Apr 26, 2024

Tech Bulls Back in Driver Seat After Microsoft and Alphabet Blowouts

Ryan Vlastelica, Bloomberg News

, Bloomberg

(Bloomberg) -- After a tense day of choppy trading on Wall Street, the Big Tech trade is back on in full force.

Results from Microsoft Corp. and Alphabet Inc. reassured investors that AI can live up to its reputation as a potent driver of growth and sales, setting the market on a more stable footing after a rocky start to the earnings season. The reports stood in contrast to Meta Platforms Inc., another AI favorite, which tumbled after it gave a weak sales forecast and said it would spend a lot more than expected this year.

“I’m absolutely breathing a sigh of relief, because these are the kinds of big beats we needed to see by big tech for the market to resume its upward trajectory” said Jim Awad, senior managing director at Clearstead Advisors.

“Alphabet and Microsoft cleared a high bar, and this justifies the levels they’ve been trading at. These reports show they’re able to generate strong AI revenue without having to spend a lot more, and they’re much better on the positive side than Meta was on the negative.”

Microsoft beat expectations on both the top and bottom lines, fueled by its AI and cloud offerings. The rally was even stronger at Alphabet, with the Google parent jumping double digits on strength in its own cloud division and implementing a dividend, as some had anticipated.

Microsoft rose 2.3% while Alphabet soared as much as 12%, its biggest one-day percentage gain since 2015, taking it above a historic $2 trillion valuation.

With the gains, both stocks are poised to extend a year-to-date outperformance that has come on the back of AI optimism. Compared with the Nasdaq 100 Index’s 4.7% increase, Microsoft has risen 8.6% while Alphabet is up 24%.

The reports could ease concerns that prices have gotten ahead of themselves, especially after Meta’s report added fuel to the idea that significant financial contributions from AI could be smaller or further away than expected. Such fears helped sent the Nasdaq 100 Stock Index down as much as 2% on Thursday before rebounding to close with a decline of just 0.6%.

Read more: Microsoft, Alphabet Face a ‘Show Me’ Moment After Meta Misfire

Microsoft trades at 31 estimated earnings, above its long-term average and a premium to the market overall. Alphabet’s multiple is 24.

“The results are really strong, and are the kinds of deliverables we need to see to fill in valuations, especially since the megacaps have really driven the market higher over the past year,” said Kevin Caron, senior portfolio manager at Washington Crossing Advisors.

In a sign of relief, Amazon.com Inc. followed its cloud peers higher, up 1.9%. Apple Inc. rose 0.4%. Both are among the notable companies reporting next week. Nvidia Corp. — the stock most directly tied to AI optimism — doesn’t report until later next month, but it also rose following the megacap reports, which indicated spending on AI would remain robust.

Not all results have been strong, including among companies with AI themes. In addition to Meta, Intel Corp. sank after giving a weak forecast, and the chipmaker said it wasn’t able to meet demand for processors used in new AI-enabled PCs. ServiceNow Inc. and International Business Machines Corp. both fell following their reports.

“The reaction to these earnings results further sort of separate the winners from losers,” said Irene Tunkel, chief US equity strategist at BCA Research.

So far this earnings season, 93% of the S&P 500’s tech companies have beaten earnings expectations, though only half have for revenue, according to data compiled by Bloomberg. For communications, the sector dominated by Alphabet and Meta, every component has topped on earnings so far, though just 50% have beaten on revenue. For the index overall, the earnings and revenue beat rates stand at 81% and 55%, respectively.

Top Tech News

Snap Inc. offered positive signs that its efforts to revamp its digital advertising business are gaining popularity with marketers — boosting revenue and providing stronger competition with powerhouses Google and Meta Platforms Inc.
Intel Corp., the biggest maker of personal computer processors, tumbled in late trading after giving a lackluster forecast for the current period, indicating that it’s still struggling to return to the top tier of the chip industry.
Huawei Technologies Co.’s latest smartphones carry a version of the advanced made-in-China processor it revealed last year, independent analysis revealed, underscoring the Chinese company’s ability to sustain production of the controversial chip.
Meituan is planning to launch its international food-delivery platform in Saudi Arabia’s capital, making its first move outside of greater China as growth slows in its home market.
Rubrik Inc. rose 16% in its trading debut after the cloud and data security startup backed by Microsoft Corp. topped its fundraising goal with a $752 million initial public offering, signaling with two other listings sustained demand for first-time share sales.

Earnings Due Friday