After Alphabet (GOOGL) reported earnings, its shares plunged on Thursday, yet Microsoft (MSFT) came through unscathed. In other words, Microsoft's stock did not fall in tandem with Google. The reason behind this is actually quite straightforward.
The market views Microsoft's quarterly results as a high-growth performance that beat expectations and appears sustainable; by contrast, Alphabet's quarter was weak and signaled that growth could slow further in the coming quarters.
Sales growth in Microsoft's Azure cloud business came in roughly 300 basis points above analyst expectations. Excluding currency fluctuations, revenue for this core cloud unit grew 48% year over year. Management guided for Azure revenue growth of 49%-50% this quarter, four percentage points above the consensus estimate.
The company's capital expenditure was about $5 billion less than expected, and revenue in other business segments also beat forecasts. Overall revenue and earnings for the quarter both exceeded analyst projections.
Stifel analyst Brad Reback said: "Overall, this earnings report strengthened our confidence. We believe Microsoft is capable of sustaining mid-to-high double-digit revenue growth; at the same time, favorable cost of goods sold and operating efficiency on the expense side will drive continued operating margin expansion."
Microsoft real-time quote: $524.19, down $6.82 (-1.28%), as of 12:15:39 PM Eastern Time during the intraday session.
Alphabet's third-quarter earnings report was disappointing, with its own results falling short of expectations and looking even worse compared with Microsoft, sending the stock down 12%. There were two main problems.
First, Google's search business revenue was $63.4 billion, below the expected $64.9 billion. The revenue miss intensified market concerns that even with Google's massive spending, the foundations of its search empire are gradually being eroded by AI products like Claude and ChatGPT.
Second, Google's free cash flow was -$9.1 billion, while Wall Street had expected only -$3.5 billion. The market is currently highly sensitive to negative free cash flow at large tech companies (see the market reaction to Meta's earnings last week, when Meta posted negative free cash flow for the first time in years and its stock came under pressure), and Google's free cash flow figure left the market deeply dissatisfied.
KeyBanc analyst Justin Patterson said: "Alphabet's third-quarter report confirmed the concerns we had before earnings: the search business is decelerating, and near-term margins have peaked. Over the next one to two quarters, the market may enter a valuation vacuum as investors wait for signals to determine whether this is a short-term fluctuation or a structural long-term change."
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