What happened
The gut-wrenching roller-coaster ride that began last year continued for investors today, with a broad cross-section of stocks losing ground. The economy was a big question mark going into earnings season, and investors have been waiting to see if technology companies would be resilient or feel the further effects of the bear market. The weak results of one tech titan seemed to provide a clue, and investors headed for the exits.
With that as a backdrop, shares of several cloud computing stocks fell hard on Wednesday, as Amazon (AMZN -1.64%) stock was down 1.9%, Alphabet (GOOGL 0.55%) (GOOG 0.74%) fell 3.9%, and Snowflake (SNOW 2.53%) slumped 4%, as of 11:22 a.m. ET.
There was very little in the way of company-specific news behind the sell-off, but fears regarding the faltering economy intensified as results from Microsoft (MSFT 0.37%) convinced investors that things will get worse before they get better.
Image source: Getty Images.
So what
For its fiscal 2023 second quarter (which ended Dec. 31), Microsoft reported revenue that grew just 2% to $52.7 billion. At the same time, earnings per share (EPS) of $2.32 fell 6%. The results weren't too bad, as analysts' consensus estimates were calling for revenue of $53 billion and EPS of $2.29.
At first glance, the results offered investors hope, particularly given the resilience in two of its three biggest segments. Revenue from its productivity and business processes segment grew 7% to $17 billion and would have been up 13% but for foreign currency headwinds.
The intelligent cloud segment grew revenue to $21.5 billion, up 18% and 24% in constant currency. The lone laggard was the more personal computing segment, as revenue tanked 19% to $14.2 billion, or down 16% in constant currency.
Investor enthusiasm evaporated, however, when Microsoft issued a downbeat forecast, saying that some of its enterprise customers are beginning to rein in spending. The company is expecting third-quarter revenue of $51 billion at the midpoint of its guidance, $1 billion short of analysts' consensus estimates of $52 billion.
Perhaps most concerning was the company's comments that growth of its Azure Cloud -- which has been the company's biggest growth engine in recent years -- would slow by 4% to 5%, down from its current growth rate of 31% (38% in constant currency). This would mark Azure's lowest growth rate in years.
Now what
That last bit of news represents serious implications for other cloud computing companies, including:
- Amazon Web Services (AWS) is the worldwide cloud infrastructure leader, controlling 32% of the market in the third quarter, according to Canalys. This suggests that Amazon has the most to lose as companies pull back on cloud spending. Furthermore, AWS generated 16% of Amazon's revenue and all of its profits during the first nine months of 2022.
- Alphabet has already been hit by a decline in digital ad spending -- which represents the lion's share of its revenue. In the third quarter, Google ad sales grew just 2.5%, while Google Cloud grew 38%. Microsoft's results suggest its cloud growth could suffer, meaning there's more pain to come for Alphabet shareholders.
- Thus far, Snowflake appeared to be largely immune to the macro headwinds, as its third-quarter revenue -- which is all cloud based -- grew 67% year over year to $557 million. Investors now fear that a broad slowdown in cloud spending will melt Snowflake's ongoing growth spurt.
While this news might seem dismal, downturns are a normal part of the economic cycle, with peaks and valleys changing places almost daily.
Furthermore, with stocks at multiyear lows, valuations are the cheapest they've been in years. For example, Amazon stock looks particularly appealing right now, with a price-to-sales ratio of less than 2, putting it squarely in bargain-basement territory. Alphabet boasts an only slightly more expensive 4 times sales. Snowflake is the frothiest of the trio, selling for 23 times sales. This high valuation also helps explain why Snowflake was among the hardest hit today.
Investors with a three-to-five-year outlook may want to start adding to industry leaders like Amazon while they're down. That's not to say things couldn't get worse, as Microsoft's results today suggest they could. That said, calling a bottom is notoriously hard, and fortunes are often made by intrepid investors braving bear markets.
