The AI race continues

Your portfolios in brief

This week, we decided to talk to you about Microsoft's stock, which filed results above expectations this week. Highly anticipated by investors as the race for artificial intelligence becomes more and more essential in the technology sector, the company is now positioning itself as a leader in the sector with its massive investment in the company ChatGPT. Microsoft has already started integrating it into its Bing platform, reviving the search engine, which was previously unable to compete with Google, pushing Alphabet to work twice as hard to try and regain its lead.

Here are the most important numbers compared to what analysts were expecting, as compiled by Bloomberg:

- Revenues: $52.9 billion versus $51.1 billion expected

- Adj. EPS: $2.45 vs. $2.23 expected

- Productivity and business processes: $17.5 billion versus $17.1 billion expected.

- Intelligent Cloud: $22.1 billion vs. $21.9 billion expected

Microsoft reported a 7 percent year-over-year increase in revenue to $52.8 billion. Revenue from Azure and other cloud services grew 27 percent, up from 31 percent in the previous quarter. Cloud revenue posted gains of 22 percent year over year to $28.5 billion, now accounting for more than half of the company's revenue.

"As with any major platform change, it starts with innovation, and we are excited about the early feedback and demand signals from the AI capabilities we have announced to date," she said. "We will continue to invest in our cloud infrastructure, particularly AI-related spending, as we adapt to the growing demand driven by customer transformation. And we expect the resulting revenue to grow over time."

Microsoft has cut more than 10,000 jobs this year, including in key businesses like Azure and security software, to address the slowdown in sales of those products as consumers and businesses tighten their belts further.

Its stock had accumulated year-to-date gains of 15% prior to its earnings announcement and closed Wednesday's session up more than 7%. "The markets were eagerly awaiting results from the big tech companies and they were not disappointed. Microsoft, Meta and Google all posted surprising quarterly results while Amazon, despite strong results, warned about the future growth of its cloud service. Revenue from the AI sector has come to offset the decline in growth of the cloud sector for enterprises as the majority have invested in this new technology. The race to AI is on," says Philippe Pratte.

The stock, which we hold in our Pratte North American Equity fund, seemed unaffected by the announcement by British authorities to block its takeover of online video game giant Activision. "We remain fully committed to this acquisition and will appeal," Microsoft reacted in a statement sent to AFP about the $69 billion deal.

Stock markets in brief

The markets closed the Monday and Tuesday sessions lower as investors awaited quarterly results from major U.S. technology companies. On Tuesday, the results of Google and Microsoft, which have become major competitors in the AI sector in recent months, were widely expected by the financial community to better analyze the health of the American economy.

Alphabet (Google) reported better-than-expected results, reassuring markets still concerned about the difficult economic environment. Alphabet's revenue increased by 3% to $69.79 billion, compared to $68 billion a year earlier. However, its advertising results declined while those of its YouTube platform accumulated losses of $6.7 billion compared to $6.9 billion in 2022 in the same period. Like many of its competitors, YouTube is facing the rise in popularity of the Tik-Tok platform. To cope with the slowdown, Alphabet also laid off more than 12,000 employees.

The company has also invested heavily in recent months in its cloud business in an attempt to better compete with Amazon and Microsoft, which seemed to pay off as Google posted a $191 million operating profit on $7.45 billion in revenue in the first quarter, after three years of losses. The stock ended Wednesday's trading session down slightly by 0.15 percent.  

First Republican Bank's stock continued to plummet on Wednesday, ending down 29.15%, after falling more than 49% on Tuesday following news that the bank lost $100 billion in deposits in the first quarter. The stock has lost more than 90% of its value since the beginning of the year.

"First Republic is fighting for its survival and trying to get help from the big banks, but its future is bleak," said Edward Moya, an analyst for Oanda. Especially since "the government doesn't seem to want to intervene," he said.

For Hugh Johnson of Hugh Johnson Economics, "it's probably premature to think that the entire banking sector has problems as large as First Republic's, because overall deposit and lending conditions have stabilized." But the economist does feel that "the combination of higher interest rates and some deterioration in lending conditions implies that there could be a hard landing for the economy," he told AFP.

In short, the problems at First Republican Bank continued to worry investors as the banking sector was volatile throughout the week. However, investors were pleased with the latest quarterly results from major technology companies, allowing the NASDAQ index to post some gains on Wednesday.

Meta surprised investors Wednesday by reporting better-than-expected results. Back in February, CEO Mark Zuckerberg said this would be the company's "year of efficiency," which pleased investors. Meta's first-quarter revenue rose 3 percent from $27.91 billion a year earlier, after three consecutive periods in which revenue declined. Its stock has racked up gains of 170% since its last low in November and closed Thursday's session up 14%, supporting all three major indexes.

Indeed, the markets had a good session on Thursday. The Dow and S&P 500 had their best day since January while the NASDAQ gained 2%. Facebook's rebound helped other tech stocks post gains: Alphabet (+3.67%), Microsoft (+3.23%) and Amazon (+4.61%).

On Friday, the Dow index was on track to record its best month since January while the NASDAQ and S&P 500 were also up.  

Here is the average for the week of the three main indexes at 1 p.m. Friday.

And here's the average for the week for the TSX in Canada.

Pratte Portfolio Management is a firm registered with the Autorité des marchés financiers (AMF) and the Ontario Securities Commission (OSC).

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