Alphabet and Microsoft earnings beat; Meta earnings on tap

Microsoft earnings beats estimates and then loses Activision Blizzard deal

Many observers have pointed out the narrow US equity market rally this year driven by the mega caps. One interpretation of this move is that it masks the real weakness and this interpretation is not wrong. A different take is, that the equity market was correctly pricing that mega caps would be better at growing earnings and beating estimates. Microsoft proved this last night with their FY23 Q3 (ending 31 March) earnings result beating on both revenue and EPS. Revenue for the quarter was $52.9bn vs est. $51bn and EPS was $2.45 vs est. $2.24 driven by strong growth in its cloud business Azure which is expected to grow 26-27% in the current quarter excluding currency effects. Microsoft said that AI will be a dominant driver of growth in the future and capital expenditures have risen to accommodate the demand for data centers as new AI systems are rolled out-

While the FY23 Q3 earnings result was a clear win for Microsoft and its shareholders the company lost another potential win in its attempted acquisition of the gaming company Activision Blizzard. The UK Competition & Markets Authority has chosen to block the $75bn acquisition as the regulators is fearing that Microsoft will be to tempted to make Activision’s games available exclusively on its cloud service eliminating competition and carving out console makers such as Sony’s PlayStation. Our general view is that when companies become as big as Microsoft then large acquisitions should not be allowed because markets should not concentrate further in the hands of a small group of companies. Instead excess cash flows should just be returned to shareholders through dividends and buybacks. While the acquisition at this point is lost for Microsoft shareholders are celebrating, thinking previously that Microsoft is overpaying, pushing the shares 8% higher in trading.

Alphabet’s advertising revenue confirms early green shoots

Advertising is a pro-cyclical industry and leading indicator on the economy because companies are increasing their marketing budgets if they improve their outlook on the economy. Google, the main business of Alphabet, reported better than expected advertising revenue at $54.6bn vs est. $53.8bn and also delivered its first operating profit in its cloud business signaling an important turning point for that business that has been lagging terribly on profitability relative to its competitors Amazon’s AWS and Microsoft’s Azure. Alphabet also delivered Q1 operating profit of $17.4bn vs est. $16.2bn as cost-cutting exercises are beginning to improve the underlying profitability.

Alphabet also announced a $70bn buyback programme indicating that management has a positive and improving outlook on the advertising industry. Alphabet’s CEO also said on the conference call that new AI technologies could add value to its advertising business and as such the Q1 results have helped calm investors about Google in the new era of AI.