Despite higher profits, Wall Street punishes Alphabet and Microsoft

Investors say the stock was perfectly priced. Alphabet stock has risen 56% since the beginning of the year, hitting a new high last week, surpassing its previous record from late 2021, at the peak of the tech boom. Microsoft is up 70% over the past 12 months, and it also recently hit a new high, surpassing Apple as the most valuable publicly traded company.

Both companies generated excitement last year by riding the artificial intelligence wave and were also praised by shareholders for dramatic cost-cutting efforts, including cutting thousands of jobs.

Investors had been buying in the weeks leading up to the earnings release, as if hoping for a positive surprise. They were disappointed and just fussed over the numbers.

Alphabet on Tuesday reported a 13% increase in sales, the fastest rate of expansion since early 2022. LSEG (formerly Refinitiv) said revenue was $86.31 billion, beating the average estimate of $85.33 billion. Earnings per share were $1.64, beating estimates by 5 cents.

Microsoft’s revenue rose 18% to $62.02 billion, beating the average analyst estimate of $61.12 billion. EPS was $2.93, 15 cents above consensus.

Both companies also beat expectations in their cloud businesses, with Google Cloud reporting 25% growth and Microsoft’s larger Azure and other cloud services expanding by 30%.

The only disappointment for Alphabet was Google’s advertising business, with revenue of $65.52 billion, below analysts’ expectations of $65.94 billion, according to Street Accounts. On the advertising front, YouTube performed slightly less than expected.

Analysts at Stifel, which recommends buying the company’s stock, said in a preliminary report Tuesday that Alphabet is “achieving healthy advertising performance, but not enough.”

Brian Wieser, an analyst at media and advertising consultancy Madison & Wall, said the market has unrealistic expectations of Google given its size and dominance.

“In general conversations with public market investors and sell-side analysts, very few people have the right view of the advertising market,” Weiser said. “Many believe that the fastest-growing companies can continue to grow at double-digit levels for much longer than realistically expected.”

Alphabet stock fell nearly 6% on the news. Microsoft’s decline was not as severe. The stock initially fell more than 2%, but has since pared some of its losses.

Microsoft’s outlook is a bit bleak, with earnings and sales growth showing signs of weakness. The company is forecasting third-quarter sales of $60 billion to $61 billion, compared with analysts’ estimates compiled by LSEG of $60.93 billion.

Chipmaker AMD’s stock also fell despite better-than-expected sales and profits that met expectations. The company’s stock, which had risen 137% over the past year on excitement about its artificial intelligence processors, fell about 6% after the announcement.

Attention now turns to Thursday, when Amazon, Apple, and Meta Inc. will report their quarterly results. Like Alphabet and Microsoft, Meta stock also rose to all-time highs this month. Apple hit a record high in December, but Amazon is still about 6% below its 2022 record.

—CNBC’s Jonathan Bunyan, Jordan Nove and Kif Leswing contributed to this report.

clock: This was a ‘highly anticipated’ quarter for Alphabet