Microsoft stock jumped after posting stronger-than-expected results in the fiscal first quarter, while Alphabet shares sank as its cloud business missed estimates.
The tech earnings season rolls on, with Microsoft and Alphabet reporting their latest quarterly results after the bell on Tuesday. Microsoft shares rose nearly 4% in after-hours trading after beating expectations, while Alphabet stock tumbled over 6% as its cloud division disappointed.
Microsoft Exceeds Forecasts, Azure Growth Accelerates
Microsoft reported fiscal first-quarter earnings per share of $2.35 on revenue of $50.1 billion, handily beating Wall Street estimates. Analysts had forecast EPS of $2.29 on revenue of $49.7 billion, according to Refinitiv.
The stellar performance was driven by Microsoft’s Intelligent Cloud segment, which includes Azure public cloud services. Azure revenue soared 35% year-over-year, accelerating from 31% growth in the previous quarter. Overall Intelligent Cloud revenue hit $20.3 billion versus estimates of $19.9 billion.
“We see continued evidence that our investments and expanded go-to-market are paying off as we deliver differentiated value to customers,” said Microsoft CEO Satya Nadella.
The results reinforce Microsoft’s position as the second largest public cloud provider behind Amazon Web Services. Under Nadella’s leadership, Microsoft has successfully transitioned to a cloud-first company, with Azure becoming its main profit engine.
“Microsoft has reached a tipping point with digital technology now at the core of how every organization operates,” said Jared Spataro, Microsoft’s VP for Modern Work. “As one of the few companies with differentiated offerings across all these dimensions, Microsoft is well-positioned to capture the tremendous opportunity ahead.”
Alphabet Beats on Top and Bottom Line, But Cloud Disappoints
Meanwhile, Google parent company Alphabet posted Q3 earnings per share of $1.06 on revenue of $69.1 billion, exceeding Wall Street forecasts. Consensus estimates were for EPS of $1.25 on revenue of $70.6 billion, per Refinitiv.
However, shares quickly sank in late trading as Alphabet’s Google Cloud business fell short of projections. Google Cloud revenue came in at $6.9 billion, below the $7.0 billion expected.
The cloud shortfall overshadowed Alphabet’s overall revenue growth acceleration. Total revenue jumped 11% year-over-year, the first double-digit increase in four quarters. Advertising revenue grew by nearly 9% as marketers ramped up spending.
YouTube ad revenue alone surpassed $7 billion for the first time. “Alphabet reported strong results this past quarter, with advertising revenue of $54.5 billion demonstrating the strength and breadth of our products and value we provide to businesses of all sizes,” said Sundar Pichai, Alphabet CEO.
The mixed results from two tech heavyweights come as investors keenly watch how spending on digital advertising and cloud services is shaking out against the uncertain economic backdrop.
Earnings Season Rolls On
Microsoft and Alphabet’s reports arrive during the heart of a busy third-quarter earnings season. Some other notable tech names on tap include Meta on Wednesday and Amazon Thursday.
Of the 188 S&P 500 companies that have reported so far, nearly 70% have topped EPS estimates, according to Refinitiv. But analysts have been closely tracking companies’ commentary on how inflation, rising rates and economic uncertainty could impact demand.
“Microsoft’s strong earnings results suggest that enterprises are still spending on digital transformation and cloud migration,” said Andrew Lipsman, principal analyst at Insider Intelligence. “But the tech giant isn’t immune to the challenges weighing on the digital ad market.”
Stock Futures Edge Lower
U.S. stock index futures edged lower early Wednesday following the big tech earnings. Futures tied to the S&P 500 slipped 0.2% while Dow Jones futures rose 0.1%. The major indexes snapped four-day losing streaks on Tuesday, buoyed by upbeat reports from other corporate heavyweights.
Despite recent volatility, the S&P 500 and Dow remain on pace for their second positive month in the past seven. However, analysts caution more turbulence lies ahead with the Fed still tightening policy and recession risks lingering.
“I think we’ll end up the year higher based on that,” said Trivariate Research’s Adam Parker. “But it’s definitely going to be bumpy between now and then.”
Japan’s Biggest IPO Since 2018
In other market news, semiconductor equipment maker Kokusai Electric debuted on the Tokyo Stock Exchange Wednesday in Japan’s largest IPO since 2018.
Kokusai shares opened at 2,371 yen, nearly 30% above its IPO price of 1,840 yen. The offering raised 108 billion yen ($766 million) through the sale of 58.8 million shares.
Demand for Kokusai shares was strong among both Japanese retail investors and international asset managers, according to deal arrangers. The IPO values Kokusai at around 424 billion yen ($3 billion).
Australia Inflation Moderates but Still High
Australia’s consumer price index rose 5.4% year-over-year in the third quarter, higher than estimates but down from the prior quarter. The inflation data comes ahead of the Reserve Bank of Australia’s next policy meeting November 1st.
The RBA has been aggressively hiking rates to combat inflation. But economists say the moderation in CPI growth could mean the central bank may slow the pace of hikes going forward.
“There are signs that inflation may have peaked, but it is still very high,” said Marcel Thieliant of Capital Economics. “Overall, today’s data support the case for the RBA to slow the pace of rate hikes.”
Soaring prices remain a global phenomenon, with central banks walking a tightrope between curbing inflation and avoiding recession. The Fed appears poised to deliver another 75 basis point rate hike at its November meeting.
China Hints at More Economic Support
Chinese authorities on Tuesday signaled plans to ease financing conditions for local governments, which have struggled with a property market slump and COVID-lockdown aftermath.
Beijing formalized a process allowing local governments to begin borrowing funds for next year starting in the fourth quarter of 2022. The move could ease financial strains on municipalities.
China also approved 1 trillion yuan ($140 billion) of special bonds for natural disaster recovery. The increased infrastructure spending could provide another targeted stimulus boost.
The announcements follow a reported visit by President Xi Jinping to China’s central bank this week, his first since gaining a precedent-breaking third term as Communist Party leader.
While not confirmed, the visit hints at Xi’s desire to bolster the economy after strict COVID controls exacted a heavy toll on growth. Chinese stocks rose broadly on the news.
Looming Government Shutdown Risk
Across the Pacific, Washington faces its own economic challenges. The U.S. government could shut down next month if the House fails to elect a new Speaker, according to Charles Schwab’s Michael Townsend.
The leading Speaker candidate, Rep. Kevin McCarthy, has faced resistance from some hardline conservative holdouts. Without a Speaker, Congress cannot pass funding bills to keep government agencies open.
“I’m not really worried about how the market will react if we do have a shutdown,” said Townsend. “I think we’ll end up shrugging it off like we have in prior years.”
A shutdown would hamper some government services but likely have minimal market impact unless it dragged on, Townsend added. The S&P 500 has edged up a slight 0.1% on average during past shutdowns.
With midterm elections just two weeks away, lawmakers are running out of time to reach a funding compromise. But Townsend believes last-minute deals will avert a crisis.
– Microsoft stock jumped after strong cloud revenue growth boosted Q1 earnings above expectations.
– Alphabet shares sank as Google Cloud revenue missed projections despite overall sales topping forecasts.
– Major indexes snapped four-day slides as investors cheer upbeat earnings, but more volatility expected.
– Japan’s Kokusai Electric surged 30% above IPO price in Tokyo’s biggest listing since 2018.
– Australia inflation moderated but remains elevated ahead of a key central bank policy decision.
– China signaled plans to ease conditions for struggling local governments.
– A looming battle over the House Speaker role raises U.S. shutdown risk.
As the busiest stretch of earnings season continues, investors are navigating a complicated mix of resilient corporate profits but growing economic uncertainty. While markets search for direction, our comprehensive coverage keeps you informed on the latest developments. Check back for more earnings reactions, data releases and market commentary.