Microsoft (MSFT) and Google parent Alphabet (GOOG, GOOGL) reported better-than-expected earnings after the bell on Tuesday, but those results weren’t enough for Wall Street as shares of both companies fell during trading Wednesday.
With Apple and Meta due to report earnings on Thursday, there is pressure on the duo to defy analysts’ expectations if they hope their stocks will suffer the same fate.
For Microsoft, the news was a boon for its AI efforts, and the company said it contributed to 6 percentage point revenue growth in its Azure cloud business. But Wall Street was less than enthusiastic about these results; Shares fell more than 1% on Wednesday, dropping the company’s market value below $3 trillion. This is despite the fact that Microsoft exceeded expectations on both the top and bottom lines.
Alphabet, meanwhile, faces a harsher reckoning, with its shares falling more than 6% on Wednesday. Alphabet took a big hit when it missed expectations on ad revenue, but it managed to maintain both top and bottom lines and saw growth in its cloud business.
For Microsoft, the results show that Wall Street wants the company to generate more revenue from its multibillion-dollar investments in productive AI technologies. According to Alphabet, the market response points to the need to balance advertising revenue growth with a greater push into the cloud market.
Two more interesting points from the announcements: Alphabet CEO Sundar Pichai told analysts on the company’s earnings that Alphabet would like YouTube TV, Google One, etc. subscription services are now a $15 billion annual business, he said. This has increased nearly fivefold since 2019.
The other surprising news came from Microsoft, which announced that Microsoft’s gaming division, which now includes Activision Blizzard, is officially the third-largest business. The group earned $7.1 billion, ahead of Windows, which earned $5.2 billion.
Apple and Meta on deck
Microsoft and Google’s earnings may have come and gone, but the Big Tech parade continues; Apple (AAPL) and Meta (META) will report their earnings on Thursday.
Apple’s announcement will help set the stage for 2024 and give Wall Street a first look at a full quarter of iPhone 15 sales. Meta, meanwhile, will need to show analysts that its advertising business continues to recover and how it will monetize its massive productive AI investments.
Apple’s Q1 earnings are some of the most anticipated in a while. Earlier this month, analysts at Barclays, Piper Sandler and Redburn Atlantic downgraded Apple’s shares over concerns about iPhone sales in China. And on Tuesday, TF International Securities analyst Ming-Chi Kuo published a report on Medium saying he expects iPhone shipments to decline 15% year-over-year in 2024.
Kuo cited Huawei’s resurgence and consumer interest in foldable and productive AI-powered phones as reasons for the potential slowdown in China.
Apple’s shares were down nearly 2% Tuesday afternoon.
This early downward trend cost Apple its position as the richest publicly traded company in terms of market capitalization. As of Tuesday, the company’s market value reached $2.91 trillion, below the $3.04 trillion market value of new leader Microsoft.
Apple is also in the midst of making major overhauls to its App Store in Europe to comply with the EU’s new Digital Markets Act. These moves mean Apple will open its devices to third-party app stores and cloud gaming services, including Microsoft’s Xbox Cloud Gaming.
But critics, including Epic CEO Tim Sweeney and Spotify CEO Daniel Ek, say the changes are inadequate. In particular, they point to the new Core Technology fee of 0.50 euros that Apple will charge developers. Pricing will kick in after developers record more than 1 million downloads in 12 months and will apply to every subsequent download.
Apple is also preparing for the launch of its Vision Pro AR/VR headset on February 2. The device, which Apple calls a spatial computer, is the company’s first new product category in nearly a decade and gives the company a strong new revenue stream. But that’s only possible if customers can get past the $3,499 price tag.
The company will need a strong performance in the quarter to justify its recent stock market performance. Meta’s shares have increased by 33% in the last three months and 164% in the last 12 months. This is better than the stock performance of Microsoft, Apple, Google and Amazon over the same period.
Meta is on a path to recovery in its all-important advertising business, after being brought to its knees by Apple’s App Tracking Transparency feature and a steep decline in the digital ad market due to dizzying interest rates.
But Meta is still pouring money from its Reality Labs division, which is responsible for its metaverse efforts and Quest headsets. In the third quarter, the company reported that the segment lost $3.7 billion in the third quarter of 2023 alone. But with the upcoming launch of Apple’s headset, Meta could see a knock-on effect on Quest headset sales.
We’ll see how this all plays out on Thursday.
Daniel Howley He is the technology editor of Yahoo Finance. He has been interested in the technology sector since 2011. You can follow him on Twitter. @DanielHowley.
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