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Analysis

Earnings Preview: Can Microsoft and Alphabet beat growth expectations?

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Microsoft and Google’s parent company Alphabet will report their earnings after the US markets close on Wednesday, 26 October, both of which shares are at their 18-month lows, or more than 30% down from their highs in November 2021. While revenue growth remains in focus, companies’ guidance will be the main driver for their stocks’ performance in the upcoming earnings reports.

Microsoft – concerns of weakened demands in PCs

Microsoft is well known for its robust sales revenue, despite a miss on both sales and earnings expectations in the prior quarter. In its Q4 FY22 reports, Microsoft’s annual revenue growth slowed to 12% from 18% in the prior quarter, which is also the slowest growth since 2020. Weakened demand in its Windows licenses for PCs, a slowdown in its cloud business, Azure, and a strong US dollar may remain a concern in these upcoming earnings, though CEO Satya Nadella voiced a positive outlook. Its finance chief, Amy Hood, also expected a continuation of double-digit growth, concerning the revenue of $49.25 billion to $50.25 billion in the first quarter of FY23 or a 10% up from a year ago. The company confirms a further job cut amid an expectation for the slowest revenue growth in five years on 17 October. The average of its earnings per share estimates is $2.30 for the September quarter or a 1.3% growth from a year ago, but a slowdown from 2% in the prior quarter.

Hence, a further slowdown in its revenue growth is expected and a figure lower than 10% may spark a further selloff in the company’s shares. But a double-digit growth could strengthen the recent bottom-up pattern in its shares.

Alphabet – a decline in earnings is expected

Same to Microsoft, the Google parent company Alphabet missed on both earnings per share and revenue estimates in the June quarter’s report, with the EPS at $1.21, or an annual drop of 11%, and the revenue at $69.69 billion, a growth of 13% from a year ago. According to Zacks Consensus Estimate, Alphabet’s earnings per share will be at $1.25, also an 11% decline annually. The revenue is expected to be $58.35 billion, or a 9% growth year on year. Therefore, a further decline in net income and a slowdown in revenue growth are expected.  

Weakened demand for its YouTube advertising became the main issue that dragged down the company’s revenue growth, due to severe competition from TikTok. In the June quarter, the annual sales of ads for YouTube only grew 5%, dramatically down from 84% during the same period in 2021 when tech companies were benefiting from the pandemic. But it is worth noting that Google is a search engine-driven business, which collaborates with its social media, YouTube to reach advertisers’ targets. The company has rolled out a Performance Max campaign, which aims to boost its advertising revenue. Hence, any better growth number in advertising income could spark a decent rebound in its stocks.

Apart from the weakened demand for YouTube advertising, Google Cloud also faces challenges of competition from Amazon’s AWS and Microsoft’s Azura. Its cloud revenue fell short of expectations in the June quarter, which came to $6.28 billion, or a 36% growth from a year ago. However, the division lost $858 million, an increase from $591 million during the same period last year. 

Technical Analysis

Microsoft, daily

The near-term directional bias- bullish

Source: CMC Markets as of 25, Oct (Click to enlarge the chart)

Microsoft’s shares are in a potential rebounding trend from the channel support of 219, with further potential resistance near the 50-day MA, pricing around 250.  A bullish breakout of this level could take the stock further up to 270, which is the 23.60% retracement of Fibonacci.

On the flip side, a breakdown below the near-term SP at 242 may press the shares to re-test the recent low at 219.

Alphabet, daily

The near-term directional bias- bullish

Source: CMC Markets as of 25, Oct (Click to enlarge the chart)

Alphabet has been in a range-bound movement in October, with the key support at the recent low of 95, and resistance at 103, the high on 18 October. A bullish breakout of 103 may take the shares to further test 106, which is at the 50-day MA. And the medium-term potential target may be at 119, the 50% Fibonacci retracement.

On the flip side, a breakdown below 99.90 could pressure the stocks to re-test the recent low of 95. 


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