Google and Microsoft Earnings Disappoint; Stock Prices Fall Back

Before you go, we thought you'd like these...
Before you go close icon

Both Google and Microsoft headed into this Thursday's earnings reports on a full head of steam. Investors in the two tech giants saw signs of recovery three months ago, and the stocks have been crushing the S&P 500 in 2013. In particular, Google investors looked forward to the potentially powerful impact of an improved advertising model, known as "enhanced campaigns." For Microsoft, the positive story focused on the recent restructuring effort and a strong push into mobile computing.

GOOG Total Return Price Chart

GOOG Total Return Price data by YCharts


Well, the reports have been filed, and the stocks took a collective haircut. Google shares dropped as much as 4.6% on the news, while Redmond lost a massive 10% of its value overnight.

For Google, the enhanced campaigns sure played a big part -- but in the wrong direction. The company is migrating all of its advertising customers to the new model at "breakneck speed," and massive changes tend to hurt in the short term.

Early adopters are reporting good results from their new-and-improved ad campaigns, which combined the separate tools for browser-based and mobile ad placements into one. The new model also promises to increase targeting and control, giving advertisers a more efficient way to reach the right potential customers. But Google didn't expect this change to boost its own results overnight. Instead, chief business officer Nikesh Arora characterized it as "a big long-term bet."

For Microsoft, the mobile boost never happened. Investors might have guessed as much earlier on Thursday, when Mr. Softie's most important smartphone partner Nokiawhiffed on its own second-quarter targets. Nokia shares fell as much as 5% on that report, unleashing at least three negative analyst comments, plus one outright downgrade.

On top of that weak partnership, Microsoft spent a ton of cash on manufacturing and marketing the Microsoft Surface tablet, which hasn't gained much market traction from all this effort. The company posted a $900 million writedown of unsold Surface RT tablets. At the same time, Redmond's cost of goods sold increased 14% year over year, thanks to the Surface push, but total revenue only grew by 3%.

The way I see it, Google is making appropriate long-term bets that should pay off somewhere down the road. I'm very comfortable owning my Google shares, and expect them to recover from this temporary setback very quickly.

The story is much darker in Redmond. I wouldn't mind Microsoft betting the house on mobility, if there were any evidence that the effort is paying off. But billion-dollar write-offs point to a failed strategy shift.

Maybe Microsoft would be better off doubling down on the enterprise-class software portfolio instead, leaving others to battle over consumer gadgets like tablets and smartphones. Spin-off or sell the successful Xbox operation to give it the best possible shot at rewarding investors, and let the core of Microsoft go head-to-head with IBM in the business-class sector instead.

That stragety wouldn't be as sexy as Microsoft's current emphasis on chasing consumer dollars, but there's nothing wrong with boring, predictable success. I mean, take one look at this long-term comparison between boring old IBM and unfocused Microsoft, and then tell me which stock you'd rather have owned. (Adding Google to the same chart is almost unfair, since that stock price has grown 760% over the last decade. But Microsoft clearly can't beat Big G at its own game, while it might stand a chance in IBM's court.)

MSFT Total Return Price Chart

MSFT Total Return Price data by YCharts

It's incredible to think just how much of our digital and technological lives are almost entirely shaped and molded by just a handful of companies, with Microsoft and Google among them. Find out "Who Will Win the War Between the 5 Biggest Tech Stocks?" in The Motley Fool's latest free report, which details the knock-down, drag-out battle being waged by the five kings of tech. Click here to keep reading.

The article Google and Microsoft Earnings Disappoint; Stock Prices Fall Back originally appeared on Fool.com.

Fool contributor Anders Bylund owns shares of Google. The Motley Fool recommends Google. The Motley Fool owns shares of Google, International Business Machines, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners