Why Microsoft Surged but Alphabet Tanked on Earnings

Tech giants Microsoft (NASDAQ:MSFT) and (NASDAQ:GOOG) (NASDAQ:GOOGL) both posted higher earnings and overall earnings beats in the most recent quarter, but the market reactions to the two were quite different.

Microsoftʻs stock price was up by about 3.7% shortly after the opening bell on Wednesday, but Alphabetʻs stock was down by about 9%.

Microsoft on cloud nine

Microsoft saw its revenue climb 13% year over year in its most recently completed quarter, rising to $56.5 billion. Net income for the company's first quarter of fiscal 2024 surged 27% to $22.3 billion, or $2.99 per share.

Its overall cloud business led the way for Microsoft with $31.8 billion in revenue, an increase of 24%, which was better than expected. The Intelligent Cloud business saw a 19% revenue jump to $24.3 billion, while the Azure cloud computing business saw revenue spike 29% in the quarter. Meanwhile, revenue for the Dynamics 365 sales and accounting software arm jumped 28% in the quarter.

A common thread running through Microsoftʻs success was artificial intelligence (AI), according to Chairman and CEO Satya Nadella.

"We are rapidly infusing AI across every layer of the tech stack and for every role and business process to drive productivity gains for our customers,” he said. “We have the most comprehensive cloud footprint with more than 60 data center regions worldwide, as well as the best AI infrastructure for both training and inference, and we also have our AI services deployed in more regions than any other cloud provider.”

Alphabet's cloud-y forecast

Alphabet, the parent company of Google and YouTube, also saw solid revenue and earnings gains in the quarter. Its revenue increased 11% year over year to $76.7 billion, while its operating income surged 24% to $21.3 billion and net income increased 41% to $19.7 billion, or $1.55 per share.

The companyʻs Google Search business saw an 11% revenue boost in the quarter to $44 billion, while overall Google Services gained 10.7% to $68 billion. The Google Cloud business had a larger revenue percentage gain of 22% year over year to $8.4 billion, but it fell short of analystsʻ projections of $8.6 billion. That likely accounted for the stock dropping on Wednesday.  

Alphabet is the third leading player in cloud computing, well behind Microsoft and Amazon. The market may have reacted to Alphabetʻs lower-than-expected revenue gains in direct contrast to Microsoftʻs robust gains in that same area, signaling that it is falling further behind. Alphabet has also invested a lot in AI, and the results in the cloud business may indicate it is lagging in the AI arms race.

“I’m pleased with our financial results and our product momentum this quarter, with AI-driven innovations across Search, YouTube, Cloud, our Pixel devices and more. We’re continuing to focus on making AI more helpful for everyone; there’s exciting progress and lots more to come,” said Alphabet CEO Sundar Pichai.

Elaborating on the earnings call, he said the company is making a big investment in AI, as the $8 billion in capital expenditures in the quarter were overwhelmingly AI-related.

“We see AI as a foundational platform shift and are excited about the opportunities across our business," he added on the call.

Overall, it may be a bit of an overreaction by the market, considering how much the stock tanked on Wednesday. Alphabet is up 58% year to date, even with Wednesdayʻs decline, so it had been running a little bit hot, with its price-to-earnings ratio up to 26. Cloud is a much smaller part of Alphabetʻs business, and the Google Search cash cow had an excellent quarter, so overall, the selloff may be overdone a bit.

Source valuewalk