Microsoft and Alphabet‘s latest quarterly results surpassed market expectations, but there is still cause for concern. The PC maker’s share price fell by 2.5% following the announcement and the Google parent company is faced with a smattering of antitrust challenges.
On the face of it, it may seem odd that Microsoft’s shares would slightly drop when it’s been riding high on the Covid-19 wave. The skyrocketing demand for computers and cloud computing services caused by the pandemic saw the Redmond, California company’s revenue jump by 19% to $41.7bn and its operating income increase by 31%, landing on $17bn.
While the coronavirus has prodded up tech companies’ results over the past year, the boom is not expected to last, which could help explain Microsoft’s shares dropping despite the stellar results. Traders have increasingly been growing fearful that the bull-run bust may happen at any point, even if most expect it to last for most of 2021.
Market experts and analysts also noted that Microsoft’s net profit had been boosted by a $620m tax benefit related to a decision by the Supreme Court in India.
A third factor, and seemingly the most popular explanation for the falling share price, is that Microsoft’s impressive figures in recent months have spoiled investors. Just days before the results came out, the company flirted with the notion that it might join Apple in the $2tn market cap club. Traders were therefore expecting an even bigger revenue beat. Those expectations failed to materialise.
“One-off tax and currency advantages have boosted Microsoft’s third-quarter numbers, and as a result the market isn’t being quite as welcoming of expectation-beating numbers as you might expect,” Nicholas Hyett, equity analyst at Hargreaves Lansdown, told Reuters.
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“That is the danger of trading on the kind of valuation Microsoft enjoys, 32.8 times next year’s earnings. Disappoint even a little and the market will be unforgiving.”
Taking a closer look at the results, it’s clear that Microsoft is still firing on all cylinders, particularly when it comes to its cloud services. Its commercial cloud service sales grew by 33% to $17.7bn over the past quarter.
“Over a year into the pandemic, digital adoption curves aren’t slowing down. They’re accelerating and it’s just the beginning,” said Satya Nadella, chief executive officer of Microsoft. “We are building the cloud for the next decade, expanding our addressable market and innovating across every layer of the tech stack to help our customers be resilient and transform.”
Sales for its Salesforce-competing Dynamics 365 tools jumped by 45%. Sales of its Xbox consoles increased by 34%, but were held back by the global semiconductor shortage.
These results comes just weeks after Microsoft announced that it had acquired speech-recognition and Siri-developer Nuance Communications in a $19.7bn deal.
Covid-19 spells out boost for Alphabet
Google parent Alphabet’s quarterly results were similarly bolstered by the pandemic. It beat market expectations and delivered a $17.9bn profit, marking the second consecutive quarter it’s achieved a record profit. It had reported $15.2bn in profits last quarter.
The profits were backed by Google ad sales jumping by 32% and its cloud sales increasing by 45.7%. Overall, Alphabet’s overall quarterly sales rose 34% to $55.3bn.
Alphabet also announced a $50bn repurchase programme for its Class C shares, saying it would be executed from time to time when market conditions allowed it.
However, the news comes as the search engine behemoth is facing mounting criticism for using its market dominance to choke competition. Lawmakers have recently turned up the heat in their questioning of the tech goliath’s practices, especially when it comes to how it treats smaller developers on its Play Store. The issue is also at the centre of its ongoing legal battle with Fortnite developer Epic.
During last year’s presidential campaign, White House hopefuls like senator Elizabeth Warren openly called for the breakup of Big Tech companies like Google. With Alphabet flaunting its Covid-induced record results this week, market analysts believe those calls could grow even more vocal.
“Yesterday’s astonishing Q1 results from Alphabet will only compound the pressures for a break-up of Big Tech,” said Michael Orme, thematic research consultant at GlobalData. “The company reported a 35% YOY surge in revenues and more than doubled its EPS. It also had enough free cash in its coffers to announce a $50bn share buyback. (This is ) all very much down to its search monopoly. Google has a fantastic business model and an entrenched competitive position in the crisply growing digital ad market which now accounts for over 50% of the total ad market in major markets – thanks to ‘search’ and YouTube.”
Google Cloud continued to make a loss, but narrowed its operating losses by 44% to $974m in the first quarter, Reuters reported.