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Big Tech Earnings Are On Tap. What to Expect.

Even as tech companies lay off workers, the cloud is still growing impressively. Nothing in the latest numbers suggests investors have misjudged its long-term potential.

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delivered the stock market a truck full of lemons this past week. Investors chose to see a tanker filled with lemonade. It’s a positive sign ahead of the most important week for fourth-quarter tech earnings.

We’ve come a long way. In 2022, tech stocks were crushed, as the Federal Reserve aggressively lifted interest rates. A month into 2023, the Fed seems closer to the end of its tightening cycle than the beginning, but only now are we seeing those higher rates begin to slow demand for tech goods. The result is that corporate earnings for the next few quarters could be ugly. If 2022 was all about reduced price/earnings multiples as rates ratcheted higher, 2023 will be all about reduced “E,” as demand contracts.

This coming week brings earnings reports from many of tech’s most important players, including
Meta Platforms
(ticker: META),
(GOOGL), and
(AMZN). The results should shed new light on the ad market and consumer spending trends. And they will provide fresh insights into the most important trend in enterprise technology: cloud computing.

But as the earnings flurry continues, there is an important distinction investors need to make between companies suffering from cyclical swings, and those facing structural change that could impact businesses over the long term. Investors last week logically concluded that the issues facing Microsoft (MSFT) are transient in nature. I think they got it right.

Microsoft has a diverse portfolio of software and services offerings, but the Street’s attention heading into the quarter was fully on the Azure cloud business. As it happens, Azure grew 38% in the December quarter on a currency-adjusted basis, about a percentage point better than expected.

But on Microsoft’s quarterly conference call with investors, Chief Financial Officer Amy Hood said that the growth rate had slowed to the mid-30s in December—and she projected another four or five percentage point slowdown in the March quarter. That implies a growth rate of 30%, down from the 50% range just a few quarters ago.

Investors need to watch the trend, but the problem is less severe than it might appear.

Microsoft is working with customers to optimize cloud spending, which in some cases means shifting to more traditional long-term contracts and away from the usual cloud-based consumption model. It also means that customers sticking with consumption-based models are slowing their usage growth as their own businesses slow.

But those are cyclical issues. Nothing happening would suggest investors misjudged the potential for cloud computing, though the business might be more cyclical than Wall Street expected. Jonathan Curtis, who co-manages the Franklin Technology fund, thinks there’s a $1 trillion opportunity here—and that penetration is well under a quarter of that.

Curtis told me that over the next 90 to 120 days, all enterprise tech vendors will speak to customers about the outlook, and estimates will be reduced. But he says that if you assume multiples have been reset to rational levels, that the Fed is nearly done hiking rates, and that earnings estimates are being derisked, then you have to conclude that “now is a good time to start stock-picking again.”

Curtis remains bullish on the “digital transformation” trend—and on cloud computing plays in particular. The fund is long not only Microsoft but also Amazon and Alphabet, the parents of the other two primary cloud vendors, Amazon Web Services and Google Cloud.

Given Microsoft’s comments about Azure, AWS is likely to get even more scrutiny than usual when Amazon reports results on Thursday. “People will look at the pace of deceleration,” Curtis says.

But no matter what the numbers are, Curtis thinks Amazon shares look cheap here, and that investors are effectively getting the company’s massive advertising and e-commerce businesses for nothing. That’s the argument I made last July in a cover story about Amazon. So far, the stock hasn’t performed as expected, but I think the case is still persuasive.

My story relied partly on an analysis of AWS by Redburn analyst Alex Haissl. He recently reviewed his thinking and came away convinced that the market is still underestimating the value of AWS. Haissl argues in his recent note that growth is going to reaccelerate and that most of the recent slowdown reflects “temporary and cyclical” changes.

In launching coverage of Amazon last summer, Haissl asserted that AWS was worth $3 trillion. He concedes that “a lot has happened since then as growth rates and margins have deteriorated…making investors increasingly question the structural growth of the business.” But he writes that investors are wrong to view the issues as “structural deceleration.” And he still thinks that AWS is worth $3 trillion over the long run.

Franklin’s Curtis has spread out his cloud bets. His fund also owns stakes in the cloud-based database provider
(MDB), the cloud infrastructure provider
(NET), the analytics and AI software provider
(SNOW), and the data-streaming platform

I think the simplest approach is to buy and hold Microsoft and Amazon, along with the upstart in the sector,
(ORCL). They’re a bet on the nonstop creation of data. If ever there was a sure thing, that would be it.

Write to Eric J. Savitz at


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