Tech Giants Hover Above the Storm

The news on Tuesday, July 26th coming from both the Microsoft (MSFT) and Alphabet (GOOG) camps with their recently published earnings reports is a sigh of relief for investors and is so far having a calming effect on Wall Street, with both companies only missing their earnings estimates by a small margin. They’re showing that they may just weather the troubling conditions currently plaguing the market as a whole.

Although globally it seems the landscape is changing with what drives business in recent times, as evidenced by the tech-heavy NASDAQ losing around 26% of its value this year, a few companies are innovating just enough to stay above their smaller competitors.

It’s all about taking advantage of changing consumer habits

Both companies reported that in addition to other segments of their businesses, their cloud and advertising services were a large part of the reason for their better than expected (or feared) results.

Much of the world has been forced to adjust their behavior over the last few years, with many spending more time online during the pandemic, whether it was working from home or shifting their buying habits, so showing growth in these areas would seem to make logical sense.

The CEO of Alphabet and Google, Sundar Pichai, commented on this in his statement, saying, “The investments we’ve made over the years in AI and computing are helping to make our services particularly valuable for consumers, and highly effective for businesses of all sizes. As we sharpen our focus, we’ll continue to invest responsibly in deep computer science for the long-term.”

Microsoft executive vice president and chief financial officer, Amy Hood, similarly commented, “In a dynamic environment we saw strong demand, took a share, and increased customer commitment to our cloud platform.”

Microsoft revenue totaled $51.9 billion and increased 12% over the same period last year. Their operating income increased by 8% to $20.5 billion. A net income of $16.7 billion saw a 2% increase, and the diluted earnings per share were $2.23, up 3%. The company showed its best ever sales for the cloud service, Azure, which were up 28%.

The company this month was also selected by Netflix to partner in their newest ad-supported, cheaper subscription service, a potentially significant new source of revenue.

Alphabet’s figures show its lowest growth rate since the 2020 April-June quarter, but they are still in an enviable position compared to most other non-tech companies in the current landscape. Its revenue totaled $69.69 billion and increased 13% compared to the same period last year. Their operating income increased to $19.45 billion, up from $19.36 billion. A net income of $16 billion saw a small drop from last year’s $18.52 billion, and the diluted earnings per share were $1.21, down from $1.36.

Google Cloud fell short of target earnings by around $1 million at $6.3 billion, and ads through YouTube came in under budget, with $7.3 billion as opposed to $7.5 billion in estimates.

So far, these two firms have avoided the pitfalls that other large businesses across the world have been experiencing. Supermarket giant Target’s shocking first-quarter earnings are one such example, as is Walmart’s predicted decline in profits for its upcoming report due in August. Many point to the ongoing issues with inflation, household costs increasing, and supply chain issues as having a huge impact on such retailers.

Online rivals in the social media world, Twitter and Snap have also just seen negative fourth-quarter earnings, with some analysts pointing to the fact that ad content can be more expensive through these types of social media as opposed to search engines, as it requires more than just text.

Both companies still communicate caution though

Despite the somewhat positive reports and forecasts, the quarter hasn’t been without its setbacks, and risks remain for both companies. Ever-increasing inflation, wages, fuel prices, raw material costs, and shortages from the China shutdowns are making some businesses that were formerly customers re-evaluate their spending on ads for marketing. The strong dollar has also meant a lower cash return after converting from foreign currency for both businesses.

Alphabet recently cut sales in Russia due to its aggression in Ukraine, and the company missed a huge opportunity to partner with Netflix in its new movement into ads on its service, to the advantage of Microsoft. The company announced back on July 20th that they would be implementing a hiring freeze for a few weeks which seemed to be a worrying sign, but over the whole quarter, there was actually an increase of around ten thousand new employees.

Additionally, antitrust regulators across most markets have also impacted Google’s share of the revenue from app sales.

Microsoft has seen a drop off in sales of its PC’s compared to the previous year, and a slight drop in advertising spending has also had a small impact. The company is also hitting the brakes on hiring. In an effort to achieve “structural adjustment,” Microsoft has cut jobs, yet plans to add more. This time, the layoffs affected less than one percent of its 180,000-person workforce and were distributed across geographies.

How the market responded

Tuesday’s regular trading session ended with a loss of 2.3% for shares of Alphabet. But the company’s shares went up around 5% on the back of the announcement in after-hours trading. Microsoft ended the day with a loss of 2.68%, but its shares were also bolstered by about 5% after the company published its earnings.

Traders seem optimistic about the companies’ ability to take the necessary steps to adapt to the new macroeconomic environment and continue improving their financial situation. ActivTrades’ sentiment feature on the left part of the below chart shows that the sentiment for both companies is highly bullish, with 85% of the ActivTrades community buying Alphabet and 95% buying Microsoft.

Daily charts of Microsoft and Alphabet – Source: ActivTrades’ online platform (ActivTrader)