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Microsoft, Alphabet Q3 Earnings Disappoint

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J.D. DURKIN: Yesterday you called Alphabet  (GOOGL) - Get Free Report Super Tuesday to Snap's Iowa caucus. And I wonder here how we're looking the morning after Super Tuesday. In your opinion, what stood out to you from what we learned yesterday?

MARTIN BACCARDAX: I guess to some degree, J.D., you could say that while the Iowa caucuses are not necessarily an available indication of where the electorate is headed, they can be very indicative. And Snap  (SNAP) - Get Free Report turned out to be prescient with respect to its concerns about ad sales growth because it was echoed significantly by Google last night. They saw the slowest growth in broader ad spend in a number of years. Ultimately, if you strip away the pandemic year, it's the slowest pace of growth since 2013. And as you indicated, we also saw a year on year decline in revenues for YouTube. That speaks to a bunch of different things, including the TikTok sort of market share grab that's taken place over the past couple of years.

But more broadly, it really does speak to the fact that corporations around the world are tightening their belts. One of the first things they do, of course, is cut jobs. But the second thing they do is reduce marketing spend when they see their own sort of economic prospects begin to dim. So it's not terribly surprising that we're seeing that pullback in marketing spend. But it was simply articulated from Google in a way that we could listen to differently than we would have and did from Snap. And that's really why you're seeing such a pullback in tech stocks this morning.

In fact, we're probably going to highs about $300 billion worth of value from the 5 biggest tech stocks in the opening hours of trading this morning. It will be interesting to see whether those losses continue through the day. But certainly Google's beacon at the bow of the global economic ship is flashing far more red warnings than they were even just a few weeks ago.

J.D. DURKIN: Alright, let's talk Microsoft  (MSFT) - Get Free Report now. That company faring better on earnings and revenue forecasts. However, we talked about cloud revenue yesterday here on the show. Microsoft did report weaker than expected cloud revenue. What more did we learn there from Microsoft when they reported?

MARTIN BACCARDAX: Really it was about the cloud, I think J.D. The fact that they saw Azure growth rate, their key hybrid cloud product inside the intelligent cloud division slowing down to about 35%. They expect it to slow further on a constant currency basis as well. In other words, stripping out the impact of the rise of the U.S. dollar. So they can't pin it all to the fact that the greenback is up about 17% to 20% compared to last year. They are seeing weakness in spending from companies who not only are pulling back on ad spend but also on investment plans.

Now, there could be an argument to be made that cloud is probably a more efficient use of capital. And therefore, when companies begin to sort of tweak and calibrate their budgets heading into 2023, they will probably accelerate. And bookings were reasonably solid, it has to be said, for Azure and the broader cloud division excuse me, cloud division. But nonetheless, those slowing growth rates, which have been pegged very specifically against the value of Microsoft stock, were certainly important and very much in focus for investors last night. It's probably why, alongside the muted growth forecast for the company's fiscal second quarter, which ends in December, that you're seeing such a big decline of the stock today. It's an expensive stock for the most part, it has been leading the Big Tech names, even though they've all been significantly lower this year. So I think, again, the assumption, if you were pinning your valuation on what you are seeing in cloud and Azure and you're seeing those growth rates decline, you simply have to recalibrate your assumptions for the stock price. And again, that's probably why you're seeing a bit of an overreaction today by Microsoft stock.

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