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Tech giants’ results have turned out better than investors feared, but high valuations are hard to explain

Autor: Article based upon analysis from Reuters Breakingviews
2 min

Microsoft and Alphabet both reported financial results for the first quarter of 2023 that came above analysts′ expectations. The tech giants’ results cleared the low bar of being better than investors feared.

But neither company exhibited the kind of high-speed growth that made them juggernauts. Talking about uncertain future gains from artificial intelligence is a way for management to reignite excitement and prop up company valuations.

Microsoft reported that revenue for the quarter ended March 31 was $52.9 billion, up 7% from the same period a year earlier. Compared to the previous quarter, revenue was flat. The company earned $18.3 billion, or $2.45 per share, compared with $16.7 billion, or $2.22 per share, a year ago.

Plummeting sales of PC have hurt Windows operating system revenue. Even previous growth stars, LinkedIn, the social network aimed at professionals, and Azure, the cloud platform, slowed their growth.

Alphabet, Google’s parent company, also reported results. Revenue was $69.8 billion, up 3% from the same period a year ago. The company earned $15 billion, or $1.17 per share, compared with $16.4 billion, or $1.23, a year ago. Alphabet had to spend $2.6 billion on employee and job cuts during the quarter.

The company also added $70 billion to its buyback program, an easy way to get Wall Street on its side.

The numbers beat analysts’ low expectations, according to Reuters, in a tough economic environment. That was enough to push both stocks higher in after-hours trading.

But keep in mind that Microsoft is trading at 27 times next year’s estimated earnings, about double what it was in 2014 when Satya Nadella became chief executive.

Alphabet trades at 20 times, which is still substantial for a company whose development has essentially stalled. It may be difficult to sustain these high valuations unless it sees strong revenue growth.

That probably explains why both companies can’t wait for the promise of artificial intelligence to become a reality. Nadella needed only five words to mention this in his comments on Microsoft’s earnings release.

Sundar Pichai, his counterpart at Alphabet, limited himself to his second sentence. Rapid advances in chatbots like ChatGPT, developed by Microsoft’s partner OpenAI, have captured the public imagination and, according to their proponents, promise to radically improve existing markets like search and create huge new ones.

How quickly this will be reflected in the two companies’ balance sheets is unclear. But given that results are modest at the moment, it’s a pleasure for both company executives and investors to dream of AI profits soon.