Why Did Big Tech Stocks Split After Earnings?

TL;DR

Alphabet delivered the strongest immediate market response after beating revenue, earnings, advertising, search, and cloud expectations. Microsoft also surpassed top-line and cloud forecasts, but its shares fell as investors awaited guidance, while Meta declined after a large tax-related charge, slightly higher spending expectations, and questions about returns on its growing AI investment.

Transcript

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Key Insights

• Alphabet's third-quarter revenue was $102.35 billion, exceeding an estimate just below $100 billion. Earnings per share also beat expectations at $2.87, helping shares rise in after-hours trading even though operating income missed expectations and capital spending came in higher than projected.
• Google advertising revenue was $74.18 billion, compared with an expected $72.46 billion. Search revenue reached $56.57 billion, beating an estimate just under $55 billion, while YouTube advertising revenue also came in slightly above expectations, showing continued resilience in Alphabet's core advertising operations.
• Google Cloud revenue was $15.16 billion, above the Street estimate of $14.75 billion. AI infrastructure agreements involving Meta, Anthropic, and OpenAI supported optimism, while Alphabet raised its full-year capital expenditure outlook to $91–93 billion from approximately $85 billion.
• Alphabet's AI position is both an opportunity and a competitive risk. Gemini models and Google Cloud infrastructure deals support growth expectations, but OpenAI creates pressure for Google's search business, which remains central to the company's results despite its continued revenue strength.
• Microsoft's first-quarter revenue was $77.67 billion, above the Street estimate of approximately $75.55 billion. Intelligent Cloud revenue reached $30.9 billion versus an expectation near $30.18 billion, and Azure and other cloud services grew 39% excluding currency effects.
• Microsoft shares initially declined despite beats on revenue, earnings, cloud revenue, and Azure growth. The discussion identified no confirmed cause for the drop and emphasized that investors were waiting for CFO Amy Hood's earnings-call guidance and further details about the company's outlook.
• Meta's advertising revenue was $50.08 billion, beating expectations of roughly $48.6 billion, while operating income increased 18% year over year. Its fourth-quarter revenue forecast of $56–59 billion had a midpoint close to the Street expectation of $57.38 billion.
• Meta's reported earnings were distorted by a nearly $16 billion non-cash tax-related charge. Investors also focused on slightly higher operating expense and capital expenditure expectations, with full-year capital spending projected at $70–72 billion and questions remaining about the return on AI investment.

Questions & Answers

Q: Why did Alphabet shares rise after its earnings report?

Alphabet shares rose because several major results exceeded expectations. Third-quarter revenue reached $102.35 billion versus an estimate just below $100 billion, and earnings per share were $2.87. Google advertising revenue, search revenue, YouTube advertising revenue, and Google Cloud revenue also performed better than expected. These strengths outweighed an operating income miss and higher projected capital spending in the immediate market reaction.

Q: How did Alphabet's advertising and search businesses perform?

Alphabet's core advertising operations remained strong. Total Google advertising revenue was $74.18 billion, above the expected $72.46 billion. Search revenue reached $56.57 billion compared with an estimate just under $55 billion, and YouTube advertising revenue came in slightly better than expected. The results showed that search remained resilient despite discussion of competitive pressure from OpenAI and changing AI products.

Q: How is AI affecting Alphabet's business outlook?

AI presents both growth opportunities and competitive pressure for Alphabet. Gemini models and Google Cloud infrastructure agreements involving Meta, Anthropic, and OpenAI have strengthened optimism about its cloud business. At the same time, OpenAI poses a potential long-term threat to Google's search business. Alphabet is responding with substantial investment, raising its full-year capital expenditure outlook to $91–93 billion from roughly $85 billion.

Q: What did Microsoft report for revenue and cloud growth?

Microsoft reported first-quarter revenue of $77.67 billion, which exceeded the Street estimate of approximately $75.55 billion. Intelligent Cloud revenue was $30.9 billion versus an expectation near $30.18 billion. Azure and other cloud services grew 39% excluding currency effects, above consensus of 37.1%. The report therefore showed stronger-than-expected top-line and cloud performance, according to the discussion.

Q: Why did Microsoft shares fall despite beating expectations?

The discussion did not identify a confirmed reason for Microsoft's after-hours decline. Microsoft beat expectations on the top line, bottom line, cloud revenue, and Azure growth, creating an apparent disconnect between its reported performance and share reaction. Investors were still waiting for forward-looking guidance and additional context from CFO Amy Hood during the earnings call, which could clarify spending, demand, and future growth expectations.

Q: What role does OpenAI play in Microsoft's earnings outlook?

OpenAI contributes to the positive enterprise and AI infrastructure narrative around Microsoft. The transcript says Microsoft holds a 27% stake in OpenAI's new for-profit public benefit corporation, valued at roughly $135 billion, while OpenAI's nonprofit retains control. Analysts had also cited accelerating AI infrastructure demand from partners such as OpenAI before the report, adding to the favorable setup heading into earnings.

Q: Why did Meta's earnings per share fall sharply?

Meta's earnings per share fell sharply because the company recorded a nearly $16 billion non-cash, tax-related charge. The discussion compared earnings of a little more than $1 with roughly $6 in the prior year and described the tax item as the main reason for that large discrepancy. Analysts viewed it as a one-time factor, but the headline change still created immediate sticker shock for investors.

Q: What concerns did investors have about Meta's AI spending?

Investors were concerned about slightly higher operating expense and capital expenditure expectations, along with uncertainty about the return on those investments. Meta projected full-year capital spending of $70–72 billion, compared with a previous range of $66–72 billion. The analyst said AI spending makes sense for engagement and advertising in the core business, but its return is less clear than cloud-driven spending at Alphabet.

Summary & Key Takeaways

• Alphabet reported third-quarter revenue of $102.35 billion, above the estimate of just under $100 billion, while earnings per share reached $2.87. Advertising, search, YouTube, and cloud revenue performed well, prompting shares to rise in after-hours trading despite a higher capital expenditure outlook and continuing AI competition concerns.

• Microsoft reported first-quarter revenue of $77.67 billion, beating an estimate near $75.55 billion. Azure and other cloud services grew 39% excluding currency effects, while Intelligent Cloud revenue exceeded expectations. Even with beats across revenue, earnings, and cloud, shares declined as investors waited for management's forward-looking guidance and additional explanation.

• Meta's advertising revenue reached $50.08 billion, exceeding expectations of roughly $48.6 billion, and operating income increased 18% year over year. However, shares fell after a nearly $16 billion non-cash tax charge reduced earnings per share, while higher expense and capital expenditure expectations raised questions about returns from AI investment.