Google and Microsoft Beat Expectations But Growth Slows

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Wall Street was bracing for any shock, but the company delivered the results that analysts were looking for. Its crown jewel business, Intelligent Cloud business segment which includes the Azure public cloud, brought in $22.08 billion in revenue — a growth of 16% and beating the consensus expectations of $21.94 billion. Specifically, Azure and other cloud services expanded by 27% which was a slight slowdown from 31% in the prior quarter. Still, it largely met the Street’s estimates. What’s the takeaway? The growth is slowing down. There’s no question about it. The next thing to watch is if Microsoft can jump-start its growth, or if the slowing pace of growth will continue over the next quarters. Now, onwards to Google. Google’s parent company Alphabet also beat expectations, leading the stock to rise more than 4% in extended trading. And it is a cause of celebration because Google finally broke its streak of four straight quarter of missing consensus estimates. The results may be time for Wall Street to place Google in the bag of “cash cows” since its revenue growth was just 3%. This continues the trend in the last few quarters where Google has just low single-digit revenue growth after enjoying nearly 20 years of nonstop growth. In the graphic below, you can see how the growth has declined steadily since the pandemic boom. But it has recovered in the recent quarter. Time will tell if it is beginning of a new trend or a brief relief. Now, the company is dealing with a pullback in ad spending as companies grapple with a slowing economy. While ad revenue beat analyst expectations, it declined from the year prior. YouTube ad revenue fell while Search and Other revenue grew about 2%. And of course, YouTube is facing a fierce competitor in TikTok in short-form videos. Slowing growth led to many changes in the company. Especially in its workforce. The company slashed about 6% of its workforce in January — the biggest ever. CFO Ruth Porat said this month that more cuts will come in many things, such as real estate, employee services and equipment. Already, the company reported $2.6 billion in charges related to the layoffs and office space reduction during the quarter. These write-offs led Google’s net income to drop by 9.2% to $15.05 billion from $16.44 billion a year earlier. This follows the trend among companies where their revenues would grow but struggle with profit margins. But its cloud-computing business, a critical revenue driver for the company, successfully posted a profit with an income of $191 million in the quarter versus a loss of $706 million a year ago. In a classic move of a cash flow-focused business, Google announced that its board authorized a $70 billion share buyback to create attractiveness in the stock to replace the growth story that was the primary driver behind the stock’s extraordinary performance. Bet On The Superstar CEO With A 30% Revenue Growth Today’s Stock Pick: Arista Networks, Inc. ([ANET]( Jayshree Ullal isn’t a household name for CEOs, but she is easily known as one of the top-performing CEOs in the world. Barron’s named her “World’s Best CEOs” in 2018 and she was also on Fortune’s “Top 20 Business persons” in 2019. Listen, a grizzled business veteran can look at the financial statements of the last five years and immediately know how good the leader is. Financials are the scoreboard of a business. And indeed, Jayshree Ullal’s Arista Networks is a spectacular stock swimming in cash. President and CEO of Arista Networks Jayshree Ullal (Photo: CNBC) Originally, Jayshree worked in Cisco Systems and worked on the Cisco Catalyst switching business. (More on switching later.) Her results were astonishing. The business grew from its beginning in 1993 to a $5 billion business in 2000. Eventually, she oversaw 20 M&As for Cisco in the enterprise sector. Simply said, she was a bona fide superstar at Cisco. It caught the attention of two entrepreneurs, Andy Bechtolsheim and David Cheriton, and she accepted the offer to become the CEO of a 4-year-old startup Arista Networks. Jayshree Ullal took a huge risk in joining Arista Networks, leaving her cushy, lucrative job at Cisco. However, the upside was irresistible. She would get equity in the company. And here’s the important thing. Arista was self-funded by founders, so the ownership structure wasn’t diluted much. In fact, insiders still own 22% of Arista Network despite a nearly $38 billion market cap. The risk paid off marvelously for Jayshree as her 4.9% equity in Arista is worth billions of dollars. But it was not a lottery ticket. Jayshree built Arista into a $36 billion company through sweat and hard work. A lot of Arista’s growth came at expense of Cisco, poaching many of Cisco’s big-time clients like Microsoft and Meta. Cisco didn’t take kindly to the competition. Cisco then-CEO John Chambers made Arista the target. He formed a “Tiger Team” of about 70 salespeople and engineers to keep tabs on Arista and tried to stall its IPO plan. Regardless of the constant attack by Cisco, Jayshree guided Arista to one of the best growth stories in the technology world, saying: - “Every calendar year may be the equivalent of ten cloud years. To navigate high-tech companies in real-time is not for the faint of heart, especially since tech markets move quickly. High tech start-up CEOs must adapt to rapid pace of change, question, iterate and constantly course-correct. It transcends education and traditional business models. They must be nimble, make decisions in ‘tech-time’, anticipate trends, project customer patterns and place big bets that keep the start-up relevant.” Her business skills are the reason why Arista Network is a buy. You can just look at its revenue growth to see how good she is at her job. Arista grew from $361 million to $4.38 billion in nine years – a spectacular annual growth rate of 31%. And best of all, Arista was profitable in all these years, with EPS growing at a 42% annual rate: (Graph: MacroTrends) Shareholder’s equity also grew at a phenomenal rate of 58% CAGR in the last nine years: (Graph: MacroTrends) What’s driving the incredible growth? Stephen Covey, the author of the timeless best-seller The Seven Habits of Highly Effective People, said: - “Effectiveness — often even survival — does not depend solely on how much effort we expend, but on whether or not the effort we expend is in the right jungle.” In other words, a horse transportation business will face its death after the popularization of automobiles, no matter how hard they work or how brilliant managers are. When you are in the right jungle, you’re riding on tremendous momentum. Arista Networks was in the right jungle by being in the cloud data center business. Obviously, the industry became so big that it becomes one of the most profitable sectors for Amazon and Microsoft. Arista pioneered software-driven networking – which eliminates dedicated hardware and instead uses software to control network traffic. The key difference is that Arista allows clients to run networks across private and public clouds in one operating system. Its competitor, Cisco, requires different operating systems for each environment, which jacks up cost and complexity. In short, Arista makes high-speed networking less complex and less costly. Sure enough, Arista gobbled up market share from previously dominant Cisco, going from 3.5% to 25.3% in nine years: (Source: Arista Networks) A 10% discount? Believe it or not, Arista Networks is swimming in so much cash that equals 8.6% of its market cap. That’s right. Arista has $3.02 billion cash and a market cap of $35 billion. Is it inflated by debt? Not so much. Its total debt is only $63 million. Bottom line: Arista Networks plays in the hottest industry of cloud computing, but you don’t need to pay for its growth at eye-popping levels. Best of all, Arista isn’t highly-leveraged which makes its stock price less risky. You can get its 30% revenue growth without the risk of leverage. That’s a rare bird. It’s a no-brainer pick for your portfolio. FREE LIVE TRADING SESSIONS & TRAINING USING THE MOST COMPREHENSIVE DARK POOL MONITOR AVAILABLE TO THE RETAIL INVESTOR Join our LIVE Trading Sessions throughout the day where we will focus on how you can learn to master the markets through the use of advanced algorithms and AI to trade like the institutions. BEFORE THE BELL Starts 6am PT / 9am ET Our newest LIVE session starts when the big institutions and elite traders do, well before the market opens. We'll look at realtime dark pool data as the market movers position themselves for the tra ding day in the secret off market exchanges. 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