Tech stocks suffer two-day selloff as investors find ‘wrinkle or two’ in Alphabet, Meta earnings

Alphabet’s earnings sailed past Wall Street estimates after the markets closed on Tuesday. Meta followed suit on Wednesday, solidly topping expectations.

It didn’t matter.

Following better-than-expected results on the top and bottom lines from two of the most valuable tech companies in the world, the Nasdaq responded by dropping close to 3.5% over two days.

With Amazon’s third-quarter report on deck after Thursday’s close and Apple set to announce next week, tech investors are showing less interest in what’s happened over the past three months and are more concerned about what may be coming as the year wraps up.

In Alphabet’s earnings report, Wall Street fretted over the numbers out of the Google Cloud division, which is investing heavily to try and catch Amazon and Microsoft, particularly when it comes to managing hefty artificial intelligence workloads. The cloud group reported $8.41 billion in quarterly revenue, missing analysts’ estimates of $8.64 billion, according to LSEG, formerly known as Refinitiv.

Ruth Porat, Alphabet’s finance chief, told analysts that the numbers reflect “the impact of customer optimization efforts,” a phrase that generally refers to clients reeling in their spending.

The concern from Facebook parent Meta was sparked by comments that CFO Susan Li provided on the earnings call regarding the advertising market in the fourth quarter. Due to the escalating conflict in the Middle East and uncertainty about how it will affect ad spending, Meta provided a wider revenue guidance range than normal, Li said.

“We have observed softer ads in the beginning of the fourth quarter, correlating with the start of the conflict, which is captured in our Q4 revenue outlook,” Li said on the call. “It’s hard for us to attribute demand softness directly to any specific geopolitical event.”

Alphabet shares are down by about 11% over the past two days, while Meta has dropped almost 7%. Amazon’s stock has dropped more than 6% over that stretch, heading into its report after the close.

Up to this point, 2023 has been a bounce-back year for mega-cap tech after a brutal 2022. Meta is the second-best performing stock in the S&P 500, behind only AI chipmaker Nvidia, up roughly 140% for the year, compared to the Nasdaq’s 21% gain. Alphabet has jumped 39% and Amazon has gained 42%.

All three internet companies instituted significant cost-cutting measures, starting late last year or early in 2023, slashing a record number of jobs and eliminating some experimental projects. Meta CEO Mark Zuckerberg said in February that this would be his company’s “year of efficiency,” and Alphabet CEO Sundar Pichai acknowledged in January that Google “hired for a different economic reality than the one we face today.”

While investors cheered the newfound focus on expenses, concern is mounting alongside broader economic uncertainty and the challenges presented by high interest rates.

The U.S. economy has been resilient so far. The Commerce Department said on Thursday that gross domestic product, rose at a seasonally adjusted 4.9% annualized pace in the quarter that ended September, up from an unrevised 2.1% pace in the second quarter.

But with war still raging in Ukraine and President Joe Biden promising that the U.S. will support Israel in its battle against Hamas, the global economy is on a shaky foundation.

In emphasizing the potential business impact of war in the Middle East on its business, Meta spelled out those concerns to shareholders.

“Management’s conservative tone tempered enthusiasm for a strong result and guide,” wrote analysts from Guggenheim, in a report late Wednesday, though they still recommend buying the stock.

Mark Avallone, president of Potomac Wealth Advisors, told CNBC’s “The Exchange” on Thursday that these latest earnings reports show the level of investor skittishness. Alphabet’s earnings were fine when looking at advertising and YouTube, its core businesses, he said, and the selloff tied to the cloud numbers indicates that “people are looking for problems where they may or may not exist.”

“You’ve got earnings reports that really aren’t that bad,” Avallone said. “We’re finding a wrinkle or two in what we don’t like about them and then we’re trashing America’s best companies and there really seems to be a bit of an overreaction.”

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