The Q2 earnings season is well underway. And this week is being dominated by quarterly reporting from the big-tech companies. Extremely high inflation, aggressive central bank tightening and a strong U.S. dollar are creating a very challenging macroeconomic environment.
Here’s what we have learned so far from Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL) quarterly reports, as well as from Walmart’s (NYSE:WMT) warning and guidance that spooked investors.
Microsoft Reports Mixed Results But Azure Deliveries Again
Microsoft reported worse-than-expected Q4 2022 earnings and revenue, though the company issued an optimistic full-year outlook, sending its shares up more than 3% in premarket trading Wednesday.
The tech behemoth reported adjusted earnings per share (EPS) of $2.23, missing the consensus estimates of $2.29 per share. Net income rose just 2% to $16.74 billion. Revenue grew just 12% year-over-year to $51.87 million, marking the slowest revenue growth for Microsoft since 2020. This compares with the analyst estimates of $52.44 billion.
Microsoft reported $20.91 billion in revenue from its Intelligent Cloud segment, which consists of the Azure public cloud for application hosting, SQL Server, Windows Server and enterprise services. The unit also missed revenue expectations of $21.07 billion.
Looking ahead, Microsoft expects revenue to be in the range of $49.25 billion to $50.25 billion in the current quarter, with the midpoint of that range implying roughly 10% growth, suggesting declining PC sales and a slowdown in cloud infrastructure growth. The midpoint is also short of the consensus estimates of $51.49 billion.
Microsoft expects a Q1 2023 gross margin of 69.85%, slightly above the consensus projection of 69.30%. The company reported $126 million in operating expenses related to its decision to exit the Russian market after the country’s invasion of Ukraine.
On a full-year basis, the tech giant reiterated its previous outlook in the face of economic turmoil.
Said Microsoft’s CFO Amy Hood:
“We continue to expect double-digit revenue and operating income growth in constant currency and U.S. dollars."
Weakening Digital Ad Market Is Staring At Google
Similarly, Google-parent company Alphabet (NASDAQ:GOOGL) reported earnings for its fiscal Q2 that missed analysts’ expectations due to a sharp decline in consumer spending and a disappointing Youtube performance.
The company reported EPS of $1.21 in the second quarter, missing the consensus estimates of $1.28 per share. Revenue came in at $69.69 billion, slightly above the consensus projection of $69.9 billion. Revenue grew just 13% year-over-year, a steep decline from the 62% growth in the same period last year amid elevated consumer spending.
Youtube advertising revenue was reported at $7.34 billion, well below the analysts’ estimates of $7.52 billion. The company’s Google Cloud unit reported $6.28 billion in revenue, while analysts were looking for $6.41 billion. The unit lost $858 million during the three-month period. Alphabet reported $12.21 billion in traffic acquisition costs (TAC), compared with the expected $12.41 billion.
The company’s finance chief Ruth Porat said Forex fluctuations from a strengthening dollar dented revenue growth by 3.7% and expects the greenback to hurt next quarter’s performance even more.
Advertising revenue grew just 12% to $56.3 billion as marketers cut back on spending due to record-high inflation. The slowest growth was seen in the Youtube business, which saw its sales rise just 5% in the quarter, compared to the 84% growth in the same period last year. Apart from lower ad spending, YouTube also continues to feel the pressure from the rapidly-growing rival TikTok.
Alphabet said the number of its full-time employees increased 21% to 174,014 full-time 144,056 last year, though the company said in June it plans to slow down its hiring and investment efforts in 2023 due to economic headwinds.
Even more worryingly, Alphabet’s CEO Sundar Pichai said he expects these headwinds to persist through the end of 2022.
“Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year-on-year growth rates of advertising revenues for the remainder of the year,” Porat said on the call.
Walmart’s Guide Down
Alphabet’s and Microsoft’s earnings reports come just two days after the U.S. retail giant Walmart (NYSE:WMT) slashed its profit outlook on inflation concerns, sending retail stocks tumbling on Tuesday.
Shares of Walmart slipped more than 8% Tuesday, while also dragging lower both Amazon (NASDAQ:AMZN) and Target (NYSE:TGT). Even more importantly, investors see Walmart’s guide down and commentary as a big hint that the U.S. is close to entering into a recession.
Walmart, often seen as a reliable bellwether for the health of the overall economy, cut its profit outlook on a quarterly and full-year basis, adding to concerns that the U.S. economy is headed for a recession. The retailer said its annual profit could plunge up to 13% and said it plans to reduce the prices of clothes and general merchandise to lure more buyers.
"It’s a telltale sign that the average consumer is hurting," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. “When you have America’s largest retailer guide down like this, you have to take it very seriously.”
Analysts at Jefferies said Walmart’s outlook offered “a diagnostic look” at the ordinary U.S. household as Americans shifted their spending habits, focusing more on essential items and less on non-essentials like apparel and electronic devices.
The move comes ahead of the Fed’s scheduled Federal Open Market Committee (FOMC) meeting, where the central bank is expected to announce another 75-basis-point rate hike to fight rampaging inflation.
Analysts believe that Walmart’s challenges could cause collateral damage to rival Amazon as well. Some believe Walmart’s outlook adjustment represents a potential warning signal for Amazon, especially a risk to Amazon’s first-party (1P) merchandise margins.
Others see Amazon’s margins at risk as inflationary pressures are offsetting positive impacts from improved supply-chain costs and reduced inventory levels at Walmart. On the other hand, the e-commerce company could become less exposed to inventory clearing and mix shift compared with Walmart because of its significantly higher third-party (3P) mix and lower consumables mix.
Summary
Google’s Q2 report showed a weakening digital ad market as companies seek to cut costs in the anticipation of a potential recession. While Microsoft’s cloud business continues to excel, the tech titan is also not immune to macro headwinds, which prompted Walmart to slash its full-year guidance and offer negative commentary on the current state of the U.S. consumer.