The quarterly results from Alphabet and Microsoft were good, but not good enough for Wall Street. Despite reporting revenue and earnings that exceeded estimates, the stocks sold off in extended trading. This reaction can be attributed to the fact that the stocks were priced for perfection. Alphabet shares are up 56% for the year and reached a fresh high last week, surpassing the previous record from late 2021. Similarly, Microsoft is up 70% over the past 12 months and became the most valuable publicly traded company, overtaking Apple.
Investors’ Expectations
Both Alphabet and Microsoft gained significant attention last year due to their involvement in the artificial intelligence wave. Additionally, shareholders applauded their cost-cutting efforts, which included the elimination of thousands of jobs. In the weeks leading up to their earnings reports, investors were buying shares as if they anticipated positive surprises. However, their expectations were not met, leaving them disappointed and nitpicking the numbers.
Alphabet reported a 13% revenue growth, which is the fastest rate of expansion since early 2022. Their sales of $86.31 billion exceeded the average estimate of $85.33 billion. Earnings per share of $1.64 also beat estimates by 5 cents. The company’s cloud business, Google Cloud, showed a growth of 25%, surpassing expectations. However, Google’s ad business fell short, with revenue of $65.52 billion, trailing analysts’ estimates. YouTube also failed to meet expectations.
Brian Wieser, an analyst at media and advertising consultancy Madison and Wall, pointed out that the market has unrealistic expectations for Google given its size and dominance. He stated that few public market investors and sell-side analysts have a correct view of the advertising market. Many believe that double-digit growth can continue for a longer period of time for the fastest-growing companies, which is not realistic. Consequently, these unrealistic expectations contributed to the drop in Alphabet’s stock price by almost 6%.
Microsoft’s revenue increased by 18% to $62.02 billion, surpassing the average analyst estimate of $61.12 billion. Its earnings per share of $2.93 were 15 cents above consensus. Just like Alphabet, Microsoft’s cloud business performed well, with Azure and other cloud services expanding by 30%. However, the company provided a slightly weaker outlook for the fiscal third quarter, overshadowing its positive earnings and revenue beat. Microsoft’s shares initially fell by more than 2% but managed to recover partially.
Chipmaker AMD also faced disappointment despite reporting better-than-expected revenue numbers and meeting profit estimates. The stock fell almost 6% after the announcement, even though it has experienced a 137% increase in the past year due to excitement about its artificial intelligence processors.
Attention now turns to Thursday when Amazon, Apple, and Meta will all report their quarterly results. Similar to Alphabet and Microsoft, Meta shares have reached a record high this month. Apple reached its all-time high in December, while Amazon remains below its record from 2022.
The recent quarterly results for Alphabet, Microsoft, and AMD did not meet the high expectations of Wall Street. While the companies reported revenue and earnings that exceeded estimates, investors seemed disappointed and scrutinized the numbers closely. It is crucial for market participants to have realistic expectations and not overvalue the potential for continued double-digit growth in the long term. As the focus shifts to upcoming reports from Amazon, Apple, and Meta, the market will be watching closely to see if these companies can live up to the high standards set by their peers.
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