AgFin Australia

Solid earnings boost Microsoft and Alphabet amid Wall Street concerns

Tech giants Microsoft and Alphabet (Google) have delivered strong quarterly results, potentially easing investor concerns about the megatechs’ ability to support the broader Wall Street market.

Microsoft reported an impressive 27% increase in first-quarter profit, announced after Tuesday’s trading closed. In contrast, Alphabet saw double-digit revenue growth for the first time in over a year in its third-quarter report.

However, investor sentiment toward Alphabet was somewhat reserved. Share prices for both companies diverged significantly in after-hours trading. Microsoft shares surged by 5% and were up 4% around 8 a.m. Sydney time, whereas Alphabet shares dipped nearly 6%.

As of Tuesday’s close, Microsoft shares have risen by 38% year-to-date, outperforming the S&P 500 index, which has gained about 11% over the same period. In contrast, Alphabet shares have shown even stronger performance, surging by 57% year-to-date.

Yet, these gains were not as remarkable as the positive response to Netflix’s recent earnings report, where shares leaped by 12% in after-hours trading following robust figures.

Microsoft’s revenue grew by 13% year-over-year in the quarter, exceeding $56.5 billion, up from $50.1 billion. The company also reported a 27% increase in net income, totaling a substantial $22.29 billion.

Microsoft’s Cloud segment contributed significantly to its strong performance, generating $24.26 billion in revenue, a 19% increase that surpassed market estimates of $23.49 billion. This segment includes Azure public cloud, SQL Server, Windows Server, Visual Studio, Nuance, GitHub, and enterprise services.

Notably, revenue from Azure jumped by 29% during the quarter, surpassing the consensus of 26% among analysts polled by CNBC and StreetAccount. Microsoft does not disclose specific dollar figures for Azure revenue but reported that at constant currency rates, Azure revenue increased by 28%, accelerating from 27% in the previous quarter.

CEO Satya Nadella emphasised the company’s commitment to helping customers leverage the Microsoft Cloud to maximize the value of their digital investments and drive operational efficiency.

In addition, Microsoft’s Productivity and Business Processes unit reported revenue of $18.59 billion, up 13% and exceeding market estimates of $18.19 billion. This unit encompasses Microsoft 365 productivity app subscriptions, LinkedIn, and Dynamics enterprise software.

Microsoft’s More Personal Computing segment, which includes Windows, Xbox, Bing, and Surface, contributed $13.67 billion in revenue, a 3% increase that exceeded the market consensus of $12.85 billion.

Earlier in the month, Microsoft completed its long-awaited $68.7 billion acquisition of video game publisher Activision Blizzard, which will impact earnings for the current quarter.

On the other hand, Alphabet (Google) reported an 11% increase in revenue for the third quarter, marking the first double-digit growth in over a year. A rebound in advertising and cost-saving measures, including job cuts, contributed to this growth.

However, Google’s cloud computing business underperformed in the eyes of investors, causing its share prices to fall. In contrast, Microsoft’s Azure cloud computing business rebounded strongly after two lackluster years.

Google has been grappling with declining ad revenues and increased competition, notably from TikTok. For the third quarter, advertising revenue reached $59.65 billion, up from $54.48 billion a year ago, with YouTube advertising revenue exceeding analyst expectations at $7.95 billion.

Although cloud revenue slightly missed estimates at $8.41 billion, growing 22% year-over-year, investors remained wary. The cloud business also turned a profit of $266 million, a significant turnaround from the $440 million loss in the same period the previous year.

Despite these positive financial results, Alphabet faces a major antitrust inquiry and legal challenges from the US government, along with pressure on its search engine business from generative AI. These factors have contributed to investor concerns about the company’s cloud and YouTube growth prospects.