When it comes to the quarterly results of tech giants Alphabet and Microsoft, the reaction from Wall Street can be summed up in one phrase: good, but not good enough. Despite reporting revenue and earnings that exceeded estimates, both companies experienced a sell-off in extended trading. This can be attributed to the fact that these stocks were priced for perfection – with Alphabet shares up 56% for the year and Microsoft up 70% over the past 12 months, investors were expecting nothing short of exceptional performance.
Alphabet and Microsoft were two companies that captured the attention of investors last year, riding the wave of artificial intelligence and implementing significant cost-cutting measures. These efforts were applauded by shareholders, leading to a surge in stock prices. However, as the weeks heading into their earnings reports saw investors buying shares with high expectations, they were ultimately left disappointed and nitpicking the numbers presented to them.
Despite both companies surpassing revenue and earnings estimates, there were still areas that fell short. Alphabet reported a 13% revenue growth, its fastest rate of expansion since early 2022. With sales of $86.31 billion, it outperformed the average estimate of $85.33 billion. Additionally, Alphabet’s earnings per share of $1.64 beat estimates by 5 cents. Similarly, Microsoft’s revenue increased by 18% to $62.02 billion, exceeding the $61.12 billion average analyst estimate. The company’s earnings per share of $2.93 were 15 cents above consensus.
Both Alphabet and Microsoft boasted impressive performance in their respective cloud businesses. Google Cloud reported a 25% growth, while Microsoft’s Azure and other cloud services expanded by 30%. These results showcased the companies’ ability to capitalize on the growing demand for cloud solutions and solidified their positions in the market.
Despite the overall positive performance, there was one area of disappointment for Alphabet – Google’s ad business. While revenue of $65.52 billion was still impressive, it trailed behind analysts’ estimates of $65.94 billion. Within the ad segment, YouTube also fell just short of expectations. Analysts from Stifel, who recommend buying Alphabet stock, acknowledged the company’s “healthy advertising results, but not enough.”
Analysts believe that part of the issue lies with the market’s unrealistic expectations for Google and its advertising market dominance. Given its size and market share, it is unrealistic to expect double-digit growth rates to continue indefinitely. Brian Wieser, an analyst at media and advertising consultancy Madison and Wall, expressed that many investors and analysts fail to grasp the reality of the advertising market’s potential for sustained growth.
The disappointment in Alphabet’s quarterly results resulted in a nearly 6% drop in its share price, while Microsoft experienced a lesser decline. Despite beating revenue and earnings estimates, Microsoft’s outlook for the fiscal third quarter fell short of expectations. This overshadowed the positive performance and led to a temporary drop in the stock price. Similarly, chipmaker AMD saw its share price fall almost 6% despite exceeding revenue expectations and meeting profit estimates.
As attention turns to Thursday, the market eagerly awaits quarterly results from other tech giants such as Amazon, Apple, and Meta. Like Alphabet and Microsoft, Meta shares have also reached record highs this month. Apple hit its all-time high in December, while Amazon continues to inch closer to its record from 2022. The performance and reception of these companies’ earnings reports will undoubtedly have a significant impact on market sentiment.
While the quarterly results of Alphabet and Microsoft exceeded estimates, they were not enough to satisfy the high expectations of investors. The mixed bag of results showcases the rollercoaster ride of Wall Street, where even exceeding expectations can lead to disappointment in a market that demands perfection. As the earnings season continues, all eyes are on the tech giants to see if they can meet the market’s sky-high expectations once again.
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