Microsoft and Alphabet stocks diverge on cloud revenue, AI

Microsoft (MSFT) pleased investors with its AI-driven boost in cloud revenue, while Alphabet (GOOG, GOOGL) disappointed and reported a miss on cloud revenue estimates.

Yahoo Finance’s Josh Schafer reports on how these figures are pushing Big Tech companies to show that AI is driving real sales amid broader uncertainty.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

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- Alphabet and Microsoft are headed in opposite directions. It's after reporting quarterly earnings. Microsoft's cloud business surpassing the Street's expectations, while Alphabet's cloud unit-- disappointing. But for investors, it seems AI is the main focus. Josh Schafer has been looking into all of this. Josh?

JOSH SCHAFER: Yeah, hey, Josh. That's something we've been following for a few quarters now-- is sort of how stocks react in the day after these earnings calls and, specifically, what those executives said about their AI strategy, and what investors are sort of looking for when it comes to that.

And an interesting thing we found between-- in the difference between Microsoft's earnings and Alphabet's earnings was Microsoft was able to provide investors a number to attribute to that cloud growth. So Microsoft Azure growing 29% last quarter, that they charged 3% of that. They said 3% of that attributed it to AI.

When Alphabet had their earnings call, they weren't really able to attribute specific numbers to AI. We saw this last quarter with Meta as well. Meta was able to say, well, people are spending more time on Instagram, on Facebook because of AI, that is leading to X ad sales and Y revenue.

And investors responded positively to that on the day after. So it's an interesting trend we're seeing in these calls basically. Yes, we know, you're all spending on AI. Everyone has big plans for AI. But what does it actually mean for the company and Is it bringing in sales now-- is something investors are watching.

I should mention, though, as we see Google shares down about 9%, a lot of the Streets still coming out with positive commentary on Alphabet today, saying that yes, we did not necessarily see AI revenues come to fruition last night. But it is something we're still expecting.

I think Brent Thill at Jefferies put it well. Maybe we just expected a little bit too much this quarter, but management wouldn't be putting that much into AI via capital expenditures if they weren't expecting revenue to come at some point.

So Jefferies still has a buy. Plenty of firms out there still have a buy on Alphabet and just believe that AI strategy might be coming a little bit further out in the future than it is for Microsoft.

- But for today, those stocks really going in very divergent directions. So zooming out a little bit, Josh, if you look at these two companies, what are the lessons, right? Are people going to be asking the same questions pretty much of every tech company now?

JOSH SCHAFER: Yeah, Julie. I definitely think so. And I think what we're seeing is just the divergence, right? It's something we're seeing across the stock market right now and across sectors. Really, we're just talking about a lot of uncertainty and a lot of-- well, what's the actual read here?

When we think about what we normally learn from cloud spending, we're thinking about business-to-business spending, right? And are businesses still growing and spending more or businesses not growing and maybe cutting back on spending?

If you look at Alphabet's report, you'd say, businesses are probably cutting back on spending. They're not giving Google as much money for Google Cloud. You know, maybe they're sort of being more conservative. But then you look at Microsoft and you say, oh, companies are actually spending on cloud. They're spending more business-to-business. So you can't get a clear read here.

And I thought BlackRock's Rick Rieder really put this well in terms of what it means for the overall market. I want to take a listen to what he told "Yahoo Finance" this morning.

RICK RIEDER: There's dispersion. I mean, if you look across, you know, even-- even last night, like you say, I mean, the numbers that came across in terms of cloud performance, in terms of broader technology performance-- I don't know. There's real dispersion. I mean, we're getting a series of conflicting signs around-- around markets. That's why markets are so jumpy, so uncertain.

JOSH SCHAFER: And so Julie, that's really the story right now. You think about the economic story that we've been following you could look at one side of economic data and say things are coming in well. Manufacturing is doing well. Inflation is generally coming down.

But then you can think about what that means for the Fed overall, and maybe inflation isn't coming down quick enough, and maybe the economy's too hot. Maybe things are still uncertain, and I think that uncertainty is, of course, what has brought us to a market that doesn't really know what to do right now.

We see stocks down today as yields rise. Yields have been driven by uncertainty. And that's brought us to this moment where we're sort of looking for the next catalyst for the stock market. Because right now, it's really just been a story about yields for it feels like a long time now.

- Yeah, indeed. And Melissa Brown of Contigo just a few moments ago-- echoing those comments. And guess what? There's another thing of uncertainty coming-- a possible government shutdown. Fun, fun. Josh, thanks so much. Appreciate it.