Microsoft and Alphabet Earnings Results Bode Well for Tech Sector

Concern that an economic slowdown would lead to shrinking earnings from U.S. mega-cap technology stocks eased late Tuesday when Microsoft (MSFT) and Alphabet (GOOGL) reported better-than-expected quarterly profits and revenue.  Those two earnings results were the first of the major technology and internet stocks to report this earnings season, and they helped to ease concerns that the recent rally in technology stocks was overdone. 

The Nasdaq 100 Stock Index is up +16% this year, even after Tuesday’s sharp -1.9% fall, the biggest one-day decline in two months.  Most of the Nasdaq’s gains this year have come on the back of the mega-cap technology stocks.  Microsoft is up +15% this year, and Alphabet is up almost +18%.  Tuesday’s earnings results from Alphabet and Microsoft bode well for the earnings of other mega-cap tech stocks that have yet to report.

Tuesday’s earnings reports were supportive for both stocks as Q3 revenue at Microsoft’s Azure cloud-computing business expanded by +31%, excluding the impact of currency fluctuations. Also, Alphabet reported Q1 advertising revenue rose $54.55 billion, above the consensus of $53.79 billion. There were worries that ad spending would stagnate due to recent economic uncertainty, but Alphabet’s results eased those concerns.

Even with this year’s rallies in Microsoft and Alphabet, their valuations remain reasonable. Microsoft trades at 26 times future profits, down from 35 times profits two years ago.  Also, Alphabet trades at 17 times projected earnings, cheaper than the S&P 500 and the Nasdaq 100 stock indexes.  Meanwhile, Amazon.com (AMZN), which reports earnings later this week, has a 12-month forward PE ratio of 60.

If Microsoft’s gains hold today, its market capitalization will rise to $2.2 trillion, putting it above Saudi Aramco as the world’s second most-valuable public company.  Apple (AAPL) remains the largest company with a value of $2.6 trillion through Tuesday’s close.  Analysts had been pessimistic about earnings for the technology sector coming into this earning season, with profits projected to shrink -15% in Q1.  However, CI Roosevelt said Tuesday’s earnings from Alphabet and Microsoft “gives you some confidence that we’ll hear good news from the companies that have yet to report.”

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.