Markets have been quick to give a thumbs-up to any tech earnings report that signals short-term business trends aren't as bad as feared. And in that respect, Alphabet (GOOGL) , Facebook (FB) and Microsoft (MSFT) each delivered the goods this week.
But a better-than-feared performance doesn't necessarily mean that a company isn't feeling any major ill effects from an environment such as the current one. And it also doesn't mean that things can't potentially become worse.
Alphabet initially rose post-earnings on Tuesday thanks to a revenue beat, and it significantly added to its gains after CFO Ruth Porat shared some color about how business has been trending in recent weeks.
Specifically, Porat indicated that Google's search ad business (still by far its biggest profit source) was declining by a mid-teens annual percentage at the end of March, and (importantly) that it hadn't seen any further deterioration in April. She also mentioned that YouTube's ad sales were still growing by a high-single digit percentage at the end of March, and that the Google Cloud unit and Google Play continue performing well.
Facebook, which is up over 4% post-earnings today, managed to one-up its fellow online ad giant. In addition to beating Q1 revenue estimates and reporting strong user growth, Mark Zuckerberg's firm said its ad sales have been roughly flat on an annual basis in April, as strong demand from advertisers in verticals such as gaming, e-commerce and tech helps offset major declines in verticals such as travel and auto.
(As an aside, Twitter's (TWTR) 8% post-earnings drop shows what can happen when a company doesn't put to rest concerns about its April performance. Though it beat Q1 revenue estimates, Twitter, which was dealing with ad execution issues going into this year, went out of its way on its call to avoid saying anything about April revenue trends.)
But while investors liked Facebook's April commentary, Zuckerberg did caution on the call that he remains "very concerned" that the economic fallout from the COVID-19 pandemic "will last longer than people are currently anticipating." And CFO Dave Wehner pointed out that current Q2 GDP forecasts raise the possibility that we'll see "an even more severe advertising industry contraction" than what has been witnessed to date.
Likewise, Porat qualified her comments about March and April revenue trends by saying that she wouldn't want analysts to extrapolate Q2 sales expectations "from just a couple of weeks."
For its part, Microsoft, whose biggest revenue streams are very different from Google and Facebook's, easily beat March quarter revenue estimates while reporting solid double-digit growth for many key businesses, including Office, Azure, Dynamics, server software and Windows business license sales. The company also issued June quarter revenue guidance that was roughly in-line with analyst estimates and implied 8% annual growth at its midpoint.
However, it's worth keeping in mind here that -- as is the case for many software peers -- a lot of Microsoft's revenue in any given quarter stems from contracts that were signed earlier, with the revenue in some instances already billed and paid for. Revenue related to software subscriptions, Azure contracts and software maintenance contracts fit this description.
And on Microsoft's call, CFO Amy Hood cautioned that "changes to [Microsoft's] sales dynamics" have been impacting deal activity for various businesses, particularly among companies hard-hit by COVID-19. There are some parallels here with what IBM (IBM) (admittedly a company that hasn't been executing as well as Microsoft) shared on its Q1 call.
Hood also said there has been a slowdown in Microsoft's "transactional" software sales, particularly among small and mid-sized businesses, and that a weak job market is hurting LinkedIn's recruiting solutions business.
None of this changes the fact that some key Microsoft businesses, including Azure, Windows, Xbox and Surface, are doing quite well in the current environment, as COVID-19 lockdowns boost notebook sales, gaming activity, collaboration app usage and public cloud consumption. Just as Google and Facebook's ad sales pressures don't change the fact that their ad businesses are also benefiting from strong e-commerce activity and greater user traffic, and could very well leave this downturn in stronger competitive positions than when they entered.
But with Google, Facebook and Microsoft's shares up sharply from their March lows, risk/reward also matters a lot here. Investors need to balance the encouraging and better-than-feared disclosures that each company made with the more cautious remarks that were also shared.
