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Microsoft stock rises 4% as Alphabet shares plunge 10% on weak Google search sales and AI spending concerns
Microsoft stock rose 4% as strong Azure growth lifted investor confidence, while Alphabet shares fell 10% after weak Google search sales and high AI spending.
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Microsoft (MSFT) shares rose 4% in pre-market trading on Thursday, while Alphabet (GOOGL), Google's parent company, saw its shares plunge 10%. Investors reacted differently to the two companies' quarterly results.
Microsoft's quarterly results were better than analysts had expected. The company's strong sales growth, especially in its Azure cloud business, helped improve investor confidence. Alphabet's results, in comparison, raised concerns about slowing growth and the rising cost of artificial intelligence (AI) investments, according to Yahoo Finance.
Microsoft Azure sales growth beats estimates
Microsoft's Azure cloud business recorded sales growth of 48%, excluding the impact of currency changes. This was about 3 percentage points higher than analysts had expected.
Microsoft expects Azure sales to grow by 49% to 50% in the current quarter. This forecast is around 4 percentage points higher than analysts' expectations.
Microsoft also reported capital spending, or money spent on long-term business assets and infrastructure, that was about $5 billion below analysts' estimates. At the same time, other parts of its business reported better-than-expected sales, according to Yahoo Finance.
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Microsoft's overall sales and earnings for the quarter came in above analysts' forecasts. This helped support its stock as investors looked for signs that the company's growth could continue in the coming quarters.
Stifel analyst Brad Reback said Microsoft's results increased his confidence that the company could continue to achieve revenue growth in the mid-to-high teens. He also said the company's ability to control costs and improve operational efficiency could help increase its operating profit margins, according to Yahoo Finance.
Alphabet stock falls after weak search sales
Alphabet shares dropped 10% in pre-market trading on Thursday after the company reported its third-quarter results. The results disappointed investors, particularly when compared with Microsoft's stronger performance.
Google's search business reported sales of $63.4 billion, below Wall Street's estimate of $64.9 billion. The shortfall raised concerns that Google could be losing some of its search business to AI tools such as ChatGPT and Claude, according to Yahoo Finance.
Also read: Nasdaq futures fall as Alphabet's AI spending concerns weigh on tech stocks
Google has invested heavily in AI, but investors remain concerned about whether these investments will protect its search business from growing competition. The weaker-than-expected search sales added to fears that Google's long-standing position in online search could face increasing pressure from AI-powered alternatives.
Alphabet AI spending raises cash flow concerns
Alphabet reported negative free cash flow of $9.1 billion, much higher than Wall Street's estimate of negative $3.5 billion. Free cash flow is the money a company has left after paying its running costs and investments. A negative figure means the company spent more cash than it earned during the period, according to Yahoo Finance.
This added to concerns about how much big technology companies are spending on AI and whether they will make enough money from these investments. Investors are becoming more worried about companies reporting negative free cash flow. Meta also reported negative free cash flow last week, for the first time in years.
Alphabet growth outlook worries investors
KeyBanc analyst Justin Patterson said Alphabet's third-quarter results raised concerns about slowing growth in its search business. He also said the company's profit margins may have reached their highest point for now. He warned that Alphabet's stock could face pressure over the next one to two quarters. Investors will watch to see if these problems are temporary or if the company is facing a longer-term slowdown, according to Yahoo Finance.
Microsoft's stock performed better because its Azure cloud business grew faster than expected. The company also gave a positive sales outlook and spent less on capital investments than analysts had expected. Alphabet's shares fell because its Google search sales were weaker than expected and it reported a bigger cash shortfall than Wall Street had predicted.
