Tech stocks sank on Tuesday despite Microsoft, Alphabet, AMD and others reporting better-than-expected earnings results. Investors showed concerns about high expectations and shaky economic outlooks weighing on future growth.
Earnings Beat Wall Street Estimates But Stock Prices Fall
Microsoft kicks off a massive week of mega cap tech earnings, beating expectations on both top and bottom lines. Revenue grew 2% annually to $52.75 billion, above estimates of $52.94 billion. Earnings per share came in at $2.32, topping forecasts of $2.29 [1].
Similarly, Alphabet reported fourth quarter earnings per share of $1.05 on revenue of $76 billion, surpassing Wall Street targets. However, shares of both companies sank in after-hours trading due to other concerns [2].
| Company | Reported EPS | Expected EPS | Revenue Beat/Miss |
|---|---|---|---|
| Microsoft | $2.32 | $2.29 | Beat |
| Alphabet | $1.05 | $1.18 | Beat |
AMD stock dropped over 6% in extended trading despite the semiconductor company posting better-than-expected fourth quarter financial results [3]. Earnings per share came in at $0.69 adjusted versus the $0.67 FactSet consensus estimate. Revenue increased 16% annually and topped expectations.
The initial market reaction shows investors are punishing these tech giants despite financial beats. Attention is turning to forward guidance and margin pressures amid a questionable economic environment.
Economic Uncertainty Clouds Outlook Despite Cloud Growth
Behind the headline beats lies more uncertainty about the future. Microsoft noted that Azure cloud revenue grew 31% and now makes up over 42% of total sales mix. However, Azure guidance for the next quarter was lighter versus the Street’s view [4].
Investors had lofty expectations heading into these highly anticipated tech earnings reports. Microsoft and Alphabet specifically called out weaker ad spending trends, which will likely continue at least in the near term [5].
All eyes shift to the Federal Reserve’s interest rate decision to see if the central bank remains data dependent. Another 25 basis point hike is expected, but the statement and Fed Chair Powell’s press conference will provide more color around their view on inflation and the economy [6].
Higher rates strain business spending while consumer demand faces threats from stubborn inflation. This challenging backdrop makes the future growth trajectory more difficult for tech giants despite their clear cloud and AI advantages.
AI Hype Fails to Match Reality in Earnings Reports
Both Microsoft and Alphabet discussed slower momentum with their AI chat products Bing and LaMDA despite much fanfare at recent product launch events. Investors hoped these emerging technologies would start contributing significantly to financial results much sooner [7].
However, commercial viability remains limited in the near term even as steady progress continues. These AI学习 models require extensive computing resources to develop while lacking obvious monetization streams today.
There is little doubt AI innovation will transform industries over the next decade. But translating that into tangible bottom line results takes real-world deployment at scale first. Companies talked up AI products to drive hype while investors got ahead of themselves on actual financial contribution.
Nasdaq 100 Faces Technical Retracement After Large Rally
The technology-heavy Nasdaq 100 index rallied over 11% to start 2023 without a single 1% down day through January. However, the index erased those year-to-date gains amid disappointing earnings reactions. More near term pain looks possible given stretched technical indicators [8].
The relative strength index on the Nasdaq 100 reads above 70, signaling overbought conditions and a heightened risk of mean reversion lower. Additionally, the index broke below its 21-day exponential moving average early in Tuesday’s sell-off before closing below it. That marks a negative technical development in the near term chart.
| Nasdaq 100 Index | Level | 1-Month Performance |
|---|---|---|
| Index Value | 12,200 | +11% |
| 50-day MA | 11,800 | – |
| 200-day MA | 11,500 | – |
With Microsoft and Alphabet’s earnings miss relative to expectations, the Nasdaq 100 appears vulnerable to more downside as investors reset positions. Target support comes into play near the 11,500 area by the 200-day moving average. A close below that key long term mark would increase odds of a deeper pullback unfolding.
Growth Stock Multiples Face Pressure
Despite financial beats, both Microsoft and Alphabet trade at roughly 22 times forward earnings. Investors seemed unwilling to further expand multiples given the macro uncertainty talked about earlier.
AMD and other growth stocks face similar pressure on elevated valuations as the economic slowdown threatens future progress. Wall Street often moves stock prices more based on changes in outlook than just beating quarterly targets.
If global growth stalls further from here, tech titans will have a tough time outgrowing current premium earnings multiples placed by the market. This dynamic explains the somewhat counterintuitive stock price reaction to otherwise strong reports this earnings season.
Any clarity from the Fed later Wednesday confirming no pivot towards cutting rates would likely increase downward pressure on richly-valued sections of the stock market.
Cloud Leaders Remain Well Positioned Long Term
While volatility may remain in the near term, Microsoft and Alphabet continue expanding their competitive edges in cloud computing. Commercial adoption of cloud-based solutions and digital transformation shows no signs of slowing over the long run.
Businesses modernizing their operations turns into a recurring software and service revenue stream for providers like Azure or Google Cloud. Even with conservatism around enterprise spending today, management teams still foresee substantial total addressable market expansion in categories like industry-specific cloud, analytics, infrastructure, cybersecurity and more. The short term economic bumps cannot offset the secular trends benefiting tech’s largest companies.
Both will likely continue taking market share with their now-established cloud units. Microsoft noted they have over 200 products generating over $1 billion in annual revenue. Network effect moats and differentiation through advanced AI capabilities allow robust unit economics as well. If the giants falter on a single earnings report, opportunistic investors usually step in upon signs of rotation stabilize.
Key Takeaways Heading Forward
After a blistering start to the year where stock prices disconnected from risks facing both consumers and businesses, reality came back into focus this earnings season. Early year optimism got tested quickly as high quality companies dealt with the same macro headwinds they have been for several quarters.
While Nasdaq giants still put up impressive growth figures, their valuations require ideal circumstances on a forward view. Any deterioration on the demand side or economic backdrop translates into more volatility and potential downside.
Treasury yields may have plateaued for now if the Fed avoids more hawkish signaling on Wednesday afternoon. However, inflation and consumer health trends need clear improvement before markets feel better about the future pace of growth.
Microsoft and Alphabet results beat top and bottom line quarterly views. But anxiety around future progression in the face of uncertainty overshadowed that fact. Reports did little to change the ongoing debate around how resilient tech titans can prove if difficult conditions persist longer. Their long-term opportunities appear strong as ever, though current rich valuations leave little room for error executing on those multi-year roadmaps.
To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.
