Microsoft on the rise, Google owner in sharp decline: What explains the different performance of stocks after the results

Shares of the first major technology companies to report results this week posted the opposite move this Wednesday (25). While shares of Alphabet, which controls Google, fell 8.39% to US$127.27 at 11:20 a.m. (Brazil time), Microsoft’s assets rose 3.38% to US$381.70 in the US market.

Alphabet’s 3Q23 earnings per share were US$1.55, beating expectations of US$1.44. However, cloud computing revenues came in at US$8.41 billion, below the market’s forecast of US$8.6 billion.

“As cloud computing is seen as the most relevant business for the company’s future, shares are falling sharply,” notes Levante Corp.

The CEO, however, tried to bring a positive approach to balance. “I’m pleased with our financial results and product momentum this quarter, as well as AI-powered innovation in Search, YouTube, the cloud, our Pixel devices and more. We remain focused on making AI more useful for everyone; there is exciting progress and much more to come,” said Sundar Pichai.

Itaú BBA said in a report that after seeing Alphabet’s shares fall sharply after the balance sheet, it questioned whether the reaction was overblown, but agreed with the poor performance after analyzing the numbers.

“We believe that earnings per share dynamics are a very strong factor in explaining returns, along with any strong price reactions immediately following the results. Both indicators (downward revisions to EPS estimates of more than 3% for 2024 and 2025 and the stock’s negative reaction of 6-7% after the close the day before) lead us to believe that Google will not perform well in the next two to three months “, analysts note.

BBA points out that after going from a “loser” to a “potential winner” in the field of artificial intelligence (AI), Google has had a great stock performance since the beginning of May (up 29%), approaching a 52-week high.

“However, while most investors fully attribute the positive returns to the change in narrative, this is far from the whole explanation. In recent quarters, Google has seen an upward revision in expected earnings per share, underpinned by accelerated revenues, mainly in search, and improved profitability (margin) thanks to better cost discipline,” the bank estimated.

BBA stressed that it will be harder to keep raising its estimates for Google going forward after the third quarter – search revenues are already in the double digits, and all other revenues (YouTube, Web and Google Cloud) are too small to make them. a difference that prevents sharp acceleration.

Moreover, House analysts left the selectors’ conference with the impression that the margin-driven tailwind is also coming to an end. “Opex (the capital used to maintain or improve a company’s physical assets) is likely to come under pressure, especially given the company’s inability to cut costs further and doomsday comments about increasing customer acquisition cost (CAC). In addition, capital spending (investment) is expected to accelerate in the fourth quarter and into 2024,” he notes.

For these reasons, and the potential determination of the matter involving the US Department of Justice (which accuses the company of monopoly and abuse of a dominant position with respect to Internet search services) as early as the first quarter of 2024 (although our best guess: a resolution by the second quarter of 2024 ), analysts believe that Google shares are unlikely to perform well until the end of 2023. Given the downward revision of earnings per share estimates, BBA decided to lower the target price for 2024 from USD 140 to USD 136 per share, keeping neutral recommendation.

Microsoft: Strong numbers

Microsoft’s performance is the opposite, with shares rising on strong cloud computing results.

The company reported revenues of US$56.52 billion in 1Q24 (calendar 3Q23). The result beat expectations at US$54.50 billion, representing a year-on-year growth of 12.7 percent. Earnings per share amounted to $2.99, which was higher than the expected $2.65.

Cloud computing revenue came in at $24.26 billion, up 19% year-over-year and beating the consensus estimate of $23.49 billion.

As Levante points out, the company says many of its customers are looking for ways to save money by moving to the cloud and using new artificial intelligence (AI) tools.

Amy Hood, Microsoft’s chief financial officer, made the announcement during a conference call with analysts management (forecast) revenues of US$60.4 billion to US$61.4 billion for 2Q24 (FYQ), up 7.7% quarter-over-quarter.

According to Itaú BBA, once again Microsoft not only had a good quarter, but exceeded all expectations. “From Azure (cloud platform) revenue growth of 28% year-over-year (compared to expectations of 26%) to an impressive increase in Ebit (operating margin) margin of almost 5 percentage points (pp), the third quarter was a truly remarkable period . Additionally, Office 365 Commercial continues to grow at a strong pace, while the margin-critical Windows OEM returned to positive growth after several weak quarters,” he assesses.

Itaú BBA points out that the company’s shares rose 5% in the early post-market the day before, but the appreciation slowed after the company did not forecast an acceleration in Azure growth and took a more conservative position in the second half of the year. fiscal year. , especially in regards to Azure growth and margins.

“We understand that it is natural for a company of this size to be conservative, especially after such an impressive quarter. In fact, when we updated our numbers, it was difficult for us to estimate a stable margin for the full year, even considering the higher ATVI inclusion costs. This suggests an ‘upside risk’ to our already high Q3 EPS estimates,” BBA points out.

In short, the bank expects the focus to return to Azure and other core businesses after several volatile quarters. While the company has made it clear that cloud optimization isn’t improving, analysts point out that AI is already making a difference in the numbers, with a 3pp increase in Azure expansion performance before mass adoption of Office Copilot.

BBA sees an opportunity for more positive feedback before the end of the financial year and, despite the fact that Microsoft shares are not cheap, maintains a “buy” recommendation.

“With Copilots, we’re making the AI ​​era real for people and businesses around the world. We are rapidly implementing AI at all technology levels and across all business functions and processes to increase productivity for our customers,” said CEO Satya Nadella.

Levante notes that there will be more of them. Meta, which controls Facebook, will release its numbers this Wednesday after trading. And on Thursday morning (26), the results come from Amazon.

“The financial performance of these companies is seen by investors as a good indicator of the health of the US economy as a whole. So far, the numbers are mixed: better than expected for Microsoft, worse than expected for Alphabet. When other giants publish their balance sheets, it will be possible to measure the impact of monetary policy tightening on companies’ profits,” he believes.

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