Microsoft and Alphabet Report Strong Q2 Revenue Despite Challenges in Azure Cloud Growth

Microsoft and Alphabet, the parent company of Google, have both reported better-than-expected revenue in their core businesses for the second quarter of the year. This has helped to support the recent stock price gains of Big Tech companies. However, both companies cautioned about increased spending on artificial intelligence (AI) in the coming quarters.

Google’s digital advertising operations showed signs of recovery, while Microsoft’s cloud business performed well despite economic uncertainties leading many customers to streamline their spending. These factors contributed to revenue exceeding Wall Street’s expectations. Additionally, job cuts at major tech companies earlier this year also improved profit margins.

Shares of Google rose by 6% in after-market trading, marking a gain of 46% for the year. In contrast, Microsoft’s stock fell by nearly 4% due to profit-taking, despite its recent rise in conjunction with the share price surge of Big Tech.

Both companies acknowledged that higher spending would be necessary to support the expected increase in demand for new generative AI services. However, they did not provide specific details on the capital spending or revenue expectations. Microsoft revealed that Azure’s growth was boosted by 1 percentage point from generative AI in the latest quarter and predicted a 2-point increase in the current period.

Microsoft’s Chief Financial Officer, Amy Hood, explained that revenue lift from new AI services would be seen after the end of this year. Capital spending is expected to increase over the next year as the company aims to align spending with the growth in AI revenue.

Alphabet’s CFO, Ruth Porat, stated that the company anticipates increased investment in technical infrastructure in the coming years, especially in AI-related areas. Despite the upcoming spending on AI, both companies emphasized their commitment to cost discipline after recent job cuts. Alphabet’s operating profit margin rose to 35% due to cuts in costs and lower depreciation charges.

Google’s search and other advertising revenue grew by 5%, a significant improvement from the 2% growth reported in the first quarter. Alphabet’s overall revenue was $74.6 billion, surpassing estimates, and net income reached $18.4 billion.

Microsoft also reported revenue and earnings above Wall Street’s expectations. The growth of its Azure cloud platform slowed to 27% in constant currency terms, attributed to customer efforts to optimize spending amidst economic uncertainty. Revenue from Office 365 increased by 17%, driven by customers transitioning to the higher-paying E5 version of the software.

Overall, Microsoft’s revenue was $56.2 billion with an 8% year-on-year increase. Earnings per share rose by 21% to $2.69, outperforming analysts’ forecasts.