Microsoft, Alphabet Cry Poor Right Before Making $32.8 Billion

MATT KRANTZ
01/24/2023

Layoff announcements from Microsoft (MSFT) and Alphabet (GOOGL), along with their tumbling stock prices, make it seem like giant tech S&P 500 companies are in dire straits. But they're on the verge of making billions — in just one quarter.

Microsoft Tuesday kicks off fourth-quarter earnings reports for the big-cap techs. The announcement comes just days after Microsoft announced plans to cut 10,000 jobs and news that Alphabet (technically in the S&P 500 communication services sector) is taking out 12,000 positions.

"We're ... seeing organizations in every industry and geography exercise caution as some parts of the world are in a recession and other parts are anticipating one," Microsoft CEO Satya Nadella wrote in a letter to employees announcing the layoff.

Amazingly, though, the job cutting is happening just as Microsoft and Alphabet get set to report making a combined $32.8 billion in the fourth quarter of 2022, according to analyst expectations. Microsoft and Alphabet will likely be two of the three most profitable companies in the S&P 500 during the quarter. Business is still strong, but just stretched out a bit.

"Software companies are calling out the more difficult macro environment. What is occurring is deal cycle elongation for the biggest or most expensive projects," said Daniel Morgan, senior portfolio manager at Synovus Trust. "This is a step-one response to a more uncertain economic environment."

Don't Pity Microsoft And Alphabet

You might think Microsoft and Alphabet are struggling. That's simply not the case.

Yes, shares of Microsoft and Alphabet are down 18% and 24% respectively in the past 12 months. But massive profit is still on the way.

Microsoft is expected to make $17.2 billion, or $2.31 a share, in the fourth calendar quarter alone. That puts it ahead of every single S&P 500 company, other than Apple (AAPL), in terms of quarterly net income. But Alphabet is no slouch, either. The parent of Google is seen earning $15.6 billion, or $1.21 a share, in the fourth calendar quarter. That ranks it third in the S&P 500.

So what's the problem, then? Growth is taking a breather. If Microsoft earns $2.31 a share in the quarter, that would be down nearly 7% from the same year-ago period. And Alphabet's profit per share is seen skidding roughly 20%. That's why the Technology Select Sector SPDR Fund (XLK) is down 13% in the past year.

But it's likely a temporary pause.

Looking At Microsoft And Alphabet Long Term

It won't take investors long to see the fourth quarter as an aberration. And that's why the Technology Select Sector SPDR is up nearly 8% this year, while the S&P 500 is up just 6.5%.

Take Microsoft. Profit for all of 2022 is still seen hitting $68.2 billion for the calendar year. If that's right, it marks nearly 3% growth in terms of adjusted earnings per share. And this year? Analysts think Microsoft's net income will top $75 billion in 2023. That's more than 12% profit growth on the same basis.

Over at Alphabet, analysts do think 2022 profit will fall more than 15%. But it's likely to be a short-lived dip. Wall Street analysts think Alphabet will make more than $68 billion in 2023, up more than 10% on a per-share basis.

It's possible these companies are just undoing some overzealous hiring. Microsoft alone added 40,000 employees in fiscal 2022, bumping up its head count by a whopping 22% to 221,000.

But you sure don't have to worry about their bottom lines.

S&P 500 Profit Booms

Largest expected profits in the fourth quarter of 2022.

Company	Ticker	Q4 2022 income (in billions)	12-month stock change
Apple	(AAPL)	$31.2	-13.1%
Microsoft	(MSFT)	17.2	-18.0%
Alphabet	(GOOGL)	15.6	-23.4%
Exxon Mobil	(XOM)	13.8	56.4%
JPMorgan Chase	(JPM)	9.5	-5.4%
Berkshire Hathaway	(BRKA)	9.4	2.3%
Chevron	(CVX)	8.3	42.3%
AbbVie	(ABBV)	6.4	12.2%
Bank of America	(BAC)	6.4	-23.6%
Pfizer	(PFE)	6.3	-14.8%

Sources: S&P Global Market Intelligence, IBD