Analysis: GOOGL MSFT INTC

As we laid out in this morning's opening comments, the March quarter earnings season continues to trek on and that brought results last night from Alphabet (GOOGL) and Microsoft (MSFT) with these companies reporting not only big revenue growth for cloud, but both are leaning into it by increasing their respective capital spending.

On its earnings call Alphabet shares it continues to "expect a meaningful increase in CapEx in 2022 versus last year. For the balance of 2022, the increase will be particularly reflected in investments in technical infrastructure globally with servers as the largest component."

Microsoft also chimes it that it sees "a sequential increase on a dollar basis as we continue to invest to meet growing global demand for our cloud services."

In our view those figures and prospects for continued growth point to continued demand for related chips ahead and should serve as a reminder to us that while market watchers may focus on "technology" there are various addressable markets within the category, some of which are thriving while others less so. As we look at the portfolio's chip end market exposure that runs graphics, high performance computing, data center, and 5G, we are comforted by the above comments from Microsoft and Google and expect more confirmation for out bullish stance in the days and weeks ahead.

Now, before we get into the nitty gritty of the March quarter results from Alphabet and Microsoft, we'll share that we have no price target or rating changes for either holding. With GOOGL shares we are seeing some price targets converge toward our $3,500 one with the same thing happening with MSFT shares and our $350 target.

Alphabet: Weaker than expected YouTube offset by $70 billion buyback increase

For its March quarter results, EPS of $24.62 at Alphabet came up short vs. the $25.54 consensus while revenue for the quarter rose 23% year-over-year to $68.0 billion, modestly ahead of expected $67.9 billion. By segment, Google advertising revenue for the quarter rose 22% year-over-year to $54.66 billion as YouTube Ads climbed 15% year-over-year to $6.9 billion Google Cloud revenue jumped 45% year-over-year to $5.8 billion.

In terms of management comments, Alphabet shared hybrid work is here to stay, and its products are well suited to match that demand. Time spent on YouTube continues to grow, and large companies are migrating data centers to Google Cloud leading to growing deal volume for the company.

When reviewing the above, the clear cut stand out was the slower growth at YouTube, but with the company testing advertising on its Shorts platform that competes with TikTok, we expect to see that growth rate rebound as that strategy is formally rolled out. As background, management shared YouTube Shorts is averaging 30 billion daily views, up 4x compared to this time last year.

We see that as a nice compliment to the 2 billion monthly signed-in YouTube users that on average are consuming over 700 million hours of YouTube content on TVs every day. In our view, that places Alphabet in a very strong position to capture the ongoing shift to advertising dollars to digital from traditional media and should lead to a resumption of more aggressive growth at YouTube Advertising.

And Alphabet warned it will face tough comparisons in the current quarter It unveiled its Board has authorized the repurchase up to an additional $70.0 billion of its Class A and Class C shares. With GOOGL shares down 20% year to date, we see the company leaning into that buyback program, bringing some support to the shares as we march toward the upcoming stock split.

Microsoft: A nice beat and a wonderful outlook

March quarter results were considerably better at Microsoft, which reported March quarter revenue and EPS that topped consensus forecasts hitting $2.22 and $49.36 billion, respectively, led by commercial bookings growth of 28% and Microsoft Cloud revenue of $23.4 billion, up 32% year over year. Not to be outdone, Microsoft also issued guidance that pointed to sequential improvement at its three core businesses, which in aggregate topped consensus expectations. For the current quarter, the company targets revenue of $52.4-$53.2 billion.

Revenue at Productivity and Business Processes was up 17% year over year to $15.8 billion with Microsoft guiding to $16.65-$16.90 billion.

The Intelligent Cloud segment posted revenue of $19.1 billion, up 26% year over year, and ahead of the company's guidance of $18.75-$19.0 billion. Azure revenue growth held steady at 46% year over year while server products and cloud service revenue rose 29% year over year, also keeping its December quarter growth rate intact.

Microsoft sees segment revenue climbing to $21.10-21.35 billion in the current quarter with the primary driver continuing to be Azure. Supporting that view, the number of $100+ million Azure deals more than doubled year over year and Microsoft shared it is seeing consumption growth across every industry, customer segment, and geography.

Revenue at the More Personal Computing segment rose 11% to $14.5 billion, topping the telegraphed $14.15-14.45 billion, and the company sees segment revenue reaching $14.65-$14.95 billion. Combined with the sequential increase called for at Productivity and Business Process, Microsoft's guidance should help alleviate concerns over the PC sector, but we'll look for more on that when Intel (INTC) reports its quarterly results later this week. Depending on how long lived the shutdowns are in China, there could be some modest downside to Microsoft's guidance for this segment.

Microsoft also called out a few headwinds to its bottom line performance in the March quarter:

  • The Nuance deal closed on March 4 and brought with it a negative $0.01 impact to EPS.
  • The US dollar strengthened throughout the quarter and created incremental headwinds with FX having a $0.03 impact on March quarter EPS.
  • As a result of the Russia-Ukraine war, Microsoft suspended all new sales and services in Russia, which had a negative $0.01 impact to EPS.

As we shared on today's Daily Rundown, we see the current share price offering a low risk entry point for newer members and another bite at the MSFT apple.