Microsoft, Alphabet Earnings Show Only This One Thing Matters for Big Tech

Microsoft and Alphabet both beat earnings expectations when they reported late Tuesday, but the stocks moved in opposite directions–the Google parent fell sharply while Microsoft advanced. The divergence is down to performance in their cloud businesses, where IT services are provided remotely over the internet – which both tech giants have been furnishing with AI-powered tools.

Microsoft’s Azure and other cloud services revenue surged 28% in its fiscal first quarter, beating the company’s own guidance and, significantly, it’s a reacceleration. Three percentage points came from AI services. That bodes well, particularly given Microsoft said the impact from its AI offerings would be weighted toward the second half of the financial year.

There’s more growth ahead, with the company launching a new $30-a-month AI assistant for its Office products in November. Its Azure OpenAI service is also going from strength to strength–more than 18,000 organizations now use it, up from 11,000 in July.

It’s not that Alphabet is doing badly as such, it’s just behind Microsoft. The Google parent still achieved 22% cloud revenue growth but that missed expectations and represents a deceleration. It also didn’t reveal the contribution made by AI services.

That investors largely overlooked a revenue beat in Google’s much larger ad business tells a story in itself.

The market is preoccupied with the AI growth opportunity, and it fears Alphabet may be getting left behind.

—Callum Keown

*** Join MarketWatch’s Washington correspondent Victor Reklaitis today at noon when he talks with Pangaea Policy founder Terry Haines about the House’s speaker drama and other Washington matters that are important for markets right now. Haines is a veteran policy analyst who previously worked on Capitol Hill and at a federal agency. Sign up here.

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Microsoft Tops Sales Expectations as Cloud Gathers Momentum

Microsoft’s
sales growth picked up in the September quarter on strengthening demand for cloud computing services. The software firm is already in the middle of pivoting products to include artificial intelligence technology from OpenAI, the maker of the ChatGPT chatbot, including a pricier offering of its Office software.

• Revenue rose 13% to $56.5 billion, beating expectations. Revenue in its Azure cloud business rose 29%, ahead of the pace set in the previous quarter. Capital expenditures jumped 70% to $11.2 billion to support demand in cloud and AI offerings, Microsoft said.

• Microsoft’s Azure hosts software from OpenAI and Meta Platforms. In November, Microsoft will introduce an AI-powered assistant for its 365 productivity platform called “Copilot.” The assistant costs businesses an extra $30 a month on top of their subscriptions.

• Productivity and business processes revenue of $18.6 billion beat guidance, while revenue from personal computing, including windows, Surface, and Xbox, of $13.7 billion also beat guidance. Microsoft closed its $75 billion deal for game maker Activision Blizzard in the quarter.

• One big surprise in the quarter was that Windows OEM revenue—which is paid by PC makers—rose 4%. The company’s guidance had called for a drop in the low-to-mid teens. Search and news advertising excluding traffic acquisition costs rose 10%.

What’s Next: Microsoft is previewing AI-based security software with customers, Bloomberg reported, and says many of them are signing up for its Azure cloud offering that offers OpenAI tools. Current quarter Azure revenue growth is expected to be 26%, the company told analysts on a conference call.

—Liz Moyer and Eric J. Savitz

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Alphabet Beats on Sales but Disappoints in Cloud Growth

Google parent
Alphabet’s
better-than-expected earnings were overshadowed by smaller cloud revenue growth than analysts had forecast. Wall Street has been looking to the cloud business to drive growth in the future but Google is still trying to compete to develop AI tools.

• Third-quarter revenue rose 11%, to $77 billion, its third quarter in a row of accelerating growth. Google Cloud revenue was $8.4 billion, up 22%, but still fell short of the Street forecast at $8.6 billion, and slowed from 28% in the previous quarter.

• Google has released an array of AI-juiced offerings, including an automated email drafting tool and its chatbot Bard, in response to OpenAI’s ChatGPT bot. It has also begun rolling out conversational AI features in its search engine.

• An advertising recovery is providing a boost to Google and other big tech companies. YouTube ad revenue rose 11% to $7.9 billion, and total Google advertising revenue rose 9.4% to $59.6 billion.

• Snap,
  the parent of social media platform Snapchat, said sales rose 5.4% in the September quarter, beating expectations they would drop as it continues to revamp its ad business. Daily active users rose 12% in the quarter, to 406 million.

What’s Next: Snap forecast fourth quarter revenue of $1.32 billion to $1.375 billion, also above expectations, as it continues to see the number of daily active users swell to a range of 410 million to 412 million. It cautioned, however, ad demand could slow in the quarter because of the Middle East conflict.

—Liz Moyer and Eric J. Savitz

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States Sue Meta Platforms Alleging Harm to Youth

Meta Platforms
faces lawsuits by 41 state attorneys general in state and federal courts, where they accuse the parent of Instagram and Facebook of intentionally building the social media platforms with addictive features that harm young users. States want changes to features they say are a danger to young users.

• Thirty-two states banded together on a federal lawsuit in California’s Northern District. Another nine, including Washington, D.C., filed in state court. Massachusetts said Meta knowingly makes features designed to manipulate young users and drive revenue.

• Meta said it shares the states’ commitment to providing teens with safe, positive experiences online, and has already introduced over 30 tools to support teens and their families. It had been in a dialogue with the states on clear age-appropriate standards and was “disappointed” in Tuesday’s actions.

• The lawsuits say Meta misled people about the dangers of its platforms for young people. The states also said Meta knowingly has pitched its products to users under age 13, who aren’t supposed to be on the sites according to Meta’s own policies and federal law.

• The states point to internal Meta documents that came to light by a former employee, Frances Haugen, who turned whistle-blower. The documents include Meta’s research into teen users’ behavior, and efforts to make the platform more appealing to them.

What’s Next: Tennessee Attorney General Jonathan Skrmetti said the states are still investigating a range of social media platforms. The group is leading any potential action with the lawsuit against Meta because it is one of the biggest in the industry, he said.

—Liz Moyer

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House GOP Chooses Mike Johnson as Surprise Speaker Nominee

House Republicans have voted Louisiana Rep. Mike Johnson as the latest nominee to become the U.S. House of Representatives speaker in an unexpected late night twist, replacing House Majority Whip Tom Emmer, who has dropped the bid.

• In an intense day of votes and internal debate, there was optimism Johnson could be a uniting figure, The Wall Street Journal reported, following a series of failed attempts to find a successor to Kevin McCarthy, who was ousted as House speaker three weeks ago.

• The failure to elect a speaker has been a roadblock to agreeing key business such as support for Israel and moving forward with a budget crucial to avoid a government shutdown next month.

• However, one political deadlock was broken Tuesday, as the U.S. Senate confirmed President Biden’s nominee Mike Whitaker as the new leader of the Federal Aviation Administration. The regulator has been without a permanent chief for more than 18 months.

What’s Next: A floor vote for House speaker could be held Wednesday, the Journal reported. To be elected speaker in the 433-member House, any candidate would need a majority of the votes. Currently there are 221 Republican seats, and the Democrats have 212.

—Rupert Steiner

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General Motors Takes Back 2023 Guidance and EV Output Target

While beating third quarter expectations on revenue and earnings,
General Motors
is letting go of its goal to build 400,000 electric vehicles by the middle of 2024 amid a slowing rate of EV adoption. The auto maker is also dealing with a continuing labor strike, which on Tuesday expanded to its Arlington, Texas, plant, its largest.

• The United Auto Workers strike, which began in mid-September, is costing $200 million a week in profit and will cost an estimated $400 million a week going forward, GM said. The Texas factory is where GM makes some of its most profitable vehicles including the Chevy Tahoe and Cadillac Escalade.

• GM delayed the opening of an EV truck factory near Detroit. Executives are still hoping to produce one million EVs in North America by the end of 2025, but they are moderating production to maintain strong pricing.
  Ford Motor
  has also pushed its EV output target out another year.

• GM’s net income for the September quarter fell 7% to $3.1 billion. The effect of the strike and higher costs on warranty repairs weighed on results. Pricing remained strong as shoppers kept buying despite higher interest rates.

• Uncertainty about the duration of the strike forced GM to remove its full-year 2023 guidance. In the second quarter, the company saw full-year operating profit of $12 billion to $14 billion. A prolonged strike could have a material adverse effect on the business, GM said.

What’s Next: Ford is scheduled to report earnings on Thursday after the closing bell. Analysts expect earnings of 46 cents a share on revenue of $43.9 billion. Both measures would be higher than last year’s third quarter but lower than the second quarter.

—Liz Moyer

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Dear Quentin,

My husband and I were married for 17 years. We divorced 5 years ago. While we were married we had a home built, and we lived in the home until we separated.

When we bought the house, we were advised to only put my husband’s name on the loan, because I had already purchased a home years before. My name was added to the deed.

The home was not mentioned in the divorce decree. My ex-husband sold the home this year, and made a significant profit. Am I entitled to any portion of the profit and if so, how do I get it?

—Ex-Wife

Read the Moneyist’s response here.

—Quentin Fottrell

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—Newsletter edited by Liz Moyer, Rupert Steiner, Callum Keown