Microsoft’s latest quarterly earnings report fell far short of analyst expectations. The news of the tech giant clocking its slowest sales growth in over half a decade sent Microsoft’s shares down over 3%, while those of its big-tech peers, particularly the FAANG grouping (made up of Facebook parent Meta, Apple, Amazon, Netflix and Google parent Alphabet) fell as much as 4%.
Many of these companies also posted eye-popping numbers in another segment recently: layoffs. But are these troubling times for big tech, a passing phase or a cause for concern?
Michael Ashley Schulman, Founding Partner and Chief Investment Officer (CIO) at Running Point Capital Advisors says the figures can’t be ignored since Microsoft is considered a national and global bellwether for corporate technology spending, which in itself is a bellwether for global growth.
“Microsoft’s morning stock slide and the FAANG sell off in sympathy was a knee jerk reaction to reported numbers that would have been stellar for most companies but were slightly disappointing to Microsoft analysts that had slightly higher growth and revenue expectations,” believes Schulman.
Stock prices, Schulman explains, are based on forward projections, and on average analysts had hoped for over $52 billion in revenues next quarter, but management projected a slightly lower $50.5 billion to $51.5 billion in revenue.
“If a stock is priced for perfection, a shortfall may be considered a major stumbling block. However, Microsoft is already down approximately -30% from its November 2021 highs, so for a $1.8 trillion company, a significant amount of relinquishment and distress is already built into its price,” spells out Schulman.
Babar Khan Javed, the director of public affairs at Z2C Limited, a Singaporean accelerator for MarTech startups, concurs, adding that the stock price of Amazon, Meta, Google, and Microsoft has declined over the last six months.
“When comparing the average price-earnings ratio multiple over five years against the current price-earnings ratio multiple, Meta has suffered worse, with its price-earnings multiple reducing to 50% of the average five-year price-earnings ratio multiple,” says Javed.
Sign of the times
Explaining prevailing market sentiments, Javed says that market forces based on macroeconomic trends as reflected in a stock’s beta seem to be driving price fluctuations in the market more now than in the past.
“With trending geopolitical uncertainty, fear impacts valuations as much as financial analysis,” believes Javed, adding that “irrational expectations drive prices up or down based on fear or appetite for risk.”
During its earnings call, Microsoft’s CEO, Satya Nadella, said Microsoft would focus on Artificial Intelligence (AI) technology, hailing it as the next major wave of computing. This is in line with Microsoft’s recent multi-billion dollar investments in OpenAI, the startup behind ChatGPT, which it has been funding since 2019.
This makes Schulman double down on his assertion that the numbers posted by Microsoft aren’t troubling at all. “Rather just the opposite; once we get beyond any economic slump, the long-term outlook seems favorable for increased implementation of technology and generative AI to improve productivity,” argues Schulman.
But Javed isn’t having any of it. He thinks the market has unanimously given a thumbs down to the recent initiatives by big tech companies like the Metaverse, driverless cars, or AI assistants, as all of them have failed to generate a return on investment. To underline his argument, he points to the fact that most of the recent layoffs have happened in the aforementioned business divisions.
Javed thinks the stock market decline should serve as a wake up call for companies, which must realize that it’s in their best interest to inform their investors of the pros and cons of entering into new initiatives, and to set the right expectations.
“Too often, firms exaggerate to prop up the share price. When these initiatives do not deliver, they are under pressure from investors to reduce costs, resulting in apathetic layoffs that contradict sustainability claims,” says Javed.