Alphabet falls short of expectations and drops on Wall Street; Microsoft performs well

The cloud continues to prop up the financial results of major US tech companies, but this time Wall Street has delivered two contrasting verdicts. Alphabet and Microsoft published their results for the quarter ending in September yesterday evening. In both cases, the division that sells computing power to businesses outperformed expectations. However, in after-hours trading, Alphabet’s share price fell by around 9 per cent, whilst Microsoft’s rose by as much as 5 per cent.

It seems that what makes the difference is free cash flow – that is, the cash remaining with the two companies after investments in data centres and chips. Alphabet’s free cash flow was negative and far worse than expected. Microsoft’s, on the other hand, was more than double what analysts had forecast. To be more specific: Alphabet’s free cash flow was negative by over $9 billion, whilst analysts had expected a figure just below zero (at $36 million). The figures, therefore, fell well short of expectations. And the difference lies entirely in expenditure on expanding cloud capacity, which came at a time when the market is particularly sensitive to this figure. Microsoft, on the other hand, took the opposite path: $18.6 billion in free cash flow compared with the $8.54 billion forecast by analysts. Hence the different market reaction.

But let’s take a closer look at the figures. And let’s start with Google’s parent company. Not least because Alphabet’s quarter was the stronger of the two in terms of cloud services. Google Cloud more than doubled its revenue, which rose to 30.71 billion. The consensus forecast had predicted a 95.1 per cent increase, to 29.57 billion. The company is the world’s third-largest player in the sector, behind Amazon Web Services and Microsoft’s Azure, and during the quarter it expanded its portfolio of multi-year contracts for cloud and artificial intelligence infrastructure. Demand for computing power to train and run models has remained high throughout the year, keeping data centres operating close to capacity. Alphabet was able to supplement third-party GPUs with its own in-house TPUs, thereby serving more customers at a time when advanced chips and electricity are in short supply for everyone. Gemini, Google’s family of models, also helped, having become even more widespread in enterprise software and developer platforms, alongside the agreement with Apple whereby Google’s cloud powers artificial intelligence functions within the Cupertino ecosystem. The group as a whole posted revenue of 127.6 billion, 25 per cent higher than a year ago but below the forecast of 128.22 billion. Earnings per share stood at $2.12, compared with an estimate of $2.99. Investment reached record levels.

For Microsoft, however, the quarter ending in September marks the first quarter of its financial year. The company’s flagship division, Azure, grew by 48 per cent to 33.17 billion, slightly above the expected 32.84 billion. Three months earlier, it stood at 29.4 billion. A comparison in absolute terms has only recently become possible, as last month the company decided to report Azure’s revenue in dollars rather than solely as a growth rate, making comparisons with competitors clearer. Total revenue stood at 92.3 billion.

Investments for the quarter totalled 45.2 billion, compared with 34.9 a year earlier. That is a lot. However, they remain below the 50 billion that Microsoft itself had indicated, and this could go some way towards explaining why cash flow performed better than expected.