Tech Titans’ Earnings: Microsoft Surges, Alphabet Falters
October 26, 2023
Overview: The Influence of Tech Earnings Releases
Tech earnings have begun to significantly impact the market with a surge in attention. The top seven tech companies in the S&P 500, often referred to as the “Magnificent 7,” are primarily fueling the index’s year-to-date (YTD) growth of 11%. That said, there was a slowdown in this rally during September and indications point towards an imminent uplift. Major players Meta Platforms (META) and Amazon (AMZN) will reveal their fiscal health later this week. Furthermore, two significant industry rivals initiated after-hours trading on Tuesday.
Microsoft Surpasses Expectations
After revealing first-quarter results that beat expectations, Microsoft (MSFT)‘s share price rose by 3.9% to $343 per share. This positive turn was largely due to vigorous expansion in its Azure cloud business sector. Additionally, innovative AI features like the upcoming AI-powered assistant named “Copilot” for Microsoft 365 have generated enthusiasm. Delving deeper into Microsoft’s financials uncovers hefty investments in AI capital expenditure, seeing a dramatic surge of 70% year over year (Y/Y) hitting a record $11.2B. This suggests that Microsoft’s cloud computing services could gain further from an impending tech revolution.
Alphabet Fails to Meet Expectations
Conversely, despite beating earning predictions with its highest revenue growth in five quarters, Alphabet (GOOGL) saw shares drop by 6.1% post-market hours down to $130 per share. Investors drew particular attention to Google’s cloud division expansion which drives the company’s AI capacities notably amid Microsoft’s impressive earning figures. However, the sales growth of this division slowed to 22% in the last quarter, falling short of the predicted 26%. This poses a question mark for a company trying to gain traction in the AI market while its Search and Advertising divisions continue to mature.
Analysts’ Take: Investment Potential
Investing Group Leader, Ahan Vashi, suggested that Google’s strong performance in Search and YouTube sectors could be overshadowed by a slowdown in Google Cloud’s growth rate and some uncertain forecasts about management’s capital expenditure. Vashi further pointed out that following the post-Q3 sell-off, GOOGL stock seems to be reasonably valued. If Alphabet’s price-to-free cash flow (P/FCF) multiple hovers around 20x for 2027-2028, its stock may potentially rise from $130 to approximately $252.6 per share. This implies a compound annual growth rate (CAGR) of roughly 14.21% projected over the next five years.