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Big tech stocks hit as Microsoft warns of cloud slowdown

Microsoft and Alphabet (Google) both took a share price hit as the former warned it expects growth from its Azure cloud division to decline next quarter.

Of course we shouldn’t feel too sorry for them as they still make the kind of money telecoms firms can only dream about. Microsoft brought in $50 billion, up 11% year-on-year, but net income was down 14% to a paltry $17.6 billion. Google managed $69 billion in revenues, which was up 6% YoY, but its net income fell by over a quarter to $13.9 billion.

These numbers generally fell short of financial analyst expectations, resulting in both Microsoft’s and Google’s shares trading down 6% at time of writing. Google is primarily a digital advertising company, so most of the focus was on that side of things. But while Google Cloud revenues increased 27% to $6.9 billion, losses also widened in that division, as they did in ‘other bets’.

“Financial results for the third quarter reflect healthy fundamental growth in Search and momentum in Cloud, while affected by foreign exchange,” said Google CFO Ruth Porat. “We’re working to realign resources to fuel our highest growth priorities.”

Microsoft’s cloud division is an order of magnitude larger than Google’s. “This quarter Microsoft Cloud revenue was $25.7 billion, up 24% (up 31% in constant currency) year-over-year,” said Amy Hood, Microsoft CFO. “We continue to see healthy demand across our commercial businesses including another quarter of solid bookings as we deliver compelling value for customers.”

But on the analyst call Hood said the following as part of the outlook section. “We expect Azure revenue growth to be sequentially lower by roughly 5 points on a constant currency basis. Azure revenue will continue to be driven by strong growth in consumption with some impact from the Q1 trends noted earlier.”

Subsequent reporting has extrapolated that to warn of a general reduction in cloud spending, as businesses react to high inflation and an anticipated global recession by tightening their belts. A similar narrative was attached to the portents for digital advertising delivered by Google’s numbers. Spotify also reported recently and its ad numbers disappointed too.

While shares are down, we shouldn’t read too much into such movements. Exceptional macro headwinds such as high inflation, the Ukraine war and the US trade war with China have been known quantities for some time and are presumably priced in already. Having said that, recessions can be self-reinforcing and until reasons for optimism start appearing we can expect both business and consumer spending to remain muted.

 

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One comment

  1. Avatar Dave Duggal 26/10/2022 @ 2:18 pm

    Excessive cloud costs with no clear ROI has to be taken into account for repatriation trend and corresponding Cloud downturn. See the recent Wall Street Journal article – “CIOs Still Waiting for Cloud Investments to Pay Off ” https://www.wsj.com/articles/cios-still-waiting-for-cloud-investments-to-pay-off-11664449203 Unrealistic expectations are forcing some tech leaders to rethink cloud costs; ‘You discover your cloud architecture is immature when you’re surprised by the bill’

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