US earnings season: Microsoft and Alphabet shares rally on earnings miss

Wall Street heavyweights Microsoft and Google parent Alphabet both missed quarterly earnings expectations on Wednesday, weighed by a stronger US dollar and weaker ad revenues.

Still, both shares rallied more than 5% in extended hours, perhaps reiterating the view that the earnings were ‘good enough’ and ‘better-than-feared’. 

Microsoft doubles down on guidance

Quarterly earnings rose 12% to US$51.87bn, slightly below analyst expectations of US$52.44bn and the slowest revenue growth since 2020.

Microsoft faces pressure from a surging US dollar, as the multinational gets about half its revenues from outside the US. The US dollar index is up almost 12% year-on-year in 2022, which was the main reason for earnings downgrades back in June.

In the September quarter, Microsoft expects revenues between US$49.25bn to US$50.25bn, slightly below analyst expectations of US$51.5bn. Though, the implied gross margin of 69.85% was better than consensus of 69.30%.

The tech giant reiterated its full-year guidance despite worsening PC sales, the elevated US dollar and slower cloud infrastructure growth. 

Earnings Whispers has an interesting take on Microsoft earnings, saying that the stock is “up after hours despite giving first quarter guidance below estimates.

If it holds, it will be only the third time the stock has opened higher on such news. While that’s a small sample size, it averaged a decline over the next month of -6.3%.”

Google not immune to a pullback

Alphabet earnings were likewise slightly below consensus expectations, as revenue rose 13% to US$69.69b versus $69.9bn expected.

Earnings faced several headwinds including the strong US dollar, which lowered revenue growth by 3.7 percentage points.

Youtube ad revenue rose just 5%, the slowest pace since coverage for the division began in 2018. To add some perspective, Youtube’s quarterly ad revenue growth since the first quarter of 2020 has averaged 33.7%.

“Going forward, the very strong revenue performance last year continues to create tough comps that will weigh on year on year growth rates of advertising revenues for the remainder of the year,” said CFO Ruth Porat in an earnings call.

Bigger picture

As of Tuesday, around 75% of US companies reported profits higher than consensus expectations. Though, they're beating expectations by a much narrower gap than usual, according to Refinitiv.

Even then, analysts have been trimming profit forecasts amid the long list of headwinds: inflation, energy prices and recession worries.

Big names like Facebook parent Meta Platforms, Mastercard, Amazon and Apple are due to report earnings this week. By week end, the market should have a holistic view of how corporate earnings are holding up.

The US market has been rather buoyant since mid-June. Bank of America observed that NYSE-listed stocks had a 90% up day last Tuesday.

In the past, returns after an extremely robust breadth day typically see solid returns in the longer-term, but tends to be a bit choppy near-term.

S&P 500 returns after a 90% up day