its conference call reminding everyone that it is the best AI company even if it does a poor job of getting that message out to the media and investors.
• Q1 24 revenues-exTAC / EPS were $67.6bn / $1.89 ahead of estimates of $66.1bn / $1.53.
• Alphabet also broke precedent by announcing a $0.20 quarterly dividend (measly 0.4% annualised yield) as well as a $70bn share buyback which was well received.
• However, these are a sure sign that slower growth is ahead in the long term as companies tend to return money to investors when they can’t think of other places to invest it or want to support the shares.
• Search and YouTube once again performed well but the biggest jump was seen at Google Cloud where revenues grew by 28%.
• This sounds great until one looks at Microsoft (see below) where revenues grew even faster, undermining Google’s narrative that the world is coming to Google for AI.
• The reality here is that the current hype around what generative AI is capable of has lit a fire under everyone who offers AI compute for rent and I suspect that AWS will also see an acceleration when Amazon reports its Q1 24 results on 30^th April.
• In short, these results go someway towards helping Google dispel the narrative that it is a laggard in AI (which I have never believed) which combined with the good results is why the shares reacted so strongly.
• Alphabet is now enjoying a rerating meaning that the best of its performance is probably already behind us making me much more ambivalent to the company.
• However, there is space for it to rally some more for those who didn’t miss it (like I did) earlier this year.

Microsoft: Making the most of good times.

• Microsoft reported excellent results as demand for AI continues to grow but at the same time, capex will increase materially as Microsoft needs more data centres in which to train and run all of these large models.
• FQ3 24 revenues / EPS were $61.9bn / $2.94 ahead of estimates of $60.9bn / $2.83 which combined with a reacceleration of cloud growth underpinned a 5% increase in the shares after hours.
• This beat is not dissimilar to the one reported by Alphabet underlining that Alphabet additionally has the tailwind of a multiple re-rating and that Microsoft’s multiple is already pretty full.
• Star of the show was undoubtedly Azure where growth has picked up to 31% YoY which is quite an achievement given how large this business has become.
• Microsoft is claiming that it has taken market share implying that when all the reports are in, 31% YoY will prove to be the fastest growth across the big 3.
• The outlook for the rest of the year is also strong as commercial booking has also increased by 29% YoY meaning that strong growth looks like it will continue for a few quarters yet.
• This is fuelled by both AI and non-AI-related demand, but I am pretty sure that it is AI that is driving all of the outperformance.
• Microsoft has also done an excellent job at wrong footing Google in this latest AI craze and this has been reflected in the difference in valuation between the two companies although Google is doing a good job of closing that gap.
• I remain pretty ambivalent about Microsoft as the valuation already reflects the outlook but also has the added danger of taking a whack should the AI bubble burst which it surely will at some point.

Intel: Painful twenties.

• Reasonable results were overshadowed by weak guidance in a clear sign that the transition is far from complete and that Intel is continuing to miss out on the AI boom.
• Q1 24 revenues / EPS were $12.7bn / $0.18 where revenues were in line with estimates and profits ahead but Q2 24 guidance was weak which Intel blamed on a supply bottleneck.
• This bottleneck has occurred in the client business, and one would have expected its data centre business to pick up the slack given the strength coming from Google, Microsoft and undoubtedly Amazon.
• This has not happened and revenues / EPS for Q2 24 are expected to be around $13.0bn / $0.10 below estimates of $13.6bn / $0.24.
• Intel is optimistic for H2 2024, and it is pinning its hopes on Gaudi which is a new AI chip it has created to challenge Nvidia but like AMD and all of the other Nvidia wannabes, it doesn’t have the depth of development platform and tools available for developers.
• Hence, I am not convinced that Gaudi is going to see a lot of traction and would be cautious of believing estimates that Gaudi is going to pull Intel out of its current troubles.
• I also remain concerned about the impact that Qualcomm’s new X Elite line of processors is going to have on Intel’s market share as Qualcomm is pulling out all the stops to make sure that this third attempt to crack the laptop processor market actually works.
• By all available metrics, X Elite is much better than Intel when it comes to performance per watt of power consumed which is a critical metric in any battery-powered device.
• This is why I continue to struggle with Intel’s valuation which even after a 7.8% fall in after-hours trading is trading at around 15x 2025 PER.
• This is more expensive than Qualcomm leaving me in no doubt as to which one I should hold.
• I own Qualcomm and have no intention of selling it yet.