Nasdaq 100 analysis: Microsoft and Alphabet deliver earnings beat, Meta up next

Key takeaways

• Microsoft and Alphabet both beat expectations in the latest quarter
• Alphabet shares hit 15-month high as it cements role as best stock in advertising market
• Microsoft shares plunge because of the high bar ahead of the results, prompting some profit-taking
• Both companies ramp-up investment in AI, which will heighten focus on profitability until the technology starts significantly contributing to sales and earnings
• Nasdaq 100 is struggling today, with eyes turning to results out from Meta after the close

Nasdaq 100 stalls as Big Tech earnings begin

Microsoft and Alphabet kicked earnings season off for Big Tech yesterday, with both juggernauts beating expectations and continuing to feed the hype around their AI prospects. However, the results have prompted a mixed-response in markets.

The Nasdaq 100 is trading down 0.2% in premarket trade today, with markets bracing for more results out today from the likes of social media giant Meta and auction platform eBay.

Let’s have a look at how Microsoft and Alphabet performed, and look at what to expect from the next round of earnings.

Microsoft stock: Q4 earnings beat

Microsoft reported an 8% year-on-year rise in revenue to $56.2 billion and adjusted EPS climbed 21% to $2.69. That was ahead of the $55.5 billion in sales and $2.55 in earnings anticipated by Wall Street.

That marked the fastest bottom-line growth in over 18 months as it starts to come up against more favourable comparatives, although the fact costs increased at a slower pace than sales for the first time in over a year also helped.

Demand for hardware remains under pressure and sales fell 4% from last year, although this was not as sharp a drop as feared. Plus, gaming sales were up for the first time in six months. Fortunately, sales of software and demand for cloud computing both came in above expectations.

Why is Microsoft stock falling today?

Microsoft shares are down almost 4% and at a two-week low in premarket trade today as markets react to the results. The bar was high for Microsoft ahead of the results considering the stock was lingering not far below the all-time highs hit a week ago, which may have prompted some profit-taking.

The ongoing slowdown in demand for cloud computing, especially Azure, is also knocking sentiment. Its Intelligent Cloud unit has seen the brakes coming down on growth for a year now and Azure’s constant currency growth of 27% was far slower than the high-40%s we saw throughout the last financial year.

Investors may also be disappointed that AI didn’t provide a significant boost (more on this below).

Where next for MSFT stock?

Microsoft shares could suffer their sharpest one-day fall of 2023 based on the drop we are seeing in premarket trade today.

The stock looks set to test the bottom-end of the rising channel today, and the 50-day moving average at $333 looks ready to provide a safety net should it slip out of the channel. On the upside, potential remains high if the channel holds and we could see it climb back toward the upper-end, with the immediate job to move back above $350.

Alphabet stock: Q2 earnings beat

Alphabet reported a 7% year-on-year rise in revenue to $74.6 billion and adjusted EPS increased 19% to $1.44. That beat analyst expectations for sales of $72.8 billion and earnings of $1.32.

The impressive results were down to a faster rebound in advertising sales on its core search engine and video platform. Advertising sales on its core Google search engine were up 3.3% from last year, faster than the 2.1% expected by analysts, while YouTube’s revenue growth of 4.4% was much better than the tepid 0.9% forecast.

Google Cloud was another bright spot after producing its second consecutive quarter of earnings, an aptly timed move now that growth is slowing as companies temper their IT budgets. It delivered operating profits of $395 million in the quarter, marking a significant jump from the $191 million we saw in the first and significantly higher than the $142 million forecast.

Why is Alphabet stock rising today?

Alphabet shares are up 6.7% in premarket trade and the stock is at its highest level in 15 months. Alphabet has been the underperformer in Big Tech this year and was trading at a discount ahead of the results, meaning the bar was lower.

Google has proven to be far more resilient than its rivals to the softer advertising conditions suffered during the last 18 months or so thanks to the popularity of Google Search and its strong position in videos through YouTube. With growth accelerating faster than anticipated, Alphabet is cementing its position as the stock of choice within the advertising space as markets brace for a rebound this year.

Alphabet also boasted about the opportunities stemming from AI, helping turn the conversation to how the breakthrough technology can be a huge opportunity rather than a threat (more on this below). It appears to be providing a big tailwind for Google Cloud, helping drive it forward now that it is profitable, and Google Search appears to be fending off competition from the likes of Bing and ChatGPT.

Where next for GOOGL stock?

Alphabet shares had been rangebound for the two months leading up to the results but has broken out in wake of its results.

The stock could now find the momentum needed to climb to $137, marking the 78.6% retracement from the lows we saw late last year. A move above $143 would then be on the cards.

We should see some support around $125 to $127, marking the ceiling that has capped the stock in recent months and the 61.8% retracement, if it comes under renewed pressure.

AI stocks: Costs to rise before money is made

Microsoft CEO Satya Nadella and Alphabet CEO Sundar Pichai both focused heavily on AI during their conference calls with investors and analysts. In fact, the two CEOs said ‘AI’ 145 times during their post-earnings conference call, according to CNBC.

Both companies were busy putting AI to work in the latest quarter and have seen rampant demand from customers. For example, Alphabet said almost 80% of advertisers are ready to use AI in search while Microsoft said AI workloads contributed about 1% growth for Azure.

However, the main takeaway from their AI commentary is that they are having to spend big to get their data centres, other hardware and cloud computing arms ready. Both companies said they are accelerating their AI investments, which may cause concerns that profitability may come under pressure as costs increase before any serious monetisation of AI happens. However, both are attempting to remain disciplined with costs and moving resources from other departments because AI is a top priority, signalling they are taking action to mitigate any negative impacts from AI investments.

That means margins and profitability will be under the spotlight until investors start to see a significant contribution from AI, and will heighten the need for Big Tech to keep cutting costs and remain strict when it comes to hiring and managing headcounts.

Nasdaq 100 analysis: Where next?

Microsoft and Alphabet both carry a large weighting in the Nasdaq 100, making it the index to watch today, especially with Meta earnings out after markets close.

The index is holding steady in wake of the results, having pulled-back since hitting 18-month highs just a week ago. The midway of the rising channel appears to be providing some support as it has done for the past two months. The Nasdaq 100 needs to close back above the recent-high of 15,888 before eyeing a move above the psychological level of 16,000.

We could see it slip back toward the 78.6% retracement at 15,300 if it remains under pressure. Any severe drop risks seeing it fall back into the bottom-half of the channel, which is currently lining-up with the 50-day moving average.

Meta stock: Q2 earnings preview

All eyes are on Meta today, with the social media giant set to report results after markets close. Meta has been the second best performer in the Nasdaq 100 in 2023 and it will need to impress if it wants to keep up the momentum considering shares have popped over 130% since the beginning of the year.

Fortunately, there is potential that Meta could hit the right notes and markets remain confident in wake of Alphabet’s results, with Meta shares up 2% in premarket trade today. Earnings are forecast to grow for the first time in 18 months, its new Threads platform is taking off, and there is a chance Meta could stir up some excitement about its AI prospects.

Investors will be hoping Meta has also seen ad sales recover at a quicker rate following the results out from Google. A weak sales outlook from smaller rival Snap, the owner of Snapchat, yesterday does not appear to be denting sentiment ahead of the Meta results today.

You can find out everything you need to know, including consensus figures and our latest technical analysis, in our Meta Q2 Earnings Preview.

Take advantage of extended hours trading

Microsoft and Alphabet both released earnings after markets closed and most traders must wait until they reopen the before being able to trade. But by then, the news has already been digested and the instant reaction in share price has happened in after-hours trading. To react immediately, traders should take their positions in pre-and post-market sessions.

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