Microsoft's Earnings Warning Sends Shockwaves Through Amazon and Other Cloud Stocks

Microsoft's disappointing outlook is weighing on the stocks of other cloud companies, including Amazon.

Microsoft's latest quarterly results revealed strength in its cloud computing business, but a gloomy outlook was getting the spotlight on Wednesday and weighing on stocks across the sector. After such a brutal stretch for tech and with the Nasdaq still in a bear market, it's no wonder investors are a bit pessimistic.

Shares in Microsoft (ticker: MSFT) fell 3.9% after the company reported better-than-expected results for the December quarter. While investors initially reacted positively to the news, sending the stock up 5%, concerns about the company's PC software business led to a sell-off in after-hours trading.

The company also saw weakness in its PC software business. The stock initially rallied 5%, but gave back its gains. The company's PC software business has been weak recently, and this caused the stock to rally 5% at first, but it gave back its gains shortly afterwards.

Microsoft wasn't the only stock to decline today. Amazon, whose Amazon Web Services is similar to Microsoft's Azure, shed 4.8%. There was more red across the cloud computing space, with shares in Salesforce CRM dropping 3.2%, Palo Alto Networks slipping 2.3%, and Snowflake tumbling 7.2%. The tech-heavy Nasdaq index was down 2%.

Despite strong growth in its Intelligent Cloud business in the fourth quarter, Microsoft was not able to dominate the narrative. Revenue in Intelligent Cloud, which includes Azure, came in at $21.5 billion, toward the upper end of the company’s own guidance, with Azure sales surging 38% on an annual, constant-currency basis.

Looking ahead, things appear to be getting darker for Microsoft. The company expects Intelligent Cloud sales growth to slow down to 17% to 19% in constant currencies in the March quarter, coming in at $21.7 billion to $22 billion. This is below the Wall Street consensus of $22.2 billion.

The read-across to Amazon and others is straightforward: Don’t get too excited about what may be upbeat fourth-quarter results. If Microsoft is expecting a gloomier start to 2023, then it is likely that other companies will follow suit.

Wall Street analysts are already concerned about the impact of Microsoft's earnings on Amazon's stock price. Lloyd Walmsley, of UBS, has lowered his target price for Amazon stock from $121 to $118, citing worries over Azure's growth outlook and what he sees as a weaker overall environment for enterprise IT spending.

The analysts have revised their estimates for revenue and operating income in Amazon's AWS business, not only for the first quarter of 2023 but also for the second half of this year. This is in response to Azure's disappointing growth outlook, which is calling for a sharp deceleration.

Fears of an impending recession are gripping Wall Street, as investors react to disappointing company outlooks and weak earnings reports. The fourth quarter may have been strong for the tech sector, but the stock market is forward looking—and it doesn’t like what it sees.