This week’s earnings lineup is headlined by quarterly results from big tech giants, featuring Alphabet GOOGL and Microsoft MSFT reporting after market hours on Tuesday. However, despite exceeding their top and bottom line expectations, Alphabet shares were down over -7% while Microsoft’s stock dipped -2%.
A Tumultuous Tale of Trading
Lately, over the last year, Alphabet and Microsoft’s stock have soared +41% and +60% respectively, with today’s selloff prompting investors to ponder if it’s a buying opportunity or a cautionary tale of turbulence.
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Alphabet Q4 Review
The dive in Alphabet’s stock comes as the market soured on the company’s ad revenue, despite fourth quarter earnings of $1.64 per share beating estimates by 2% and soaring 64% from $1.05 a share in the comparative quarter.
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Quarterly sales of $72.32 billion came in 2% better than expected, a 14% jump from the previous year. Amidst this, ad revenue of $65.51 billion slightly surpassed the Zacks Consensus of $65.44 billion in a bid to retain its position as the leader in total digital advertising revenue in the United States ahead of Meta Platforms META and Amazon AMZN.
With that being said, Alphabet’s ad revenue did rise 11% from the prior-year quarter, leading to an annual earnings increase of 27% to $5.80 per share, although total sales saw a decline of -9%.
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Microsoft Q2 Review
Reporting its fiscal second quarter results, Microsoft’s Q2 earnings of $2.93 per share pleasantly surpassed expectations by 6% and climbed 26% from $2.32 a share in the prior-year quarter. Second quarter sales of $62.02 billion topped estimates by more than 1% and jumped 17% from a year ago.
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Microsoft attributed the strong quarter to Azure and other Intelligent Cloud Segment services which expanded 20% YoY to $25.88 billion and topped estimates of $25.27 billion by 2%. The company highlighted that it has now moved to applying AI at scale with Microsoft having 53,000 Azure AI customers.
However, Wall Street wasn’t blown away by Microsoft’s sales guidance for the third quarter which played a role in today’s dip. Microsoft projects Q3 revenue to be in the range of $60-$61 billion and this does fall in line with the current Zacks Consensus of $60.56 billion.
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Reading the Valuation Tea Leaves
With Alphabet and Microsoft forecasted to have double-digit percentage growth on their top and bottom lines in fiscal 2024, reviewing their current valuations may provide better insights into potential stock purchases. At present, Alphabet’s stock presents an attractive option, trading at 22.6X forward earnings, nearly in line with the S&P 500’s 20.8X, while Microsoft’s 36.6X is at a slightly higher but not overly stretched premium to the broader market.
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The Bottom Line
Considering the strong rally in Alphabet and Microsoft’s stock over the last year, the trend of earnings estimate revisions in the following weeks will play a significant role in the possibility of more upside. Presently, both tech giants land a Zacks Rank #3 (Hold), supported by their reasonable P/E valuations, paving the way for long-term investors to potentially reap future rewards at current levels.
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