Microsoft’s Q4 earnings ‘weren’t that bad’, analyst says

Bob O’Donnell, TECHnalysis Research President and Chief Analyst, joins Yahoo Finance Live to discuss Microsoft earnings, Google earnings, and the outlook for Big Tech.

Video Transcript

- Welcome back to Yahoo Finance Live. Big tech earnings continue to be in focus. We're watching shares of Microsoft, as well as Alphabet, closely today. Microsoft posting slowest sales growth since 2020, while Alphabet got a bit of a lift from strong revenue in its search business, despite the company missing on the top and bottom lines.

Let's bring in Bob O'Donnell, president and chief analyst at TECHnalysis Research. Bob, we had a guest on in the last block who said, well, these weren't really great earnings, but you're actually saying it's kind of the opposite. Aside from the FX hit with Microsoft, the numbers weren't so bad.

BOB O'DONNELL: They really weren't that bad. And you look-- think about it. Again, these are huge numbers, and they're still growing on huge numbers. And yeah, we saw-- we saw IBM last week had the FX hit. We saw Google talk about it. I'm sure we're going to hear some of these other big tech players talk about it. But all in all, I mean, the thing to remember is, unfortunately, a lot of people tend to throw big tech together. And we do have to think about it a little bit differently, right, because a company like Microsoft has really got a lot of enterprise focus.

And businesses are going to continue to invest in technology for the foreseeable future in a significant way, right? Cloud computing itself, of course, is going to be a big part of it. Windows and PCs, yes, we saw a little bit of a slowdown, but we learned during the pandemic that the PC is an incredibly important device. So that business is going to continue as people eventually start to replace the machines they bought at the beginning of the pandemic. Yes, is it going to balance out a little bit? Sure, it will. But long-term, there's still opportunity there, software-related, as well.

So to me, the biggest takeaway from the earnings call was, of course, that forecast. And that forecast spoke a lot not only, I think, to the confidence that Microsoft has in their own business, but I think it also speaks, to a certain degree, to that bigger enterprise technology story. And we saw that a little bit out of Google, of course, with their cloud business. They're struggling to get there. They're building up-- remember, they're number three, so it's a little bit harder for them. But I think we're going to see Amazon likely have very strong AWS. Consumer could be a little bit different. Apple, of course, always be interesting to watch, as well.

But the bottom line is I think we need to be careful not to throw together, you know, Twitter and Spotify and-- Shopify, excuse me-- and some of the consumer tech types of companies with the really bigger, traditional tech companies. I think they're very different animals and they need to be thought about differently.

- Well, and Bob, you could argue that we already saw those declines last week, you know, Microsoft and Alphabet kind of both getting lumped in after we saw Snap report. And so maybe that's kind of the bounceback we're seeing today. Specifically on cloud, we did hear Satya Nadella talk about the investments that are being made. He said Azure is actually deflationary, in part because he thinks that companies are going to lean on the cloud even more when they're short-staffed, when they need to save on costs, as well. Do you buy that argument?

BOB O'DONNELL: I think there's some truth to it. I mean, there's a little-- you've got to take a little bit of that with a grain of salt, of course, because he's got his own interest there, but the truth of the matter is a lot of the reasons why people are moving more of their workloads to the cloud and trying to figure out how to modernize their businesses is because there are long-term savings involved. Now, there's a lot of the economics of how cloud computing works that gets very complicated very quickly, which makes it hard to easily decipher.

But fundamentally, again, as companies recognize, if they're going to stay competitive in the modern era, as they continue to deal with the post-COVID world and how people are working and where they're working and all these kinds of things, the ability to drive more of that to a cloud environment, balanced, oh, by the way, by some of that cloud computing capability, even being within the walls of traditional companies, that notion of what's called the hybrid cloud, that's where you're going to continue to see a lot of growth. So I do think there's opportunity there. And I don't think Nadella is wrong in saying it's, to some degree, deflationary.

- Bob, let's talk about what we saw with Alphabet. We got some strength coming through on their search business. They talked about the searches they're seeing in travel and retail. But YouTube a big disappointment here, their growth just at 5% compared to where we were a year ago. This comes on the back of those concerns around advertisers going to these platforms. What's your read into that and how much of this is specific to Google?

BOB O'DONNELL: Well, I think advertising-related companies in general are going to face this. We're obviously seeing this happen with social media. I think we're going to see other digital advertising-based companies, which, to be honest with you, have always had somewhat, I would argue, less solid business models in the long run because they've always been based on these crazy expectations for growth, I think that the reality is kicking in for some of them. So in the case of YouTube, obviously there's a huge amount of competition from other social platforms.

You know, and it's interesting, myself, I mean, like a lot of people, watched a lot more YouTube during the pandemic, and I'm finding I'm watching a lot less of it. I'm kind of tired of it. I'm done with that. You know? And I think there's a lot of sense of that. And I think that's been a concern. And again, it being advertising-driven.

On the other hand, am I searching less? Of course not. I'm searching as much, if not more, right? And just the idea is that certain principles and certain capabilities, certain technologies are absolutely essential and people are going to continue to use them, and other things, they start to waver over time. And I think that's a tiny example of what we can expect to see with other types of companies, other types of technologies over time.

Certain things are going to weigh themselves out as being more important longer-term, and other things are what we're going to see are perhaps not quite as much. So I don't think it's Google-specific. I think it's part of an overall picture around how people are consuming media, the platforms they're using, and frankly how their lives are evolving as people starts to travel more and do other things.

- Bob, you mentioned the concerns around some of these companies that are very reliant on those ad dollars. A big one coming up today, Meta. And this comes at a time, to your point, where I think a lot of investors are trying to differentiate big tech by looking at very company-specific stories. I mean, if you look at more consumer-facing names like Meta, how does it compare to another one like Apple that is still consumer-facing, but still has a pretty strong balance sheet?

BOB O'DONNELL: Yeah, well, I mean, the thing about Meta is so much of it is, in fact, advertising-based. I mean, their hardware business with Oculus is a tiny fraction of what they're doing, whereas Apple's hardware business is a huge part of their story. And people are buying devices. They're not buying them as quickly as they did, and they're holding on to things like their iPhones longer than they used to.

But the Meta story isn't nearly as well-balanced. I think that's the other thing. If you look at Alphabet, if you look at Microsoft, if you look at Apple, they're pretty well-balanced in terms of they have a lot of money and revenue coming from different places. It's not as anywhere that that is the case, excuse me, with Meta.

It's much more biased towards the ad revenue. And that's where things start to get difficult, is, like you said, if you look at it company by company and look at the revenue splits and the breakdowns, you start to see that there's some more obvious concerns that are going to be risen. And again, companies who are more well-balanced, have that business spread across a lot of places, I think you're going to see are going to be better in the long run.

- Yeah, so far Meta up nearly 5%. We'll see if those gains hold after the numbers come out. Bob, always good to have you on. Bob O'Donnell, TECHnalysis Research and president-- Research president and chief analyst.