Microsoft Up, Alphabet Down: Same Growth, Different Outcomes
Microsoft is rewarded for trimming its spending plans. Alphabet is hit on profitability, and it may be its worst earnings reaction ever.
Alphabet Miss, Why Fed Shouldn’t Raise Rates, All Eyes on Amazon
Higher statistical growth coupled with accelerating statistical inflation seems like a good reason to raise rates. I’ll explain why it’s not.
The Fed Holds, Oracle Jumps, Chips Rise for Fourth Session but Alphabet Sinks After Hours
The Fed held rates steady with two hawkish dissents, Oracle’s aggressive long-term targets lifted AI names, but Alphabet fell about 9% after missing expectations.
Microsoft Rises on Double Beat as Azure Growth Accelerates
Microsoft ($MSFT) shares were up about 2% in after-hours trading Wednesday, off their highs, after the company’s fiscal first-quarter results topped Wall Street estimates on revenue and earnings, led by faster growth in its Azure cloud business, according to TipRanks. Shares came into the report up nearly 35% over the past three months.
Results Beat on Both Lines
Adjusted earnings came in at $4.89 per share versus the $4.73 consensus, and revenue was $92.28 billion against the $90.69 billion expected, according to TipRanks. Revenue rose 19% year over year and landed $1.33 billion above the top of the company’s own $89.85 billion to $90.95 billion guidance range, per TIKR. GAAP earnings rose 32% to $4.92 per share, including a $207 million net gain from Microsoft’s OpenAI investments, according to the company’s earnings release.
Margins widened even as depreciation climbed. Operating income rose 21% to $45.9 billion, lifting the operating margin to 49.8% from 48.9% a year ago, per the release. Gross margin slipped to 67.8% from 69.0% as depreciation and amortization rose 44%, but operating expenses grew just 6%.
Azure Accelerates
Azure (cloud) revenue grew 48% to $33.17 billion, the first quarter Microsoft has reported Azure in dollars, according to the release. That topped the $32.32 billion analysts expected, per TipRanks, as well as the 44.8% growth rate analysts had modeled, per TheStreet, and the roughly 47% “whisper number” among institutional investors, according to MarketWatch. Azure grew 42% in the June quarter under the new, narrower definition, per CNBC.
Per Claude, Azure supplied $10.8 billion of the $14.6 billion year-over-year revenue increase, or about 74%, and now makes up 36% of total revenue versus 29% a year ago. Revenue outside Azure grew about 7%. Microsoft Cloud revenue rose 30% to $63.9 billion, with Chief Financial Officer Amy Hood noting growth accelerated, per the release. Microsoft 365 cloud revenue of $27.78 billion also topped the $27.37 billion consensus, according to TipRanks. Azure is now Microsoft’s largest product line, ahead of Microsoft 365 cloud.
Spending and Cash Flow
Capital spending came in about $5 billion below expectations even as Azure beat. Capital expenditures including finance leases rose about 30% to $45.2 billion, short of the $50.67 billion StreetAccount estimate, according to TipRanks, and below the more than $50 billion Microsoft had signaled for the quarter, per TIKR. Cash spending on property and equipment more than doubled to $39.4 billion from $19.4 billion, according to the release. Microsoft attributed the faster growth in cash spending to timing differences between receiving and paying for goods and “a lower mix of finance leases,” according to CNBC.
Free cash flow fell 27% to $18.63 billion but stayed positive, according to TipRanks. By contrast, Alphabet ($GOOGL), which also reported Wednesday, posted negative free cash flow for its quarter, per TipRanks, and shares are down over 8%.
Microsoft returned $10.2 billion to shareholders through dividends and buybacks, per the release.
Backlog and Segments
Commercial backlog stalled sequentially. Commercial remaining performance obligation rose 73% year over year to $677 billion, according to the release, but that was little changed from $678 billion at the end of June, per Quartz, and short of the roughly $706 billion estimate cited by Wall St Engine.
This was the first report under Microsoft’s new two-segment structure. Agents and Infra revenue rose 25% to $76.8 billion, ahead of the $75.6 billion expected, according to Yahoo Finance. Devices and Consumer revenue fell 3% to $15.48 billion but beat the $15.05 billion consensus, according to TipRanks. Within it, Windows OEM and devices fell 22%, which CNBC attributed to higher memory and storage costs pushing up device prices. Xbox content and services fell 2%, while search and advertising revenue excluding traffic acquisition costs rose 12%, per the release.
What to Watch on the Call
Microsoft holds its conference call at 5:30 p.m. ET, where it will provide forward guidance, according to the release. Some key items on the call are the fiscal second-quarter Azure growth outlook, whether the capital spending shortfall reflects timing or a slower build, and what explains the flat sequential backlog. Wall Street rates the stock a consensus Strong Buy with an average price target of $611.85, per TipRanks.
Market Postscript
* Here are my thoughts following the plethora of EPS releases after the close…
With Google’s ($GOOGL) miss (the deceleration in its core business was unanticipated by every panelist on “the show”), Meta’s ($META) continued awful share price action, Nvidia’s ($NVDA) price rollover threatening chart support, Amazon’s ($AMZN) lackluster share price action (and underperformance) and some possible toppiness in Apple’s ($AAPL) share price, we are left with one… Microsoft ($MSFT).
Meanwhile, ServiceNow’s ($NOW) disappointing results (the company cut subscription revenues for the full year) will likely weigh heavily on software stocks (which were market leaders) tomorrow morning.
I remain independent in view.
As I said in response to subscriber jryan, most stocks do not meet my standards to buy and I won’t change my process or discipline — even if Perma Bulls Tom Lee and Dan Ives (confidently) see clear skies ahead…
The S&P Short Range Oscillator registered 1.84% (more overbought than the prior day) and I ended the day with a large short positioin in $SPY.
Position: Short SPY (L)
Microsoft Beats, Alphabet Misses and Fed Holds Steady
Oracle reassurance moved the market more than the Fed did.
As I Await Microsoft, Alphabet Earnings, Here’s What I’m Not Doing
No one has an edge in guessing how a stock will react to earnings. The edge comes from having a plan for every outcome.
OpenAI and Oracle to Use Google Chips: 8 Key Items Shaping the Stock Market Wednesday
SK Hynix and ASM International see tight chip capacity, here comes Fed Chair Kevin Warsh and other headlines moving the market this morning.
Big Tech Earnings, the Fed and Iran Are in Play as the Market Tries to Recover
Alphabet and Microsoft report after the close, and Warsh takes the stage.
A Fair Criticism Deserves a Response
Subscriber jryan (below) delivered some reasonable comments and criticism yesterday in the Comments Section.
Basically he said he is “getting sick of reading about cannabis and Fin TV commentary” — and he wants more (long) stock suggestions, etc.
I wanted to respond in the first column of the day.
* Few longs have represented value to me as I have been unduly negative for a lengthy period of time. I take ownership of that.
* The stocks that I have owned have recently been Staples ($KO, $PEP, $PG and $KMB), selected cannabis names and some others. The consumer nondurable stocks have been fine recently (and I have taken profits in them). We shall see about cannabis — a speculative sector and my focus has been intermediate-term based on the improved likelihood of rescheduling and other factors clearly delineated in my Diary.
*As to the CNBC constructive criticism. I point these out not only as an advocate of the retail viewer that should see timestamps (panelists taking ownership) and observe better company interviews, but so they can evaluate the merits and process of the panelists’ recommendations and become better-informed investors through more hard-hitting interviews (that serve more than as a marketing tool of companies).
* But the criticism directed to Fin TV also is intended to highlight investment recommendations from panelists and guests that I strongly disagree with. Choosing stocks to avoid (in that FIN TV criticism) can be as valuable or even more valuable than choosing stocks to buy. Consider my negative comments towards $BA, $BABA, $META, $UBER, $NFLX, $RDDT, $TTAN, $DIS, $CLF, $MRNA and $UNH (a few years back) etc. that were mostly confidently and strenuously recommended on CNBC.
* My “More Tales From Nvidia” series is intended to deliver the idea that the functionality, productivity and ROIC on the enormous capital spend may disappoint the many and multitude of optimists on AI. I have felt that my contrarian and non herd-like observations were valuable in a backdrop of near-universal bullishness (that is readily and frequently available from the buy/sell sides, panelists and guests). My view was that dwelling on “More Tales” had statistical value in that over 40% of the S&P is comprised of large-cap tech.
* As to specific AI beneficiaries, I have admitted (often) of missing $MSFT and $GOOGL. The valuation on $AAPL seems foolish to me — the shares have prospered and I have been wrong. But the others ($META, $AMZN and even $NVDA) have not set the world on fire this year. As to memory and chip stocks, they have been “the world’s fair” up until the summer but awful since late June. Not only do I think these companies are “overearning,” but the volatility is not for me and not consistent and doesn’t conform with my appetite for risk.
* The financial stocks were quite strong until early summer. I repeatedly cautioned not to embrace banks, brokers and private equity shares (I successfully shorted $BX, $KKR and $APOL since then). Viewed by panelists as perhaps the best “value play,” financials have been dismal over the last four months. We avoided this decline (in $C, $JPM, $BAC, $GS, $MS et al).
* The stocks that I have been short in the AI sphere have been terrific (to the downside) — $ORCL and $CRWV. (Avoiding them as longs has also been a valuable contribution.) My recent foray into shorting NVDA was profitable also.
* As to my preoccupation with CNBC I suggest taking the number of words written about FIN TV and divide it by the number of words written on other subjects daily. You will find my criticism is dwarfed by my other columns. In the scheme of things my criticism is de minimis.
* Finally, to jryan I say there are many other contributors that actively recommend longs and provide a valuable service.
All this said I am imperfect.
I take ownership of my mistakes.
The transparency of my Diary exposes my blemishes.
I believe jryan has some good points and I will purposefully look for more long ideas in the future.
I truly appreciate jryan’s comments and I have tried to respond to his concerns:
jryan
Just a thought. There used to be a lot of different investment ideas, stock suggestions etc., but all it seems to be now is cannabis and CNBC commentary, which I don’t watch anyway. Kind of getting sick of it, especially the cannabis info, is it ever going to pay off? Likely, but it will be quite a while from today, if ever. But at least it’s easier to scroll through the commentary and use less time.
Position: Long KO (VS), PG (VS), KMB (VS), MSOS common (VL) and calls (VS), VRNO (VS), GLAS (S), GTBIF (S), TRLV (VS), CURLF (VS); Short AAPL (S)