Earnings season is now in full swing, with mega-cap tech giants Microsoft (MSFT) -) and Google (GOOGL) -) having simultaneously reported third-quarter earnings after the bell Tuesday.
Despite Google reporting an 11% surge in group revenues to nearly $77 billion for the period, and despite beating Street expectations for adjusted EPS, the company's stock dipped hard in after-hours trading on the news that Google's cloud sector experienced slower-than-anticipated growth.
Microsoft, meanwhile, handily beat Street expectations in reporting adjusted earnings of $2.99 per share. Shares of Microsoft surged after hours on the news that Microsoft's own cloud sector advanced far beyond the expected pace.
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To Wedbush analyst Dan Ives, Microsoft's third-quarter results resembled a "flex the muscles moment" for the tech titan. And it's all due to strength in artificial intelligence.
"For tech earnings, this was a monumental night in terms of digital advertising, but especially in terms of cloud and AI," Ives told CNBC. "I think this conference call from Microsoft could be the conference call of earnings season."
With so much of Wall Street focused on the more steady AI bet of Nvidia (NVDA) -), which supplies the computer chips that allow companies to create AI products, this report from Microsoft indicates the early stages of cloud monetization, Ives said.
Where other tech giants, including Google, are fighting a bit of an "uphill battle" when it comes to gaining market share in cloud, Microsoft is "controlling the narrative" around AI.
Microsoft, among the largest companies in the world with a $2.45 trillion market cap, will be the "first beneficiary of AI," Deepwater Management's Gene Munster said.
The impact of the moment was not lost on Ives, who compared Microsoft CEO Satya Nadella to Steve Jobs, the legendary innovator who co-started Apple (AAPL) -) out of his garage in 1976 and went on to introduce the smartphone to the world in the early 2000s.
"I think when you look at Nadella, he's playing chess and others are playing checkers. OpenAI was a perfect example of that," Ives said. "They really own the AI story. Others are playing catch-up."
"Nadella spoke and the Street listened. This was a win for the bulls tonight."
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What went wrong with Google
The vital difference between the third-quarter results of Microsoft and Google came down to cloud services, something that Wall Street was quick to react to. With Microsoft shares up nearly 5% in pre-market trading, the stock is steadily nearing its year-long high of $366 per share.
But Google sank more than 6% in pre-market trading, in a knee-jerk panic that Ives deemed an "overreaction."
Ives noted that the company is still "strong in terms of cloud."
My colleague Scott Devitt and I on Alphabet. Owning Alphabet for its Cloud business is like rooting for Michael Jordan to play baseball. We think the reaction in shares is overdone and believe investors are placing too much relative value on cloud for now. Outperform and $160 PT
— Dan Ives (@DivesTech) October 25, 2023
And Munster, who expressed surprise over the violent reaction to Google's earnings, urged investors to "just take a deep breath."
"The deep breath piece of this is just looking at the aggregate of what's in front of Google over the next decade," Munster told CNBC, saying that, though Google might be losing cloud share to Microsoft right now, the scale will, at the very least, "tip back toward Google" once the firm's Gemini platform becomes integrated over the next year.
Gemini is Google's answer to OpenAI, whose models Microsoft has leveraged to supercharge its lead in AI and cloud services.
"Most importantly, they are investing more but they're doing it judiciously," Munster said. "They're going to grow earnings faster than expenses."
"Big picture here: the Google story is intact."
Google, Munster contended, is in the "pole position" of what is going to be a decade-long shift toward AI.
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