Microsoft and Alphabet set to slide despite solid beats on revenues and profits

When your shares are up over 8% year to date in anticipation of a bumper set of earnings numbers then a realistic expectation is that you deliver on those expectations, and that is the challenge facing all of big tech this week.

With the share prices of Microsoft and Alphabet both getting January off to a strong start and Microsoft establishing itself as the biggest company in the world, overtaking Apple in the process as $3trn company the expectations management goes into overdrive.

Back in Q1 when Microsoft reported revenues of $56.5bn, a rise of 13%, comfortably above forecasts of $54.5bn, the company set the bar for Q2 even higher with an expectation of a 20% increase in revenues to $61.1bn, with commercial cloud revenue expected to account for $32.2bn of that total. Profits were forecast to come in at $2.77 a share.

Since those numbers were released back in October, the Microsoft share price has risen by 20% which suggests a high degree of confidence that Microsoft would be able to deliver.

Last night’s Q2 numbers have borne that out with another record quarter of $62bn, with commercial cloud also beating expectations with a return of $33.7bn, aided by a 30% increase in revenues for Azure. Profits came in at $2.93 a share.

In the other areas of the business there was solid growth except for devices revenue which saw a decline of 9%. Revenue in personal computing was $16.9bn an increase of 19%, driven by a 61% increase in Xbox content and services revenue although a lot of that was driven by the integration of the Activision assets.

Despite this cracking set of numbers Microsoft shares slipped back in after-hours perhaps due to some disappointment on the guidance front when it comes to Q3. For Azure Microsoft said it expects growth to remain stable, with intelligent cloud revenue expected to be between $26bn and $26.3bn, a modest rise from Q2’s $25.9bn.

Microsoft also said it expects the Activision acquisition to further add to operating income with operating margins forecast to rise by 1-2%.

Google owner Alphabet also had a high bar to clear with expectations of Q4 revenues of $85.3bn, with cloud expected to come in at $8.95bn, and profits of $1.59 a share.

On the numbers the revenue headline was a beat at $86.3bn, pushing full year revenues up to $307.4bn. On profits we also saw a beat at $1.64c a share, or $20.69bn.

Despite this solid set of numbers, the shares also fell after hours with disappointment over search revenue prompting the weakness, even as cloud revenue beat forecasts.

Google search saw revenues of $48bn, with YouTube adding another $9.2bn on top of that, helping to push total advertising revenue up to $65.6bn, a rise of 11% from a year ago, and slightly below expectations.

The cloud business did much better, seeing a 26% increase in revenue rising to $9.19bn as it continues to play catch up in that area. Over the year Alphabet said it also incurred $2.1bn in charges related to severance charges.

All in all, these were another set of decent numbers, more than beating expectations on the headline level, however given the gains seen since October the margin for error becomes miniscule in terms of an excuse for some profit taking.

This appears to be where we are with respect to the gains seen so far this year, with the risk that we could see more froth blown off the gains so far year to date even if we beat expectations, with Meta, Apple, and Amazon due tomorrow.