Wall Street reacted with disappointment to the quarterly results from Alphabet and Microsoft, despite both companies reporting revenue and earnings that exceeded expectations. This article digs deeper into the market’s reaction and analyzes the factors that led to the sell-off.
Investors had priced the stocks of Alphabet and Microsoft for perfection, given their impressive performance in recent times. Alphabet shares have soared by 56% this year, reaching new highs and surpassing the previous record set during the tech boom in late 2021. Microsoft, on the other hand, has seen a 70% increase in its stock price over the past 12 months, becoming the most valuable publicly traded company, surpassing Apple.
Alphabet and Microsoft generated excitement among investors last year by riding the artificial intelligence wave. Their efforts in embracing AI technology and implementing it across their businesses were well-received by shareholders. Additionally, both companies were commended for their aggressive cost-cutting measures, which included significant job cuts. These factors contributed to the positive sentiment around the companies leading up to their earnings reports.
Despite beating revenue and earnings estimates, Alphabet and Microsoft’s results fell short of the market’s high expectations. Alphabet reported a 13% revenue growth, its fastest rate since early 2022, with sales reaching $86.31 billion, exceeding the average analyst estimate. Microsoft’s revenue increased by 18% to $62.02 billion, surpassing the average estimate of $61.12 billion. Both companies also exceeded expectations in their cloud businesses, with Google Cloud and Microsoft Azure experiencing significant growth. However, Alphabet’s ad business, particularly YouTube, fell short of analysts’ estimates and the market’s expectations.
Analysts and investors have often unrealistic expectations for Google, given its size and dominance in the advertising market. Brian Wieser, an analyst at media and advertising consultancy Madison and Wall, believes that there is a lack of understanding among market participants regarding the advertising industry’s growth potential. Many anticipate double-digit growth rates for the fastest-growing companies like Google over an extended period, which may not be realistic. This misalignment of expectations contributed to the market’s disappointment.
Following the earnings reports, Alphabet’s shares dropped by almost 6%, while Microsoft’s drop was less severe. Microsoft’s outlook for the next quarter was a bit below market expectations, overshadowing the positive earnings and revenue beat. Chipmaker AMD also experienced a drop in stock price despite better-than-expected revenue numbers, likely due to market apprehension regarding its future prospects.
The market’s attention now turns to upcoming quarterly reports from Amazon, Apple, and Meta. Similar to Alphabet and Microsoft, Meta shares have recently reached record highs. Apple hit its all-time high in December, while Amazon is close to achieving a new record. The market will closely scrutinize these companies’ results and gauge whether they can meet or exceed the market’s high expectations.
Wall Street’s reaction to the quarterly results of Alphabet and Microsoft highlights the challenge of meeting the market’s heightened expectations. While both companies reported strong revenue and earnings growth, the market demanded more. Understanding the advertising industry’s growth potential and avoiding unrealistic expectations are crucial for investors and analysts. As the focus shifts to other tech giants, such as Amazon, Apple, and Meta, it remains to be seen whether they can surpass the market’s expectations or face a similar market reaction.