Microsoft, Alphabet, and Meta report results

Key Concepts

• Alphabet (Google) Q3 Earnings: Revenue beat estimates, driven by strong ad performance and cloud growth. Capital expenditures increased significantly, reflecting AI investments.
• Microsoft Q1 Earnings: Beat on revenue and cloud, but stock initially dipped. AI infrastructure demand and a partnership with OpenAI are key drivers.
• Meta Q3 Earnings: Revenue and ad revenue beat expectations, but a significant tax charge impacted EPS. Increased capex for AI and a mixed outlook on hardware (VR vs. glasses) were discussed.
• AI Impact: AI is presented as both a tailwind and a threat across these tech giants, influencing infrastructure spending, product development, and competitive dynamics.
• Digital Ad Market: The large platforms (Google, Meta, Amazon) are expected to continue seeing momentum, while smaller players may lose share.

Alphabet (Google) Q3 Performance

Revenue and Profitability:

• Q3 revenue exceeded estimates, reaching $102.35 billion, surpassing the expected figure of just under $100 billion.
• Operating income, however, missed expectations.
• EPS (Earnings Per Share) beat expectations at $2.87, compared to the forecast of $2.26. Without this beat, it would have been Alphabet's slowest profit growth in over two years, partly due to an EU antitrust fine.

Key Business Segments:

• Google Ad Revenue: Performed significantly better than expected, with overall Google ad revenue at $74.18 billion versus an estimate of $72.46 billion. YouTube ad revenue also came in slightly better than expected.
• Google Cloud: Showed strong performance, with revenue of $15.16 billion, beating the street's estimate of $14.75 billion. This growth is attributed to a number of AI deals, including those with Meta, Anthropic, and even OpenAI.

Capital Expenditures (CapEx):

• CapEx spend is ramping up significantly, reaching nearly $24 billion, exceeding the estimate of just over $22 billion.
• The full-year CapEx forecast has been raised to $91-$93 billion, a substantial increase from the previous $85 billion estimate. This increased spending is largely directed towards AI data centers.

Stock Performance:

• Shares were up approximately 4% in after-hours trading following the earnings release.
• The stock had already rallied significantly, up about 40% year-to-date heading into the report, and added nearly 6% in after-hours trading.

AI and Competition:

• AI is viewed as both a tailwind and a threat. The competitive pressure from OpenAI on Google's search business is acknowledged.
• However, Google's Gemini AI models and its AI infrastructure deals through Google Cloud are boosting optimism.

Analyst Sentiment:

• Many analysts are bullish on Alphabet, with price targets as high as $300 per share. The stock is nearing $280-$290 per share.

Microsoft Q1 Performance

Revenue and Profitability:

• Q1 revenue was $77.67 billion, beating the street's consensus of $75.55 billion.
• EPS was $3.72, though a year-over-year comparison was not immediately available.

Key Business Segments:

• Azure and Other Cloud Revenue (excluding FX): Grew by 39%, exceeding the street's consensus of 37.1%.
• Intelligent Cloud (overall): Reached $30.9 billion, ahead of the street's estimate of $30.18 billion.

Stock Performance:

• Initially down about 4% in aftermarket trading, later settling around 2-3% lower.

AI and Partnerships:

• Analysts cited stronger enterprise tone and accelerating AI infrastructure demand from partners like OpenAI.
• Microsoft holds a 27% stake in OpenAI's new for-profit public benefit corporation, valued at roughly $135 billion.

Guidance:

• Forward-looking guidance is expected from CFO Amy Hood on the earnings call.

Competitive Landscape:

• The Azure outage earlier in the day served as a reminder of internet dependency, similar to a recent AWS outage.

Meta Q3 Performance

Revenue and Profitability:

• Q4 revenue forecast is between $56 billion and $59 billion, largely in line with the estimate of $57.38 billion.
• Reported a nearly $16 billion non-cash charge on a tax bill.
• EPS was $1.05, a significant decrease year-over-year from $6.30, largely due to the tax charge.
• Ad revenue beat expectations at $50.08 billion versus an estimate of $48.6 billion.
• Operating income was up 18% year-over-year.

Key Business Segments:

• Reality Labs Revenue: Saw lower year-over-year revenue in Q4.

Capital Expenditures (CapEx):

• Full-year CapEx is now projected between $70-$72 billion, a slight increase from the previous $66-$72 billion range.
• Investors are seeking clarity on the return on investment (ROI) for this CapEx spend, particularly for "super intelligence" investments.

Stock Performance:

• Shares experienced a significant drop, down around 7% initially, and later around 6.5%.

AI and Investment Strategy:

• Meta is using AI to boost engagement and ad revenue.
• There's a debate among investors regarding the significant CapEx spend on AI, with some bullish on its impact on engagement and ad business, while others seek clearer monetization strategies for non-core AI investments.

Hardware:

• Enthusiasm for the "glasses" (sunglasses initiatives with Ray-Ban) is noted.
• Less clarity on the mass market adoption potential of VR.

Analyst Perspective (Aaron Kessler):

• Remains bullish on Meta, citing expected strong revenue growth (20%+ ad growth in Q3 and Q4, mid-teens topline growth for advertising in 2026).
• Believes valuation is still undemanding on a GAAP earnings basis, projecting around $30 of GAAP earnings in 2026.
• Catalysts include continued strong revenue growth and option value from AI investments.
• Risks include the tax hit, increased expenses, and the uncertainty around ROI on non-core AI CapEx.

Digital Ad Market Outlook

• Large Platforms (Google, Meta, Amazon): Expected to continue seeing good momentum.
• Smaller Players: May be losing share.
• Reddit and Amazon: Expected to have strong results in their advertising businesses.
• Overall, advertising is expected to continue gaining market share.

Upcoming Events and Data

• Thursday, October 30th:
  • Earnings: Apple (iPhone sales, China vs. US performance, guidance, tariffs impact of $1.3 billion this quarter and up to $2 billion next quarter) and Amazon.
  • Fed Commentary: Fed Vice Chair for Supervision Michelle Bowman. Fed Chair Jerome Powell indicated differing views on future rate cuts, with a December cut not a foregone conclusion.
  • Housing Data: Weekly interest rates from Freddie Mac (30-year fixed at 6.19%). Mortgage rates have dropped for three consecutive weeks.
• Post-Break Earnings Coverage: Starbucks and Chipotle.