Cloud Tech Earnings Send Mixed Messages

It's been a bit of a grim season so far for cloud technology shares. Although some earnings surprised to the upside -- such as those from Microsoft and Facebook -- disappointing results from Google, Corning, and others have been indicating a general market slowdown.

This can be seen first from a straight share price perspective, as technology stocks have been hammered in recent weeks on a number of concerns, including: the war in Israel, uncertainty about the U.S. government and budgets, rising interest rates, and questions about growth in 2024. The general vibe is that people are growing more cautious.

For a few examples, take a look at some of the bellwethers in the cloud tech landscape: Google shares have lost 12% of their value last week, Amazon shares lost 8%, and NVIDIA shares are down 8%. Microsoft, which reported strong results in its cloud business, have emerged relatively unscathed -- flat on the week and up 5% in the past month.

Let's take a look at some of the highlights.

Corning Scares the Infrastructure Market

Corning shares may not be as widely followed as they were during optical boom times, but as one of the world's leading fiber suppliers, it's an important indicator of what's going on in the infrastructure market -- where fiber is used for pretty much all major bandwidth.

In reporting results this week, the company missed revenue estimates by $50 million and earnings per share (EPS) came in light at 45 cents, rather than the 47 cents estimated. The company also lowered its fourth-quarter guidance from $3.6 billion to $3.25 billion.

Corning shares have actually recovered after the disappointing news, but Corning CEO Wendell Weeks was clear that demand has weakened: "... weak customer demand has put us consistently at the lower end of our sales expectations over the last year even as we are outperforming on price and productivity plans," said Weeks on the conference call. "More importantly, we are well below the trend line for our operations profile."

This reinforced a theme across the board, in which communications companies and suppliers such as Adtran and Calix traded down on weakening results and perceptions that the communications infrastructure market is slowing significantly.

According to analyst George Notter, with Jefferies, much of the problem can be attributed to bloated inventory:

"Per our checks at the Fiber Connect trade show in August, we knew this was going to be tough. There’s excess inventory at multiple levels across the industry: 1) in Service Provider warehouses; 2) in the Distribution channel; and 3) Finished Goods in the equipment vendors themselves. Most industry folks believe the excess inventory lingers through 1H’24."

Cloud Is Cooling, but Microsoft Gains

Microsoft and Alphabet’s earnings couldn't be more divergent. Microsoft’s impressed and Google disappointed, leaving the impression that Microsoft could be increasing its lead over Google in both the cloud and AI segment.

Microsoft reported revenue of $56.5 billion, up 13% from a year ago, and $2 billion ahead of consensus analyst estimates. The company reported EPS of $2.99, ahead of EPS estimates of $2.65. The Azure cloud business grew 28%, ahead of the company's forecast for growth of 25% to 26%. Microsoft cloud revenue was $31.8 billion, up 24%.

Microsoft attributes its cloud success to a general infusion of artificial intelligence across all of its products. "Higher than expected AI consumption contributed to revenue growth in Azure," said CFO Amy Hood on the earnings call, referring to the addition of multiple foundation models to Azure. Azure sales also benefited from the addition of Oracle databases to the cloud service.

Meanwhile, Alphabet, Google's parent company, reported numbers that beat estimates -- but shares sold off on slower cloud growth and a disappointing outlook for advertising. Google reported revenue of $76.69 billion, up 11% from a year ago, beating a forecast of $76 billion. The company reported EPS of $1.55, nine cents better than estimates. Google Cloud revenue in the quarter was $8.4 billion, up 22%, but that fell short of analyst consensus estimates of $8.6 billion. It's also a marked slowdown from the growth of 28% in the previous quarter.

Google's slowing growth rate indicates that Microsoft still appears to be taking share from Google and extending its lead in cloud infrastructure and services. The technology earnings calendar is loaded with reports this week, including Arista networks, Qualcomm, and Apple.

Amazon, on the other hand, gave investors good news which has lifted shares 10% over the past week. Amazon reported cloud growth of 12% for its third quarter of 2023, which is the first time in four quarters that it's growth rate hasn't declined -- its growth rate in the second quarter was also 12%.

Overall, Amazon reported $143.1 billion in revenue, up 11% year over year; $11.2 billion in operating income, up 343% year over year or $8.7 billion; and $20.2 billion in trailing 12-month free cash flow adjusted for equipment finance leases, up $41.7 billion versus the comparable period last year.

CEO Andy Jassy had some upbeat things to say about the fourth quarter:

"... we're encouraged by the strong last couple of months of new deals signed. For perspective, we signed several new deals in September with an effective date in October that won't show up in any GAAP reported number for Q3, but the collection of which is higher than our total reported deal volume for all of Q3.

Summing things up: Earnings have so far been mixed, but not a disaster. The overall cloud market seems to be absorbing higher growth and higher interest as companies focus on cost optimization. There is still cloudy visibility for 2024, as the market remains concerned about many issues including global conflicts in Israel and the Ukraine, slow growth in China, high interest rates, and business uncertainty.