Alphabet and Microsoft: Be Afraid, Be Very Afraid!

Oct 26, 2022

Microsoft and Alphabet confirm worries about the state of the economy.

On Oct. 25, the two major behemoths kicked off the big tech earnings season by raising caution lights about the current slump.

Their concerns may be summed up in one sentence: the economy is in bad shape and will not improve in the next months.

Both international corporations offer goods and services to consumers, businesses, and governments. As a result, they are ideally situated to offer an accurate assessment of the status of the economy.

They have a combined market worth of $3.235 trillion, as Microsoft is the world's third largest corporation and Alphabet is the world's fourth largest. Apple is the world's largest corporation, followed by Saudi Aramco, the world's largest oil firm. According to Alphabet and Microsoft data, both firms and individuals have cut down on spending.

Lower Ad Revenue

Alphabet, the parent company of Google and YouTube, delivered the bad news.

"There is greater uncertainty as we go through than in the past," CEO Sundar Pichai told analysts during the results call.

Alphabet has stated that the internet advertising industry, which comprises products and services such as advertisements, Android, Chrome, hardware, Google Maps, Google Play, Search, and YouTube, is being impacted by inflation, a major danger to the economy, and interest rate hikes to battle it.

Google Services earns money largely via advertising, app and in-app purchases, digital content offerings, hardware sales, and fees for subscription-based products like YouTube Premium and YouTube TV.

In the third quarter, Alphabet's sales increased 6% year on year to $69.09 billion. This is less than the $70.58 billion predicted by experts. They had expanded by 41% by the third quarter of 2021.

If we omit the beginning of the pandemic, the revenue gain in the previous quarter was one of the worst since 2013.

Search, which had so far escaped the effects of the economic slump, suffered from a withdrawal by advertisers in the third quarter. Thus, income from Search and everything associated with it amounted to $39.54 billion, vs. the $40.87 billion predicted by experts.

YouTube's revenue fell 2% to $7.07 billion, owing to fierce competition from the short-video platform TikTok. Analysts were expecting a 3% increase in income from the platform, which just debuted Shorts, a format to fight TikTok's growth.

During the results call, Google's chief business officer, Philipp Schindler, informed investors that the downturn in advertising seen in the second quarter was exacerbated in the third quarter. He said that financial sector advertisers, such as insurance, loans, mortgages, and cryptocurrency, were advertising their products less.

Strong Dollar

The company also noticed that fewer gaming firms advertised their products and services.

Alphabet will continue its austerity program in this context.

Chief Financial Officer Ruth Porat warned analysts that the group's hiring would decline dramatically in the fourth quarter. Alphabet aims to hire half as many workers as it did in the third quarter. Hiring will be concentrated mostly on "important roles" and "technical abilities."

Porat also cautioned that the strong dollar, which damaged third-quarter performance, will play an "even greater" role in the fourth quarter.

The rising dollar has been and will continue to be a major concern for Microsoft. It is now predicted to represent a 5-point drag on revenue growth in the fiscal year 2023.

Azure, the cloud services sector that symbolizes growth and justifies most of the software giant's bets was relatively underwhelming. Revenue from Azure and other cloud services increased 35% year on year (42% in CC), somewhat below the 36.5% expectation.

The scenario isn't looking good in the coming months: Azure revenue growth is likely to be around 5 points lower in constant currency.

Amy Wood, CFO, told analysts that increased energy costs are raising the cost of supplying cloud services in Europe. She cautioned that this would continue in the coming months.

Revenue increased 11% to $50.1 billion in the first quarter of fiscal 2023, which ended September 30. This is Microsoft's worst quarterly revenue rise in five years. The company's net profit was $17.6 billion.

"In a world with growing headwinds, digital technology is the ultimate tailwind," stated Satya Nadella, CEO of Microsoft. "In this climate, we're focused on assisting our clients in doing more with less while investing in long-term development opportunities and managing our cost structure with discipline.

PC Market Is Suffering

Microsoft is likewise suffering a PC market decline following a golden era during the covid-19 epidemic.

Wood stated that the PC will be a "difficult market" for Microsoft in the fiscal year 2023, despite the fact that PC usage remains higher than pre-pandemic levels. She went on to say that Microsoft wants to have "a steady hand" in this climate when it comes to investing but that it is responding to the macro environment by limiting expenditure growth.

According to Gartner, worldwide PC shipments declined 19.5% in the third quarter compared to the third quarter of 2021, falling to 68 million units from 84.1 million units at the same time a year earlier.

"This is the biggest market decrease since Gartner began tracking the PC market in the mid-1990s, and the fourth straight quarter of year-over-year decline," according to the research firm on Oct. 10.

Alphabet shares dropped over 7% after hours, as did Microsoft shares, which plunged nearly 7%.