Wall Street punishes Alphabet and Microsoft despite earnings beats

In investor speak, the stocks were priced for perfection. Alphabet shares are up 56% for the year and climbed to a fresh high last week, exceeding the prior record from late 2021, the peak of the tech boom. Microsoft is up 70% over the past 12 months, also reaching a fresh high recently and surpassing Apple as the most valuable publicly traded company.

The companies generated excitement last year by riding the artificial intelligence wave, and were also lauded by shareholders for their dramatic cost-cutting efforts, which included eliminating thousands of jobs.

In the weeks heading into their earnings reports, investors were buying as if they expected positive surprises. They were left disappointed and nitpicking the numbers.

Alphabet on Tuesday reported 13% revenue growth, the fastest rate of expansion since early 2022. Sales of $86.31 billion topped the average estimate of $85.33 billion, according to LSEG, formerly Refinitiv. Earnings per share of $1.64 beat estimates by 5 cents.

Revenue at Microsoft increased 18% to $62.02 billion, topping the $61.12 billion average analyst estimate. EPS of $2.93 was 15 cents above consensus.

Both companies also beat expectations in their cloud businesses, with Google Cloud reporting 25% growth and Microsoft’s larger Azure and other cloud services expanding by 30%.

The one disappointment from Alphabet was in Google’s ad business, which delivered revenue of $65.52 billion, trailing analysts’ estimates of $65.94 billion, according to StreetAccount. Within ads, YouTube came in just shy of expectations.

Stifel analysts, who recommend buying the stock, said in a quick-take report on Tuesday that Alphabet produced “healthy advertising results, but not enough.”

Brian Wieser, an analyst at media and advertising consultancy Madison and Wall, said the market has unrealistic expectations for Google given its size and dominance.

“In my general conversations with public market investors and sell-side analysts, few have a correct view of the advertising market,” Weiser said. “Many think that growth can continue at double-digit levels for the fastest-growing companies for much longer a period of time than is realistic to expect.”

Alphabet shares dropped almost 6% after the report. Microsoft’s drop was less severe. The stock initially fell by more than 2% and then pared some of its losses.

Microsoft’s outlook was a bit light, overshadowing the earning and revenue beat. The company called for fiscal third-quarter sales between $60 billion and $61 billion, while analysts polled by LSEG had expected $60.93 billion.

Shares of chipmaker AMD also dropped despite better-than-expected revenue numbers and profit that met estimates. The stock, which is up 137% in the past year on excitement about its artificial intelligence processors, fell almost 6% after the announcement.

Attention now turns to Thursday, when Amazon, Apple and Meta all report quarterly results. Like Alphabet and Microsoft, Meta shares have climbed to a record this month. Apple hit its all-time high in December, while Amazon remains about 6% below its record from 2022.

—CNBC’s Jonathan Vanian, Jordan Novet and Kif Leswing contributed to this report

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