Microsoft and Alphabet Q2 earnings show strength in the cloud

The news: Alphabet and Microsoft were the first among Big Tech companies to release quarterly earnings this week, raising confidence in the US equities market.

• Alphabet and Microsoft shares each gained 5% following their release of quarterly reports on Tuesday, propping up the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite, per CNBC.
• Alphabet’s Q2 revenue was up 13% year over year (YoY) to $69.69 billion, which was only slightly lower than the forecasted $69.88 billion, per The Guardian.
• Meanwhile, Microsoft’s fiscal Q4 report showed 12% YoY quarterly growth with revenue at $51.87 billion, just under the anticipated $52.44 billion, per CNBC.

The context: Despite the Wednesday stock market rally, the reports point to a growth slowdown.

• Both Microsoft and Alphabet’s earnings gains are their slowest in two years, on par with the broader 2022 economic deceleration.

How we got here: As the Big Tech companies Apple, Amazon, Microsoft, Alphabet, and Meta are collectively worth $7.6 trillion in market capitalization, what happens to their bottom lines is a major market driver.

• As more reports land this week, we’ll see the stock market react, accompanied by response to the Federal Reserve’s latest interest rate hike.
• A big takeaway from the reports is that Microsoft and Alphabet are gliding on their cloud strength.
• Microsoft server and cloud revenue jumped 26% YoY adjusted for inflation, with Azure sales growth leaping by 46%, adjusted for inflation, per Protocol. Meanwhile, Alphabet-subsidiary Google Cloud revenue was up 36% over last year.
• With cloud computing integral to businesses’ digital transformations and the ability to leverage AI, cloud services have become bread-and-butter divisions for Amazon Web Services, Azure, and Google Cloud in recent years.
• With global public cloud spending expected to increase by 20.4% in 2022, per Gartner, we can expect that Big Cloud will make gaining market share a core growth strategy.

Watch for red flags: Just because enterprises have come to depend on digital computing and Big Data, it doesn’t mean that the cloud is recession-proof, as sometimes claimed. Although recent earnings reports have eased fears, the slowdown could intensify.

• As companies with smaller cash reserves than Big Tech rush to curb spending, cloud computing could be a top area to cut.
• Big Cloud’s astronomical and cryptic billing practices make those expenses harder to justify, which could send businesses shopping around for better cloud deals.
• This could create opportunities for alternative cloud providers and startups to gain market share, but could also roil the economy if Big Tech’s earnings fall short.
• Rising concerns about wasteful cloud spending, outages, and shifts to private infrastructure could all trigger cloud turbulence.