Microsoft and Alphabet earnings show signs of resilience

Microsoft and Google parent Alphabet’s core businesses held up better than expected in the past quarter, pushing their shares higher and giving a bump to rival tech companies due to report earnings later this week.

Revenue at Microsoft’s cloud division climbed 16 per cent in the first three months of 2023, a faster than expected rate that dispelled fears of a sharp slowdown in spending by their corporate clients following a boom for digital services during the Covid-19 pandemic.

Google’s search advertising business also topped forecasts and returned to growth, with revenue rising 2 per cent in the quarter after slipping 2 per cent in the final three months of last year.

The biggest US tech companies had been expected to produce little growth, if any, in the three months to the end of March owing to difficult comparisons with the strong start they had to 2022 and a spending slowdown that has hit many parts of their businesses.

But the results on Tuesday fed hopes on Wall Street that Big Tech’s main engines of growth were proving more resilient than expected at a low point in the companies’ recent fortunes.

“Expectations were for a broader slowdown and Microsoft executed better and shrugged off the macro-boogieman,” said Brent Thill, analyst at Jefferies. The two tech giants’ positive numbers together “should help broader technology stocks regain momentum”.

Alphabet shares climbed 4 per cent but trimmed those gains to 1.2 per cent after executives warned that capital spending would increase progressively this year as it adds to its data centre capacity to handle the higher demands of artificial intelligence.

Amazon’s stock also climbed 5 per cent, as investors expect better cloud growth when it reports earnings on Thursday. Facebook parent Meta, which reports on Wednesday, rose more than 2 per cent after Google’s earnings pointed to a recovery in digital advertising.

Microsoft’s shares, which were up 15 per cent year-to-date, jumped more than 9 per cent in after-hours trading, extending gains after Amy Hood, chief financial officer, said the current quarter would see “healthy revenue growth” and “disciplined” spending.

Microsoft’s intelligent cloud unit — its biggest revenue driver, led by Azure, its public cloud computing platform — recorded revenue of $22.1bn in the three months to the end of March, ahead of forecasts for $21.8bn. Revenues at Azure, which had grown 49 per cent excluding currency moves one year ago, were up 31 per cent year-on-year.

Microsoft is making a big bet on the development of AI technology through its partnership with, and investment in, start-up OpenAI, the maker of ChatGPT.

On a call with investors Microsoft executives said its AI capabilities were not a big driver for last quarter, but chief executive Satya Nadella said the company was now “having conversations we never had” with clients keen to leverage AI. Microsoft was particularly well positioned at the “very start” of a new cycle, Nadella added.

“We feel we have a good lead and we have differentiated offerings up down the stack,” he told investors.

Overall revenue at Microsoft was up 7 per cent to $52.9bn, beating forecasts for $51bn, according to Refinitiv. Net income rose 9 per cent to $18.3bn, versus forecasts for $16.6bn.

Total revenue at Alphabet increased by 3 per cent — or 6 per cent before the effect of currency movements — to $69.8bn, while earnings per share fell to $1.17, from $1.23 the year before. Wall Street had been expecting revenue of $68.9bn and earnings of $1.06 per share. Overall, its advertising came in only slightly below the buoyant results reported a year ago, raising hopes that it was on the way back to consistent growth after a 4 per cent downturn in advertising last quarter.

Responding to questions about whether the AI race that has broken out in the tech world would eat into profit margins, Alphabet chief executive Sundar Pichai said he believed Google would benefit from its previous experience of boosting the efficiency of its technology and monetising new services, though he did not offer specifics.

The boost in earnings come three months after both groups slashed thousands of jobs in an attempt to cut costs to reflect a new, post-Covid normal. In January Microsoft announced it would shed 10,000 jobs, 5 per cent of its workforce, while Alphabet said it would trim 12,000 jobs, 6 per cent of its headcount.

Microsoft and Alphabet will face less difficult comparisons later this year and stock market investors have already started to look ahead to a return to double-digit growth, fuelling a strong rally.