Two of the so-called “Magnificent 7” stocks – Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) — posted earnings that beat estimates on Tuesday afternoon after the market closed, but neither were able to move the market.
Both the S&P 500 and Nasdaq Composite ended Tuesday down slightly, and they were both trending lower in early morning trading. Also, both the S&P 500 and Nasdaq Composite were down on Wednesday morning.
It may seem unusual that two of the mega-cap technology stocks that drove markets last year failed to make a blip this week after posting solid earnings. However, there are other forces at play — namely, the Federal Reserve meeting on Wednesday and its subsequent decision on interest rates.
AI fuels Microsoft’s gains
Currently the world’s largest company by market cap, Microsoft, had a strong fiscal second quarter, which ended on Dec. 31. The company’s revenue jumped 18% to $62 billion while its net income rose 33% year over year to $21.9 billion, or $2.93 per share. However, Microsoft’s stock price was down by about 1% Wednesday morning, trading at around $403 per share.
The tech giant’s revenue continues to be driven by its cloud-computing business, which saw a 24% increase in revenue, rising to $33.7 billion in the quarter. Of that amount, $25.9 billion was generated through its artificial-intelligence-fueled Intelligent Cloud business, which was up 20% year over year, also beating estimates.
“We’ve moved from talking about AI to applying AI at scale,” said Satya Nadella, chairman and CEO at Microsoft. “By infusing AI across every layer of our tech stack, we’re winning new customers and helping drive new benefits and productivity gains across every sector.”
Microsoft’s outlook for the third quarter may have been part of the reason its stock was moving lower on Wednesday, as its revenue is projected to be between $60 billion and $61 billion in Q3, down slightly from Q2’s $62 billion. While both the Intelligent Cloud and Productivity and Business Processes businesses are expected to see quarter-over-quarter revenue increases, the More Personal Computing segment is projected to see a drop.
Microsoft also projected operating expenses in Q3 to be between $15.8 billion and $15.9 billion, which would be up from about $15.3 billion in Q2. However, that guidance includes about $300 million in costs related to the integration of the recently purchased Activision.
On the earnings call, Chief Financial Officer Amy Hood expanded on that, saying the company expects capital expenditures to “increase materially on a sequential basis, driven by investments in our cloud and AI infrastructure.”
Alphabet sees higher capital expenses
Alphabet, the company that owns Google and other properties, also beat estimates, but its stock was dropping on Wednesday, down by about 6% in the morning to around $143 per share.
Currently the fourth-largest company in the world by market cap, Alphabet saw its revenue increase 13% year over year to $86.3 billion in the quarter. Its operating margin increased from 24% to 27% compared to the fourth quarter of 2022, and its net income rose 52% to $20.7 billion.
Alphabet saw a 26% year-over-year increase in revenue in its cloud-computing business to $9.2 billion, while Google Advertising, which includes Google Search and YouTube ads, was up 11% to $65.5 billion. However, the Google Advertising numbers came in slightly below estimates.
“We are pleased with the ongoing strength in Search and the growing contribution from YouTube and Cloud. Each of these is already benefiting from our AI investments and innovation. As we enter the Gemini era, the best is yet to come,” Alphabet CEO Sundar Pichai said in the earnings release.
Gemini is Alphabet’s recently launched AI-driven search model, which was built to rival OpenAI’s ChatGPT. With it will come some hefty capital investments, as the company outlined in its 10-K filing.
“During the years ended December 31, 2022 and 2023, we spent $31.5 billion and $32.3 billion on capital expenditures, respectively,” Alphabet said in the filing. “We expect to increase, relative to 2023, our investment in our technical infrastructure, including servers, network equipment, and data centers, to support the growth of our business and our long-term initiatives, in particular in support of AI products and services.”
That may have also impacted investor sentiment toward Alphabet. However, if you look at how Wall Street analysts reacted, it was a mixed bag, with roughly half raising their price targets and half lowering them.
Thus, the bottom line is that neither of these Magnificent Seven stocks were able to move the markets despite solid quarters, but investors may be preoccupied to some extent with what the Fed might do on Wednesday.
