by Microsoft ( MSFT ) and Google-parent Alphabet ( GOOG , GOOGL ) reported better-than-expected earnings after the hour on Tuesday, but those results weren’t enough for Wall Street, as shares of both companies fell to trading pool on Wednesday.
With Apple and Meta set to report earnings on Thursday, the duo are under pressure to blow away analyst expectations if they hope their respective stocks avoid the same fate.
For Microsoft, the news was a boon to its artificial intelligence efforts, which the company said added 6 percentage points of revenue growth to its Azure cloud business. But Wall Street was less enthusiastic about those results, sending shares lower by more than 1% on Wednesday and dropping the company’s market capitalization by $3 trillion. This is despite Microsoft exceeding expectations on both the top and bottom lines.
Meanwhile, there was a steeper alphabet to count, with shares falling more than 6% on Wednesday. Alphabet took a gut shot after asking prospects for advertising revenue, though it hit the top and bottom lines and saw growth in its cloud business.
In the case of Microsoft, the results seem to indicate that Wall Street wants the company to extract more revenue from its multi-billion dollar investments in AI generation technologies. For Alphabet, the market reaction shows the need to balance ad revenue growth with its push deeper into the cloud market.
Two other interesting points from the announcements: Alphabet CEO Sundar Pichai told analysts on the company’s earnings call that Alphabet’s subscription services, like YouTube TV, Google One, etc., are now a $15 billion a year business. That’s up five times from 2019.
The other surprising news came from Microsoft reporting that its gaming division, which now includes Activision Blizzard, is officially the third largest business. The group earned $7.1 billion, ahead of Windows, which took in $5.2 billion.
Apple and Meta on deck
Microsoft and Google’s earnings may have come and gone, but the Big Tech parade keeps moving, with Apple (AAPL) and Meta (META) set to report earnings on Thursday.
Apple’s announcement will help set the stage for 2024, giving Wall Street its first look at full-quarter iPhone 15 sales. Meanwhile, Meta will have to show analysts that its ad business continues coming back and how it will monetize its massive AI generation investments.
Apple’s Q1 earnings are the most anticipated in a while. Earlier this month, analysts at Barclays, Piper Sandler, and Redburn Atlantic downgraded Apple stock due to concerns about iPhone sales in China. And on Tuesday, International IT Securities analyst Ming-Chi Kuo released a report on Medium saying he expects iPhone shipments to decline 15% year over year in 2024.
Kuo cited Huawei’s resurgence as well as consumer interest in foldable phones and an AI-powered generation as reasons for the potential slowdown in China.
Apple shares were down about 2% on Tuesday afternoon so far.
That early downward trend protected Apple as the richest publicly traded company by market capitalization. As of Tuesday, the company’s market cap topped $2.91 trillion, below new leader Microsoft’s market cap of $3.04 trillion.
Apple is also in the midst of major reforms to its App Store in Europe, as it tries to comply with the new EU Digital Markets Act. The moves mean Apple will open up devices to third-party app stores and cloud gaming services, including Microsoft’s Xbox Cloud Gaming.
But critics, including Epic CEO Tim Sweeney and Spotify CEO Daniel Ek, say the changes aren’t enough. In particular, they point out that there is a new 0.50 euro Core Technology fee that Apple will charge developers. The fee kicks in after developers record more than 1 million downloads in 12 months and applies to all downloads thereafter.
Apple is also gearing up to launch its Vision Pro AR/VR headset on February 2. The device, which Apple refers to as a spatial computer, is the first new product category from the company in almost ten years, and it could provide the company with a powerful new revenue stream. But that’s only if customers can stomach the $3,499 price tag.
The company will need a strong performance in the quarter to defend its stock market performance of late. Meta shares are up 33% over the past three months and 164% over the past 12 months. That’s better than the stock performance of Microsoft, Apple, Google, and Amazon over the same period.
Meta is making a big comeback in its critical ad business after being knee-deep in Apple’s App Tracking Transparency feature and a steep decline in the digital ad market thanks to dizzying interest rates.
But Meta is still squeezing money from its Reality Labs division, which is responsible for its metaverse work and Quest headsets. In Q3, the company reported that segment lost $3.7 billion in Q3 2023 alone. But with an Apple headset coming soon, Meta could see a knock-on effect for Quest headset sales.
We’ll see how this turns out on Thursday.
Daniel Hawley He is the technology editor at Yahoo Finance. He has been covering the tech industry since 2011. You can follow him on Twitter @Daniel Howley.
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