Earnings Show Mega-Cap Growth Stocks Are Not Immune To Macro Headwinds

Shares of Microsoft (NASDAQ:MSFT) and Google parent Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) are down on Wednesday after their September quarter results showed the challenging macro backdrop, which continues to hamper growth trends.

Microsoft shares fell 8% following missed expectations for FQ1’s cloud revenue and a worse-than-expected quarterly outlook. Revenue came in at $50.12 billion, up 11% year-over-year, while analysts were expecting $49.61 billion. The company reported earnings per share (EPS) of $2.35, topping the consensus estimates of $2.30 per share, according to Refinitiv.

Macro Headwinds

Microsoft’s income declined by 14% in the three-month period to $17.56 billion. The drop was in part because Microsoft extended the useful lives of servers and networking gear from 4 years to 6 years, denting its Q1 net income by $859 million. The company’s gross margin stood at 69.2% in the quarter, missing the consensus projection of 69.8%.

Moreover, the company’s cloud division reported $20.33 billion in quarterly revenue, up 20% year-over-year and just below the consensus estimates of $20.36 billion. Microsoft’s flagship cloud computing service Azure reported revenue growth of 35% in the period, down from the 40% growth in the previous quarter and compared to analysts’ estimates of 36.9%.

The unit’s growth has seen a slowdown due to higher energy costs amid rampant inflationary pressures, said the company’s CFO, Amy Hood. CEO Satya Nadella added that cyclical trends are weighing on the company’s consumer business.

On the earnings call, Microsoft said it expects Q2 revenue in the range of $52.35 billion to $53.35 billion, suggesting growth of roughly 2%. The outlook fell short of analysts’ expectations of $56.05 billion. Similarly, the tech giant estimated a Q2 operating margin of 40%, also below the consensus estimates of 42%.

More importantly, Azure growth is expected to decline on a sequential basis by around 5% to about 37%, while analysts were expecting a 39.4% growth in the cloud computing business.

Shares of tech peers Amazon.com (NASDAQ:AMZN) and Apple (NASDAQ:AAPL) also headed lower as Microsoft suffered the weakest quarterly sales growth in the last five years. Moreover, soft guidance issued on the earnings call shows the management is fearful of very tricky quarters ahead. Investors’ concerns are elevated amid moderating Azure growth that could limit the upside in Microsoft shares in the near term.

Ad Slowdown Worse Than Feared

Alphabet reported worse-than-anticipated profit and revenue for the third quarter and announced plans to significantly cut headcount growth, sending the company’s shares down on Wednesday.

The Google owner reported EPS of $1.06 in the third quarter, short of the analysts’ estimates of $1.25 per share, according to Refinitiv. Revenue stood at $69.09 in the period, also below the expectations of $70.58 billion.

Alphabet generated $7.07 billion in YouTube advertising revenue, well below the estimated $7.42 billion. Google Cloud revenue beat expectations, with the unit generating $6.9 billion, compared to the estimated $6.69 billion. Traffic acquisition costs (TAC) amounted to $11.83 in the quarter, compared to the consensus estimates of $12.38.

Overall revenue growth was down to 6% from 41% last year due to headwinds related to online ad spending. It marked the slowest growth period for Alphabet since 2013, excluding one period early in the COVID-19 pandemic.

YouTube ad revenue declined 2% to $7.07 billion year-over-year, while analysts were projecting a 3% growth. Alphabet’s overall advertising revenue stood at $54.48 billion in Q3 2022, marking a moderate growth from the same period last year.

Despite this, cloud-based systems remain on the rise in virtually every aspect of the business. Likewise, on a more positive note, Google Cloud reported better-than-expected revenue of $6.9 billion, marking a sharp increase compared to the year-ago quarter of $5 billion. However, the cloud unit’s losses increased to $699 million from $644 million in the year-ago period.

Google’s chief business officer Philipp Schindler, said the company saw a slowdown in ad spending for specific areas, including loans, insurance, crypto, and mortgage. Alphabet added that its total full-time employee headcount stands at 186,779, up from 150,028 year-over-year.

The company’s CEO Sundar Pichai said the Q4 headcount growth will be “significantly lower” compared to Q3 as the company doubles down on “moderating expense growth.”

Alphabet’s problematic Q3 report comes after Snap (NYSE:SNAP), another tech business that is reliant on the health of the ad market, warned about weakening demand for ad sales. After Snap’s warning sent shock across the digital advertising sector, Google’s Q3 report confirmed the slowdown is weaker-than-expected.

Shares of Meta Platforms (NASDAQ:META) and Pinterest (NYSE:PINS) are also trading lower on Wednesday as investors fear the entire social media sector will feel the heat of the slowdown.

Conclusion

While traditionally considered blue-chip stocks, the soft earnings from Microsoft and Google show that not even the most prominent tech corporations are immune to ongoing macro headwinds. Analysts are lowering profit and sales estimates for 2023 to reflect slowing demand and macro headwinds that could only intensify once Fed’s aggressive rate hikes take effect.