Microsoft’s Earnings Warning Pushes Cloud Computing Stocks and Nasdaq Down

While Microsoft's latest quarterly results showed improvement in its cloud computing division, the negative outlook dominated the headlines on Wednesday, which negatively impacted the market in general. However, in the midst of such a difficult period for the technology industry and a bear market on the Nasdaq, who can blame investors for being pessimistic?

On Wednesday, Microsoft's shares dropped 3.9%. Investors originally welcomed the tech giant's higher-than-expected fourth-quarter results late Tuesday, which were primarily driven by Azure's cloud services division profits, but the company's cautious guidance wiped out after-hours gains and sent the stock sliding.

However, Microsoft was not the only stock to fall. Amazon, whose Amazon Web Services (AWS) is a competitor to Microsoft's Azure, dropped 4.8%. Several other companies in the cloud computing sector fell as well, with Salesforce CRM losing 3.2%, Palo Alto Networks down 2.3%, and Snowflake falling 7.2%. The Nasdaq index, which is dominated by tech stocks, fell by 2%.

A truly strong cloud offering by Microsoft in the final three months of the year just did not have the impact it needed to dominate the narrative. Revenue in Intelligent Cloud, which includes Azure, reached $21.5 billion, exceeding the company's own expectations, with Azure sales increasing by 38% over the same period the year before on a constant-currency basis.

A darker future, however, is foreseen: Microsoft expects Intelligent Cloud sales growth to slow from 38% in the December quarter to 19-17% in the March quarter to $21.7 billion and $22 billion — even lower than Wall Street's $22.2 billion consensus estimate.

As for Amazon and others, the message is straightforward: Do not get carried away with positive fourth-quarter results. Other cloud companies may follow Microsoft's lead if Microsoft experiences a gloomier start to 2023.

There is already evidence of it among Wall Street analysts.

Following Microsoft's results, a UBS team led by Lloyd Walmsley lowered its target price on Amazon stock to $118 from $121, citing concerns about Azure's growth potential and what UBS views as a "weaker overall enterprise IT expenditure environment."

According to analysts, Amazon's AWS business is expected to face revenue and operating income declines not only in the first quarter of 2023 but also through the remainder of the year "following a disappointing Azure growth outlook calling for a sharp deceleration."

Market fears of a recession are taking over this earnings season, and forecasts from companies that point towards an economic slowdown are certainly taking center stage. Cloud computing might have done well in the fourth quarter, based on what Microsoft said in its earnings report, yet the stock market is looking to the future — and things do not look optimistic.