01-05-2025
Microsoft And Meta Stocks Surge On Q1 Earnings But Tariffs Could Still Bite
The Mobile World Congress 2025 (MWC) kicks off in Barcelona, Spain, on March 1, 2025, becoming the ... More global epicenter of technological innovation. Organized by the GSMA, the event showcases the latest innovations and advancements in mobile technology, telecommunications, and digital connectivity, with a strong focus on the development of 5G, 6G, artificial intelligence, and augmented reality. This edition also highlights digital sustainability and the industry's transformation towards a smarter and more connected future. (Photo by Charlie Perez/NurPhoto via Getty Images)
Shares of Microsoft and Meta rose 9.25% and 5%, respectively, after they beat expectations and raised guidance.
In so doing, they joined a handful of other companies – notably Netflix, ServiceNow, and SoFi – that appear to be immune from the tariff uncertainty affecting many other companies, as I noted in an April Forbes post.
Should investors bet Microsoft and Meta will continue to power through? The answer appears unclear. While both companies have very high profit margins, their ability to beat investor expectations and raise guidance depends on two external forces:
If companies find they are not getting sufficient payoff, both companies could be saddled with high capital expenditures and lower cloud demand. Under that dire scenario, Microsoft and Meta shares might drop later in the year.
For the March-ending quarter, Microsoft and Meta exceeded expectations.
Microsoft's revenue – up 13% to $70 billion – and earnings beat expectations for all the company's business segments. The firm's Azure cloud services unit exceeded expectations – reporting 35% revenue growth – which is four percentage points faster than the Wall Street consensus, according to the Wall Street Journal.
Moreover, the software giant's projections for the June-ending quarter were also ahead of analysts' expectations. Microsoft's business segment revenue forecast of $73.7 billion for the fiscal fourth quarter was 2% ahead of Wall Street's projections, the Journal reported.
Demand signals for Microsoft remain strong as companies view software as a way to boost productivity and grow faster.
Software is 'the most valuable resource we have to fight any type of inflationary pressure or any type of growth pressure, where you need to do more with less,' Microsoft CEO Satya Nadella told the Journal. 'Cloud and AI are the essential inputs for every business to expand output, reduce costs and accelerate growth,' he added.
Microsoft's capital expenditures will rise in its next fiscal year – albeit more slowly than the 57% the company expects to report for the current year-ending June 2025, chief financial officer Amy Hood told investors.
Meta also reported stronger-than-expected first quarter revenue and guided second-quarter revenue 'in line with Wall Street's expectations,' CNBC reported. Meta's first-quarter sales rose 16% to $42.31 billion – $890 million more than the London Stock Exchange Group consensus – while the company's net income rose 35% to $16.64 billion, noted CNBC.
The midpoint of Meta's revenue forecast for the current quarter was $44 billion – inline with LSEG estimates. While Meta suffered a slowdown in Asian advertising revenue, 'Our business is also performing very well, and I think we're well positioned to navigate the macroeconomic uncertainty,' Meta CEO Mark Zuckerberg told analysts on an earnings call on Wednesday.
Meta increased its 2025 capital expenditures estimate to $68 billion – the midpoint of a range – about 10% more than the company's prior outlook, noted CNBC. 'This updated outlook reflects additional data center investments to support our artificial intelligence efforts as well as an increase in the expected cost of infrastructure hardware,' noted Meta's earnings release.
Will tariffs slow the economy and the job market? That appears likely. How so? A decline in first quarter gross domestic product, according to Reuters, and widespread reports of companies cutting back on long-term investment due to uncertainty could result in further economic declines and rising unemployment as companies seek to align their costs to a drop in revenue.
While the Q1 GDP slowdown was due to a surge in imports – up 41.3% rate, the largest rise since the third quarter of 2020 – that increase 'obliterated a modest rise in exports, resulting in a large trade gap that chopped off a record 4.83 percentage points from GDP,' noted Reuters.
Q2 GDP could grow but end the year in decline. How so? "If the blowout on trade was the result of firms pre-buying imported inputs to beat the tariffs, the decay in the trade balance will reverse in second quarter," High Frequency Economics chief economist Carl Weinberg told Reuters.
"That will generate some GDP growth. However, corrosive uncertainty and higher taxes -- tariffs are a tax on imports -- will drag GDP growth back into the red by the end of this year," Weinberg added.
Slower GDP growth and higher unemployment could reduce consumer spending, decrease business investment, and potentially slow the adoption of new technologies. Unless businesses see a high payoff from cloud services and artificial intelligence, such spending could be viewed as expendable – which might result in slower growth for Microsoft's Azure, software, and PC business units.
A slower U.S. economy could extend the Asian advertising slowdown highlighted in Meta's latest earnings report to the U.S. market. A slower economy could also reduce user engagement on social media platforms – potentially lowering Meta's virtual reality and metaverse revenue.
Some $1 trillion is being invested in generative AI but will it payoff? As I noted in my Value Pyramid case study, most generative AI use cases help people overcome creator's block — such as the anxiety about writing an email.
Fewer generative AI applications help improve the productivity of business functions such as customer service or coding. And few, if any, applications of AI chatbots enable companies to add new sources of revenue.
Until leaders deploy AI chatbots to make life much better for many people, their $1 trillion investment could go up in smoke. Now companies are struggling to create a return on AI, according to the Wall Street Journal.
As of last year, while 78% of companies said they used artificial intelligence in at least one function, they typically found cost savings less than 10% and revenue increases below 5%, according to McKinsey's March 2025 State of AI survey featured in a Journal report.
Why have these efforts resulted in so little payoff? One answer is so few of them – a mere 1% -- have deployed their AI applications throughout the company, while 43% report that they are still in the pilot stage, McKinsey reported.
I think scaling is not the main issue. The main one is whether generative AI is being used to solve an essential business problem – either to reduce non-value-added costs or better yet creating a new source of revenue, as I wrote in my book, Brain Rush.
An accounting services firm 1-800Accountant says it has achieved a return on investment from using an AI customer service agent to provide high quality responses to customer inquiries. Since the firm's AI addresses 65% of customer inquiries, with 30% arranging a call with a human, the payoff from AI is clear, the Journal wrote.
The firm's payoff comes from saving money on the cost of human agents. 'The ROI in this case was abundantly clear,' 1-800Accountant's chief technology officer Ryan Teeples told the Journal.
Unless more companies can earn clear payoffs from generative AI, an economic slowdown could drive some companies to reduce their investment in the technology to preserve their core business.
This could make it more difficult for Microsoft and Meta to keep beating and raising.
