Microsoft earnings drag down software stocks as results ‘could spark new rounds’ of sector concerns

Microsoft Corp. saw that cloud-computing growth slowed in the latest quarter, suggesting that even big tech companies are not immune to the current macroeconomic storm.

Microsoft MSFT shares,
was down more than 6% in premarket trading on Wednesday, and signals from the company’s latest report seemed to weigh not only on cloud-computing rival Inc.’s stock AMZN,
but also the wider software sector. Among the big losers in premarket action were shares of Snowflake Inc. SNOW,
down 6.0%; parts of ServiceNow Inc. NOW,
down 3.9%; and Salesforce Inc. shares, down 2.8%.

See more: Microsoft stock slammed by cloud-growth fears, brings Amazon down here

Microsoft’s results in its Azure cloud-computing business and elsewhere indicated that the company faces challenges in the commercial business, not just in consumer-facing areas, according to Cowen & Co. analyst. which is Derrick Wood. “We suspect this could raise new investor concerns for the broader software group entering the earnings season,” he wrote in a note to clients.

Guggenheim’s John DiFucci took a similar view, writing that Microsoft showed “significantly weaker new business signings for all of its recurring revenue businesses,” which in his view means that the company is feeling pressure from more than small and medium-sized business customers.

“We see this as an overall weak macro environment with a material impact on a broad-based, well-managed company,” DiFucci wrote. “And the guidance suggests it will get worse. We believe these results could weigh on shares of MSFT, along with shares of the entire software sector.

Other analysts seek to select software read-throughs in a more granular manner.

“Azure’s weaker growth and outlook combined with optimization commentary is a negative read-through on cloud consumption models,” wrote Citi Research analyst Tyler Radke, while specifically mentioning Snowflake, MongoDB Inc. MDB,
and Elastic NV ESTC,
At the same time, he noted that “gross margin/power costs” seem to be “an MSFT-specific issue,” so he doesn’t expect those to “pass.” (Microsoft flagged in its earnings call the impact of higher energy costs on Azure’s margins.)

See also: Google ad sales hit and widely miss estimates, Alphabet stock falls 6%

Radke added that while Microsoft’s commercial bookings growth reached 16% on a year-over-year basis in constant currency, marking a slowdown relative to recent quarters, growth was ” still solid” for a fiscal first quarter. “We see this as neutral overall for other large software companies that rely on the deal” such as ServiceNow, Oracle Corp. ORCL,
and Salesforce, he wrote.

More positively, MoffettNathanson’s Sterling Auty weighed in. Microsoft’s results offer some encouraging read-through for cybersecurity companies like CrowdStrike Holdings Inc. CRWD,
Zscaler Inc. ZS,
Cloudflare Inc. net,
“and maybe Okta too.” Microsoft increased the number of security customers by 33% in the quarter, he said.

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