Wednesday's Headlines: Alphabet Sinks as YouTube Comes Up Short

Wednesday's Headlines: Alphabet Sinks as YouTube Comes Up Short

Here were the biggest movers in the MyWallSt shortlist yesterday:

Moving Up ⬆️

2U (TWOU) +17.4%

Stitch Fix (SFIX) +14.3%

Farfetch (FTCH) +12.8%

Upstart Holdings (UPST) +11.9%

Yext (YEXT) +11.7%

Moving Down ⬇️

Ericsson (ERIC) -0.5%

IMAX (IMAX) -0.4%

Activision Blizzard (ATVI) -0.0%

Avalara (AVLR) 0.0%

Tripadvisor (TRIP) +0.1%

Here are the stories that you need to know ahead of market-open today, Wednesday the 26th of October.

Alphabet Sinks as YouTube Comes Up Short 🔤

Shares in Google’s parent company Alphabet (GOOG) are trading down over 6% premarket this morning following a less-than-stellar earnings report yesterday after the closing bell. Costly misses on both the top and bottom line sent shareholders into a fluster, while an unusually weak performance from YouTube’s revenue has seen worry ripple across Wall Street.

Alphabet reported earnings per share (EPS) of $1.06 on revenue of $69.09 billion, missing analyst expectations of $1.25 per share and $70.58 billion respectively. Perhaps most damning of all was the revelation that YouTube, one of the company’s crown jewels, reported its first decline in advertising revenue on a year-over-year basis since first being reported separately in 2019.

Fears around an impending recession have shuttered ad spending across the board, with companies such as Snap and Microsoft having already felt the pinch in their respective earnings calls (which you can read all about below), and Meta expected to follow suit tonight.

Alphabet did report higher-than-expected revenue for its cloud segment, with Google Cloud bringing in $6.9 billion against an anticipated mark of $6.69 billion, but that’s certainly not enough to assuage shareholders.

The company doubled down on its plans to reduce its current hiring pace, with a clear focus on “moderating operating expense growth” now a top priority. This, coupled with the shuttering of certain services such as the recently discontinued Stadia gaming arm, will likely be the first in a series of radical steps to realign the company with the current macroeconomic reality.

Alphabet is currently down over 27% year-to-date prior to market open today and over 30% off all-time highs from late 2021.

Microsoft Drops On Weak Guidance 😰

Microsoft (MSFT) stock is down significantly in premarket trading this morning after the software giant gave weak forecasts for the coming quarter.

In the quarter just past, Microsoft performed pretty well overall. Earnings of $2.35 per share and revenue of $50.12 billion both easily beat analyst expectations for the quarter, with overall sales growing 11% year-over-year in what has been a challenging period for the wider tech industry.

However, revenue for the Azure cloud segment was softer than expected, growing by 35% in the quarter compared to 40% in the quarter before.

The future is uncertain for so many companies out there, and behemoths like Microsoft are no different. Investors weren’t best pleased with the conservative guidance that management gave for the current quarter — Microsoft’s second fiscal quarter of 2023. The company expects revenues of $52.35 - $53.35 billion in revenue, which implies just 2% growth at the middle of the range, whereas analysts had expected much stronger revenue of $56.05 billion.

Interestingly, Microsoft also indicated that it is seeing a fall in demand for PCs, similar to industry-rivals Intel and AMD. In the last quarter, for the first time ever, revenue from the company’s Microsoft cloud division — which encompasses Azure and other non-hardware elements like Office 365 subscriptions and LinkedIn commercial revenues — made up over 50% of total revenue.

In a statement, CEO Satya Nadella said:

“In this environment, we’re focused on helping our customers do more with less, while investing in secular growth areas and managing our cost structure in a disciplined way.”

Chipotle Wraps up Another Strong Quarter 🌯

On Tuesday, Chipotle (CMG) reported on its third quarter and proved the demand for burritos can survive a higher price tag. The home of “food with integrity” was able to beat estimates for earnings per share and just about meet them for revenue, despite raising prices three times in the last 18 months. Earnings per share came in at $9.51 adjusted vs. $9.21 expected, while revenue was $2.22 billion compared to $2.23 billion anticipated.

Management stated that it saw minimal resistance to its price hikes and reiterated these were necessary in certain markets due to higher labor and ingredient costs. In about 700 locations, a fourth price increase took place at the beginning of October due to localized wage inflation. However, CEO Brian Niccol assured investors an affordable lunch can still be found at Chipotle as he noted the average price of a chicken burrito bowl, the chain’s most popular dish which accounts for half of U.S. orders, is still under $9.

For the quarter, same-store sales were up more than 7% while in-restaurant sales climbed 22.1%. Clearly, customers are happy to come into their local Chipotle and walk the assembly line. But this behavioral shift did put a damper on the brand’s digital sales which became its bread and butter during the pandemic and temporary store closures.

E-commerce sales accounted for just 37.2% of revenue, down from more than 50% in 2021. Good news for investors though, this kept Chipotle’s margins strong as delivery orders require the chain to pay fees to third parties.

For Q4, Chipotle is anticipating same-store sales growth in the mid-to-high single digits. It should wrap up the year with 235 to 250 new restaurants and hopes to open even more in 2023.

Chipotle’s stock is down a little more than 1% in pre-market trading.

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