Today, ahead of the doubleheader of Mag 7 reports when both Microsoft and Google parent Alphabet report, we wrote in our preview that Microsoft has become the consensus long, while Alphabet “still feels like the consensus funding short across megacaps.” And both have to convince a market that, as Goldman’s Rich Privorotsky put it this morning, now has “eye watering expectations”:
“These really matter. Eye watering expectations… buyside probably closer to Azure growth around high 40s%, Google Cloud around mid 90s%. The question isn’t whether those are good numbers, but whether they can surpass already high expectations… Azure probably needs a guidance raise to be properly supportive. The nuance is capacity… if they miss elevated expectations simply because they cannot bring enough compute online. That’s disappointing for near term revenue but potentially even more bullish for the scarcity premium and future spending. Watch customer concentration, how broad the demand really is and, crucially, the relationship between revenue growth, capex and margins. The market wants evidence that the incremental economics work.“
In other words, a cloud beat is just the price of admission, and the debate tonight is what all that cloud costs, and who pays for it.
Within the Mag 7, Microsoft and Alphabet sit at opposite ends. Goldman’s derivatives desk has Microsoft at 8/10 on its positioning score (the same score Meta carried into its print last week, and we all know how that went). Alphabet, meanwhile, keeps getting sold to pay for everything else. JPMorgan’s TMT trader Brian Heavey wrote this morning that “we continue to see GOOG being used as a source of funds (note there was another negative 3P check ahead of earnings – all pointing to a Search miss).” The stock dropped 10% from its October 13 high into Monday.
There are some signs of a thaw. Goldman’s US desk saw “a buyer of 50k GOOGL 15Jan 360 calls” on Tuesday, and Privorotsky notes that “people have barely begun to re-risk. What we’ve really seen so far is the abatement of supply, rather than meaningful fresh demand.”
Away from Goldman, and focusing on Alphabet, the whole debate fits in one line from JPMorgan’s Mark Schilsky, whose Tech Sketch “Earnings Preview Bonanza” (available to pro subs) frames it as “Street (Consensus) Fighter II: Search vs. Cloud”:
“On the one hand, Google Cloud Revenues are likely to crush this quarter, thanks to TPU sales. On the other hand, Search Revenue growth is expected to miss the Street because the alt data (which is always right!) suggests so… GOOGL is also on a path to where Google Cloud Revenues could be equal to Search Revenues by late 2028. That’s massive! Who thought that was possible 1 year ago? And now we’re debating whether or not Search is going to miss by like -50 bps this quarter. Who cares?!?”
