Alphabet and Microsoft Rise to Records After Quarterly Earnings Beat Estimates

Geert Vanden Wijngaert | Bloomberg | Getty Images
  • Analysts raised price targets on Microsoft, helping the company's market capitalization close in on Apple, the most valuable public company.
  • For Google parent Alphabet, analysts see revenue growth slowing in 2022, but that wasn't enough to stop the stock from soaring.

Shares of Alphabet and Microsoft rallied to record highs on Wednesday after both companies reported third-quarter results that surpassed analysts' expectations.

The stocks helped lift the tech-heavy Nasdaq Composite higher even as the S&P 500 and the Dow Jones Industrial Average were down slightly.

Alphabet jumped almost 5% to $2,924.35, giving the company a market cap of almost $2 trillion. Microsoft rose 4% to $323.17. With a market cap of $2.43 trillion, the software maker is approaching Apple's valuation of $2.46 trillion.

Despite concerns about inflation, supply chain constraints and privacy changes made by Apple that limit advertisements, the world's most-valuable tech companies continue to surpass growth expectations and prove their resilience to swings in the economy.

Google reported a 43% increase in advertising revenue to $53.1 billion, with YouTube ad sales rising to $7.2 billion from $5 billion a year earlier. Earnings of $27.99 a share topped analyst estimates for profit of $23.48, according to Refinitiv.

Google was able to skirt a major hit from Apple's iOS privacy changes, which hurt quarterly results from Snap and Facebook. Ruth Porat, Alphabet's finance chief, said Apple's new features had a "modest impact" on its ad revenue.

"The ad market remains strong, and unlike most digital peers, Google doesn't seem to be negatively impacted by iOS 14 or supply chain issues," wrote Ross Sandler, an analyst at Barclays, in a note on Wednesday. "Longer-term Google remains the best positioned company in digital advertising and one of our favorite names," wrote Sandler, who has a buy rating on the stock.

Revenue at Microsoft increased 22% in its fiscal first quarter from a year earlier to $45.3 billion, while earnings of $2.27 exceeded the average estimate of $2.07, according to Refinitiv.

For the current quarter, Amy Hood, Microsoft's finance chief, said that even without the impact of an accounting change resulting in a longer useful life of data center equipment, she expects gross margin to go up by 2 percentage points as the company makes improvements in its cloud businesses.

Microsoft's PC-related business, meanwhile, is powering through the global supply chain bottleneck. The company reported 10% revenue growth in Windows license sales to device makers,

"Microsoft overcame the two key concerns heading into the print – the PC exposure and margins," UBS analysts, who have a buy rating on the stock, wrote in a note after the earnings report.

While investors are bullish on Google and Microsoft's growth prospects, both companies signaled potential challenges ahead. The stocks are up 83% and 51%, respectively, in the past year.

Hood told analysts on Microsoft's call to "watch the advertising market," because companies hurt by supply issue may be less willing to spend. Search and news advertising accounts for about 6% of Microsoft's revenue. 

Google warned that growth rates won't be as rosy as they've been in the last few periods, including 69% ad sales growth in the second quarter.

"Given the gradual recovery and results through the back half of 2020, the benefit of lapping prior year performance diminished in Q3 vs Q2 and will diminish further in Q4," Porat said on Tuesday's earnings conference call.

Analysts expect a slowdown in revenue growth into the first half of 2022, due in part to lower fees in the Google Play store and regulatory challenges.

WATCH: Alphabet is getting better at deploying apps and services to consumers, says Baird's Sebastian

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