'Buffering Growth' Alphabet and MS, Side by Side with Rosy Stock Prices... Why? (Comprehensive)

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] Global big tech companies Alphabet, Google's parent company, and Microsoft (MS) both reported their "slowest growth in two years" for the second quarter (April to June) of this year. This was the result of market slowdown due to recession concerns and the impact of a strong dollar exchange rate. However, despite these market worries, both companies posted unexpectedly solid earnings and rosy forecasts for next year, causing their stock prices to surge significantly.

According to Bloomberg and others on the 26th (local time), Alphabet announced in its earnings report that its second-quarter revenue reached $69.69 billion (approximately 91.36 trillion KRW), a 13% increase compared to the same period last year. This revenue growth rate is the lowest since the second quarter of 2020, when the company was hit hard by COVID-19.

Alphabet's core business, advertising revenue, reached $56.3 billion in the second quarter, up 12% year-over-year. Search advertising revenue increased by 14% to $40.689 billion. YouTube's advertising revenue was $7.34 billion, with a growth rate of only 5%, significantly down from 84% a year ago. This is interpreted as companies drastically cutting advertising due to recession concerns. Ruth Porat, Alphabet's Chief Financial Officer (CFO), explained, "Some advertisers reduced spending considering uncertainties caused by various factors."

Despite the slowdown in advertising revenue growth, market participants viewed Alphabet's performance as less impacted than expected. After the market closed, Alphabet's stock price rose more than 4%. Dan Morgan, Senior Portfolio Manager at Synovus Trust Company, said, "This report can be interpreted as a sigh of relief. In a very difficult environment where competitors are struggling, the fact that Google generated advertising revenue will be a boost." Evelyn Michel, an analyst at Insider Intelligence, evaluated that "Google is in a relatively good position amid the turbulent waves ahead."

[Image source=Reuters Yonhap News]

MS recorded its slowest growth in two years during April to June due to decreased PC demand and the strong dollar effect. MS announced that its revenue for the fourth quarter of fiscal year 2022 (April to June) was $51.9 billion, a 12% increase year-over-year. Net income rose 2% to $16.7 billion, with earnings per share of $2.23. CNBC reported that MS's revenue growth was the lowest since 2020, and this was the first time since 2016 that earnings per share fell short of market expectations.

MS's cloud computing segment, represented by Azure, saw a 40% revenue increase, down from 46% in the previous quarter, and personal PC sales revenue was $14.4 billion, up only 2% year-over-year. Derek Wood, an analyst at investment bank Cowen, analyzed that consumers are postponing purchases due to recession concerns. Due to reduced advertising spending, revenue related to search/news ads and social networking service (SNS) subsidiary LinkedIn decreased by $100 million, and Windows license sales also fell 2% during this quarter.

MS's stock price initially dropped more than 1% following the earnings announcement after market close. However, the situation reversed after the conference call, where MS stated that both revenue and operating profit for fiscal year 2023 (July 2022 to June 2023) are expected to increase in double digits as forecasted three months ago. Satya Nadella, MS CEO, said, "We are seeing bigger and longer-term contracts," adding, "(MS) has more data center regions than any other provider and will operate 10 new ones next year." Following the optimistic outlook in the conference call, MS's stock price rebounded, rising more than 5% from the closing price that day.

One notable point in these earnings is that both Alphabet and MS experienced performance impacts due to the strong dollar. The dollar index has risen 10% this year, reaching its highest value in 20 years, affecting overseas revenue. Both companies mentioned revenue on a constant currency basis in this earnings report, unlike before. Alphabet stated that without the exchange rate impact, second-quarter revenue growth would have been 16%. MS reported that the revenue impact from exchange rates was $595 million, and operating profit per share was reduced by about $0.04.

This content was produced with the assistance of AI translation services.