Microsoft Rises, Alphabet Falls: ‘Not All Technology Stocks Are Created Equal’

Alphabet

stock (ticker: GOOGL) was heading the other way, falling after the parent company of Google posted first-quarter sales that missed analysts’ expectations. To blame was slower advertising growth in the quarter and a sales slowdown at YouTube. Chief Financial Officer Ruth Porat said revenue growth at Alphabet’s advertising business will face a tough comparison in the second quarter. The results will also reflect the suspension of commercial activities in Russia, Porat added.

Microsoft was rising 4.7% to $282.91 on Wednesday. The stock has fallen almost 16% year to date. Alphabet fell 3.5% to $2,291. It has tumbled nearly 21% this year.

“Microsoft’s earnings beat and Alphabet’s earnings miss suggest investors should be selective within the technology sector,” said Ryan Belanger, managing principal and founder of Claro Advisors, a Boston wealth management firm. “Not all technology stocks are created equal and not all megacap tech stocks are created equal.”

Revenue in Microsoft’s fiscal third-quarter rose 18% to $49.4 billion. At its Intelligent Cloud segment, which includes the company’s Azure cloud business, revenue was $19.1 billion, up 26% from a year earlier and higher than Wall Street estimates of $18.89 billion. The Azure cloud computing business grew 46% in the quarter, or 49% in constant currency.

Microsoft Chief Financial Officer Amy Hood said on the company’s conference call that Azure revenue growth would slow only slightly in the fourth quarter—to about 47%, which would still be above analysts’ projections.

Analysts at RBC Capital Markets said Microsoft’s guidance for the fourth quarter was “solid, which should allay investor fears of a macro slowdown.”

RBC maintained its Outperform rating on the stock and price target of $380.

Wedbush’s Dan Ives said Microsoft “gave a robust cloud guidance ‘for the ages’ that will calm Street nerves …and was a bullish data point for MSFT and importantly the whole tech sector moving forward.”

Wedbush maintained its Outperform rating on Microsoft but lowered its price target to $340 from $375, “reflecting a lower multiple,” Ives said.

Revenue at Alphabet’s YouTube was $6.87 billion in the first quarter, which was well below analysts’ forecasts of about $7.5 billion. RBC analysts called YouTube’s second miss in a row “the main controversy.”

YouTube experienced slower growth of direct-response ads, which had a lot to do with “IDFA headwinds,” the analysts said.

Apple

has defanged a feature on its platform known as IDFA, or Identifier for Advertisers, which assigned a unique designation for every device, making it easier to track visits to various apps and websites.

RBC analyst Brad Erickson also highlighted YouTube’s battle with TikTok, saying that the popular video app will “continue to be viewed as a key disrupter in the space.”

Erickson rates shares of Alphabet at Outperform with a price target of $3,420. Despite the first-quarter sales miss, the company “is as well-positioned as anything in the space to continue showing strong, profitable growth at scale with a rising commitment to return capital to shareholders,” the analyst said.

Write to Joe Woelfel at joseph.woelfel@barrons.com