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Microsoft and Google deliver solid results, but Cloud yet to be tested in economic slowdown

Written by Ben Barringer, equity research analyst at Quilter Cheviot

Microsoft and Google both reported results that can fall into the camp of not terrible given the current backdrop, but also not living up to recent history.

Given companies continue to digitise and this is a theme that is going nowhere, despite global economic troubles, these remain high quality businesses that have the potential to thrive in a multitude of environments.

Microsoft’s cloud business continues to march skyward, although expectations remain lofty. Google’s cloud business was not as good as hoped and with economic growth slowing, it will be interesting to watch various cloud propositions. The cloud has yet to be tested in a time of economic stress and its value is partly in the fact you can dial consumption up and down. It could be as businesses struggle, demand weakens over the year.

Advertising is also likely to slow given its cyclical nature, but there are two interesting points here. Firstly, Microsoft is looking to up its game in this regard with its partnership with Netflix and its ad-supported service. We are yet to know what this exactly looks like but it marks a significant development for Microsoft. Google meanwhile is seeing search traffic transition, with people searching for last minute holidays. Search will always see good traffic and thus the ad revenue is likely to follow, but we are likely to see some slowdown here too.

Microsoft also gave a good insight into the labour market with LinkedIn showing some softness towards the end of the second half. This corroborates wider market observances, and will be a good indicator of just how robust the global economy is in the face of rising interest rates and high inflation.

Finally, both companies are seeing headwinds with the strength of the dollar and if economic conditions are to worsen then this will continue to impact on revenues. But while we are likely to see revenues moderate over the rest of the year, these companies will withstand the test of time and continue to be very valuable to investors.

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