Microsoft's dour outlook raises red flags for tech sector

© Reuters. A view shows a Microsoft logo at Microsoft offices in Issy-les-Moulineaux near Paris, France, January 25, 2023. REUTERS/Gonzalo Fuentes

By Nivedita Balu and Tiyashi Datta

(Reuters) -Microsoft Corp's lackluster quarterly outlook points to more gloom ahead for the tech sector, analysts said, after the tech bellwether warned that its customers were cautious about spending in a turbulent economy.  

The warning from Microsoft (NASDAQ:MSFT), the second most valuable U.S. company, came after a steep fall in client spending prompted tech heavyweights from Amazon.com Inc (NASDAQ:AMZN) to Meta Platforms to slash jobs and save cash.

Microsoft, along with Big Tech peers Amazon and Apple Inc (NASDAQ:AAPL), pared losses from earlier on Wednesday to trade nearly 1% lower. Alphabet (NASDAQ:GOOGL) Inc was down 3%. The companies are four of the biggest by market value in the United States.

Shares of cloud companies including IBM (NYSE:IBM) Corp and Oracle Corp (NYSE:ORCL) all declined. IBM is scheduled to report fourth-quarter results later in the day.

Microsoft Chief Executive Satya Nadella and other company executives used the words "caution" and "cautious" at least six times on the one-hour call on Tuesday.

"The rate of Microsoft's revenue slowdown should be seen as a warning sign for the wider tech sector," Hargreaves Lansdown analyst Sophie Lund-Yates said.

Analysts expect other tech executives to follow Nadella in laying out a conservative outlook.

"What we learned is that no one is immune to macro ... what is telling is the quarter was largely fine, but we started to see softness in December and the outlook for this quarter was worse than expected," said Rishi Jaluria, analyst at RBC.

Microsoft forecast third-quarter revenue in its so-called intelligent cloud business a tad below market estimates, with a growth rate of as much as 19%. The segment outperformed expectations in the second quarter, however, which initially boosted shares on Tuesday evening.

"That (the outlook) is taking the wind out of the sails," said Art Hogan, chief market strategist at B Riley Wealth.

Nadella, however, said Microsoft would focus on AI technology, calling it the next major wave of computing.

The tech giant has made multibillion dollar investments in OpenAI, deepening ties with the startup behind the chatbot sensation ChatGPT and building on a bet it made on AI four years ago.

With many tech companies now focusing on building their cash reserves, analysts expect the money to be used for other investments - from fresh buybacks, mergers and acquisitions or new technology such as artificial intelligence.