It’s earnings season, that time of the quarter when we get to judge how well public tech firms are fulfilling all the lofty promises they’ve been making. So far this week, we’ve heard from Microsoft and Alphabet (Google) and Meta (Facebook), among other names.
While results from companies like Roku and Spotify hold interesting information about particular segments of the consumer tech market and the health of advertising demand more generally, the sheer extent of Big Tech’s reach means their results bring a sheaf of color to our understanding of the current tech and business worlds.
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What have the majors shown us this week? The most important trend we’ve gleaned from three of the American big five (we’ll hear from Amazon later today and Apple next week) is their very moderate pace of trailing growth.
Investors were largely mollified, if not downright pleased, by these results. Both Alphabet and Microsoft are each up a few points in early trading, and Meta is up nearly 15% after it managed to pleasantly surprise investors, who expected it to post another quarter of slowing revenues.
We’ve spilled more ink than I want to recall covering investors’ new preference for more profitable growth instead of crazy, unprofitable growth. Mostly, we’ve discussed that in reference to startups, but in the case of these tech giants, things get a bit more nuanced. That said, it’s clear that trimming costs and investing in growth are efforts that make investors happy.
3%, 3%, 7%
Given that we often hear of startups bearing growth expectations in the triple digits, it may be surprising to assume that roughly $4 trillion in market cap across three companies could be defended with revenue growth in the single digits, but here we are.
Alphabet’s 3% rise in revenue was driven by Google Cloud’s top line increasing to $7.5 billion from $5.8 billion a year earlier. Search grew by less than $1 billion to $40.4 billion, while Google Network and YouTube advertising incomes dipped.
Why are investors content with this mixed set of numbers from the company’s biggest businesses? Well, everyone already knows that the advertising market is weak these days, and seeing Google Cloud flip to positive operating income from a $701 million operating loss a year ago was enticing. Alphabet also spent a lot of time talking about AI, and right now, investors love AI.
Meta’s quarterly results are slightly funnier. The company’s expenses rose faster (10%) than its revenue (3%), so its operating income dipped just as its operating loss from its metaverse efforts widened to nearly $4 billion from around $3 billion a year ago. But what investors cared about was that the company posted some kind of growth after several quarters of a shrinking top line.
And if you consider the continued, if modest, expansion of its user base and the slight decline in headcount, it seems fair to say that Meta will retain its ability to repurchase its stock at a rapid pace ($9.22 billion in Q1 2023, with $41.73 billion left). That’s good news for investors because buybacks increase how much value each share carries, and when crossed with a bit of operating leverage in terms of revenue per employee, the stock is positively investor catnip. Meta capped off the quarter by forecasting better Q2 revenues than analysts expected, and up went the stock.
Next, we have Microsoft. The company spent a good chunk of its earnings call discussing its various AI efforts, which includes AI services it sells to other companies via its public cloud and the use of AI in its own products and services. Microsoft reported more operating income in the quarter compared to a year earlier, unlike Meta and Alphabet, which means Microsoft grew more rapidly than the others while also becoming more profitable.
Given the sheer number of categories Microsoft competes in, we can’t go too deep into its results without exploding our word count. Suffice it to say that Microsoft saw the most growth in areas of investor interest (cloud, SaaS) in the quarter, and the declines were found in more mature categories (Windows) or smaller efforts that don’t play a big role in driving growth at the company (devices).
In fewer words, Microsoft grew where it matters.
Before we condense all of that into a set of viewpoints that we can apply to startups, let’s talk about the cloud.
Google Cloud grew 28% and Azure expanded by 27% in the quarter, if you count some other items. Given the size of those businesses and their respective growth rates compared to the overall revenue expansion at both companies, you can see why investors and operators alike are so focused on their performance.
We’ll have more on cloud growth after Amazon posts its results, but given what we know, it’s not too early to say that without public cloud spend rising, Alphabet and Microsoft would have seen their already modest growth rates being diminished dramatically.
So what?
It’s a somewhat boring point to make, but the changes in investor preference we’ve been hearing about in the venture community appear to apply to the biggest tech companies as well. Growth matters, but given the slack macroeconomic environment, smaller numbers are OK so long as there are clear factors driving both revenue and profit in the future.
Startups shouldn’t feel unfairly maligned, in other words. They are not expected to announce 11-figure buybacks or return cash to shareholders at all, but the same mix of cost-efficiency and forward-looking focus that venture investors are looking for is what’s being cheered on in the public markets as well.
How can we say that if Alphabet and Microsoft’s shares aren’t screaming higher this morning? Simple: Before market open today, shares of Alphabet were up around 16% from the start of the year, while Microsoft had gained more than 23%, and Meta’s been enjoying a stonking 68% rise; those figures have all improved since the start of the formal trading day. Even a small bump to preceding gains is a win in today’s business environment, where we’re talking more about down rounds and layoffs than about exuberant growth.
For startups, that means that a focus on slashing burn alongside continued growth is the ticket for being venture-ready while private, and potentially, public-markets-ready in the future.
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