Did Microsoft’s Guidance Call Just Kill the Rally?

Microsoft CEO Satya Nadella

Stocks opened lower today as the bear market rally lost steam. The Dow, S&P, and Nasdaq Composite all fell in response to Microsoft (NASDAQ: MSFT) earnings, revealed last night. The tech giant beat on EPS ($2.32 reported vs. $2.29 expected) but missed on revenue ($52.75 billion reported vs. $52.94 billion expected).

Cloud revenues, which analysts are viewing as Microsoft’s most important source of growth moving forward, came in at $21.51 billion, beating the $21.43 billion estimate.

“The next major wave of computing is being born, as the Microsoft Cloud turns the world’s most advanced AI models into a new computing platform. We are committed to helping our customers use our platforms and tools to do more with less today and innovate for the future in the new era of AI,” said Microsoft CEO Satya Nadella.

The EPS and cloud “beats” powered MSFT shares to a 5% post-market gain before the company’s guidance call started at 5:30 pm EST, a full hour after earnings were reported.

Microsoft finance chief Amy Hood said that the company expects $50.5 billion – $51.5 billion in fiscal third quarter revenues, which was well below the consensus estimate of $52.43 billion. If Microsoft revenues fall within their expected range, that would represent a quarter-over-quarter contraction.

Hood blamed a shrinking PC market, which should lead to a 17% year-over-year decline in the company’s personal computing business segment, for much of the coming revenue “crunch.”

As a result, MSFT shares were ripped lower after hours, erasing all of their gains before flipping negative. Today, MSFT opened even lower, dragging down the major indexes with it.

“With the bulk of earnings still in front of the market, the question as to whether the shift towards growth being signaled by recent rallies is warranted could be answered by upside earnings surprises and solid guidance,” said LPL Financial strategist Quincy Krosby.

Microsoft certainly failed to answer the call last evening. If the rest of Big Tech provides poor guidance, the rally of the last few weeks is likely over.

Texas Instruments (NASDAQ: TXN) also reported earnings last evening, sharing similarly poor guidance. Unlike Microsoft, though, the chipmaker experienced its worst sales decline since 2020. Revenue fell to $4.17 billion from $4.53 billion in the quarter prior despite Texas Instruments beating on EPS ($2.13 reported vs. $1.96 expected).

“As we expected, our results reflect weaker demand in all end markets with the exception of automotive,” said CEO Rich Templeton.

The company remains unsure as to when orders and revenue would rebound.

“I wish I knew,” remarked CFO Rafael Lizardi in an interview.

“Customers have done what they’ve done for decades, and will continue to do. They’ve built a little too much inventory. We’ll see how long that takes to work itself out.”

A clear trend has emerged this earnings season; companies are mostly beating estimates (65% of S&P companies have done so thus far) but can’t confidently provide satisfactory guidance.

Maybe it’s a simple case of lowballing so as to not disappoint shareholders when earnings are reported next quarter. There’s not a single company out there that wants to overpromise and underdeliver for their investors.

But even if that’s the case, traders still need to take guidance at face value as it’s all they have to go on. And forward guidance has almost unilaterally been disappointing for the stocks that matter.

That could all change if Apple (NASDAQ: AAPL) or Tesla (NASDAQ: TSLA) show the market something that suggests the contrary. Tesla reports this afternoon while Apple reports on February 2nd.

For now, though, bulls are feeling the heat, and should continue to be under pressure until a major Big Tech guidance “beat” saves the day.


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