Yesterday, we had the Federal Reserve meeting. And as expected, there were no surprises. Interest rates remained unchanged at 3.75%–4.00%. In fact, two members voted in favor of a rate hike.
The only change we might see in the future? Fewer meetings. Warsh announced that, starting in the fall of 2027, one of the eight annual meetings will become a strategy session, with no interest rate decision. And in 2028, the number of meetings involving rate decisions will drop to six.
But honestly, that wasn't the biggest news of the evening. It was the earnings reports from Alphabet and Microsoft. Two giants following exactly the same playbook. Yet investors reacted to them in completely different ways.
ALPHABET AND THE CLOUD BUSINESS THAT DOUBLED
Let's start with my favorite, Alphabet. Revenue reached $127.6 billion, up 25%. That's a very strong number, right? Yes. But analysts had expected slightly more, around $128 billion. A narrow miss, in other words.
The star of the evening was Google Cloud. Revenue came in at $30.7 billion, up from $15.16 billion last year. Yes, that's a 103% increase. In just one year, Alphabet's cloud business doubled. Operating income more than tripled as well.
Of course, there's a big "but." Search, the company's core business, generated $63.35 billion, compared with estimates of around $65 billion. YouTube advertising revenue came in at $11.2 billion, versus the market's expectation of $11.4 billion. Both missed expectations.
And here's something puzzling. Sundar Pichai says search queries are growing at their fastest pace in five years. In other words, people are searching more than ever. Yet revenue didn't grow as much as analysts had expected.
WHAT DRAGGED DOWN EARNINGS?
"And what about earnings per share?" you might be wondering. They came in at $2.12, while the market had expected around $3.00. Last year, the figure was $2.87.
So what happened? Put simply, Alphabet recorded an $8.7 billion loss from the valuation of its investments in other companies. This has nothing to do with how well the core business is performing. It's an accounting issue that could reverse in a subsequent quarter.
Nevertheless, the company broke a streak of 12 consecutive quarters in which earnings exceeded expectations.
And as if that weren't enough, there's also spending. Alphabet poured $51.4 billion into infrastructure in a single quarter. So much that its free cash flow turned negative.
What should we expect going forward? Pichai is talking about an annual revenue run rate of half a trillion dollars. Meanwhile, the Gemini app has reached 1 billion users. The direction is clear. The question investors are asking is how much it will cost.
And the market's response was harsh. The stock fell close to 10% in after-hours trading. As CNBC reported, the revenue miss and heavy spending on cloud infrastructure shook the entire AI investment thesis.
MICROSOFT BEATS ALL EXPECTATIONS
Now let's turn to Microsoft. The picture here is completely different.
Revenue came in at $92.3 billion, up 19%, compared with expectations of around $90.7 billion. Earnings per share reached $4.89, versus estimates of $4.72–$4.73. Net income climbed 32% to $36.6 billion, helped in part by a $207 million contribution from its investment in OpenAI.
And then there's Azure, Microsoft's cloud business. It grew 48%, reaching $33.2 billion. The market had expected growth of around 45%. Overall, Microsoft's cloud business generated $63.9 billion.
Infrastructure spending? $39.4 billion, double last year's figure. But that was approximately $6 billion less than analysts had expected.
What should we expect from here? Microsoft has commercial commitments worth $677 billion, up 73%. What does that mean? These are contracts that have already been signed but have not yet been recognized as revenue. In other words, the company already knows it has an enormous amount of business ahead of it.
Chief Financial Officer Amy Hood described it as a "strong start to the year."
And investors? They were pleased. The stock rose close to 4% in after-hours trading.
WHAT THE TWO GIANTS HAVE IN COMMON
If we put the two companies side by side, there are plenty of similarities.
At both companies, cloud computing is doing the heavy lifting. And behind cloud growth is enormous demand for AI.
Both spent massive amounts on infrastructure, but less than the market had expected: $51.4 billion versus approximately $56 billion for Alphabet, and $39.4 billion versus around $46 billion for Microsoft.
Even their investments in other companies affected net income. In one case, they dragged earnings down. In the other, they provided a boost.
"So why such a different market reaction?" you might ask.
Because the market didn't punish cloud computing. It punished the stumble in Search and the cash flowing out of the business.
According to Reuters, Microsoft is expected to be the only major cloud provider with positive cash flow next year. Alphabet, meanwhile, is expected to continue burning through cash.
In a nutshell? Same playbook. Different bill.