Microsoft and Alphabet deal markets a reality check as shares dip after earnings

Microsoft and Alphabet dealt equity traders a reality check last night after the two technology giants reported earnings overnight.

Shares in the two companies were slightly lower in the US premarket, not because the companies dramatically missed estimates – they both beat earnings forecasts – but because they didn’t beat to the extent that justifies the already frothy valuations expanding further.

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Expectations were huge going into results, and there was a feeling that both companies needed to smash estimates out of the park to sustain a rally. This failed to materialise, and Microsoft was down 1.3%, while Google-owner Alphabet dipped 5.3% in US premarket trade.

Microsoft

Microsoft is investing heavily in AI, and its cloud business showed signs of strength in the cloud business, which was instrumental in driving the earnings beat.

Microsoft’s Q3 revenue came in at $62.02 billion, beating expectations of $61.12 billion. EPS was $2.93 per share, a decent best of the forecasted $2.78 per share.

“Microsoft’s numbers actually beat analysts’ forecasts, but their future guidance was not enough,” said Steve Clayton, head of equity funds at Hargreaves Lansdown.

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A cloudy outlook coupled with questions about the effectiveness of investment in AI returning future earnings growth dragged on shares.

“The market has been caught up in the exciting potential around AI but it has largely neglected to consider the costs required to exploit this potential until now,” said AJ Bell investment director Russ Mould.

“Microsoft’s latest earnings update flagged substantial investment as it looks to roll out AI across all areas of its business. There is no doubt this is the right move for Microsoft; investing in the business seems a much better use of its capital from an investor perspective than buying back shares, for example.

“Where the market will be closely scrutinising Microsoft is in how efficiently this money gets spent. Any sense the company is just throwing cash at AI willy-nilly and hoping some of it pays off would not go down too well. 

“Quarterly numbers came in ahead of expectations with strong growth in its cloud division as customers lap up a suite of services which have been augmented using AI.”

Alphabet

While there was quiet discontent with Microsoft’s earnings, investors were evidently disappointed with Alphabet’s results. Earnings and revenue did beat estimates, but only marginally.

Advertising sales growth was much lower than expected, which would have unnerved the market.

The move higher in the stock in the run-up to results suggested traders expected fireworks from Alphabet and felt let down when the numbers hit the wires.

“Last time it was the cloud computing arm causing a downpour on Alphabet’s results, now it is the advertising segment which has made investors switch off. Analysts had high hopes for Alphabet-owned Google and YouTube to scoop up bucket loads of cash from advertising but the group has fallen short of what was expected,” Russ Mould said.

“When you’ve been so successful in the past, expectations can be high and this is certainly the case for all of the Magnificent Seven group of stocks. Everyone expects these companies to pull a rabbit out of the hat every time they report and the slightest miss causes widespread disappointment, even if the actual numbers still showed positive gains on comparative periods.”

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