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Opinion: Google and Microsoft earnings show the bar has been lowered for Big Tech

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Alphabet Inc. and Microsoft Corp. both reported results that missed Wall Street’s expectations Tuesday, but not only did investors not melt down, both actually saw their stocks rise in after-hours trading.

Amid troubling economic signs, tech stocks have been battered so far this year, and fears about a slowdown among Big Tech names had Wall Street on edge heading into this week. But the reactions to earnings misses Tuesday afternoon show that the fears and declines so far this year have resulted in a lowered bar for even the biggest of the Big Tech names.

Microsoft
MSFT,
-2.68%
missed on both revenue and profit expectations, and forecast that its cloud business, Azure, will grow about 43% in the September quarter, amid fears of slowing cloud growth. While the four-percentage-point deceleration from the previous quarter’s growth rate may have led to sharp declines in the past, Microsoft stock jumped as soon as the forecast was provided.

Google parent Alphabet
GOOGL,
-2.32%

GOOG,
-2.56%
reported an earnings decline for a second quarter in a row, and told analysts on its conference call that a slowdown by ad buyers impacted its second quarter. Yet Alphabet shares were up nearly 5% in after-hours trading.

“In context of the weakening macro backdrop, Alphabet’s Q2 results were decent, with close to in-line revenues across all key business segments,” wrote Colin Sebastian, an analyst with Baird Equity Research, in a note to clients, summing up the general view on Wall Street that things were not yet as bad as feared.

Much like the relief rally seen by Meta Platforms Inc.
META,
-4.50%
shares three months ago, however, this is a case of numbers that, while good enough to avoid tanking their stocks, still shouldn’t actually be seen as “good.” Both companies warned about the macroeconomy, and clearly each company has businesses that are slowing sharply right now.

In Alphabet’s case, revenue at YouTube, a recent star, grew a scant 3% in the second quarter, compared with 14.3% growth in the first quarter, due to overall advertiser pullbacks in spending and more competition from TikTok. Microsoft saw its PC business soften, as the big PC boom of the pandemic is over. The advertising slowdown is also affecting its LinkedIn business, while the Xbox business is slowing rapidly as the pandemic-fueled surge in videogames wears off.

But those stocks are not facing the wrath reserved for some smaller competitors. Last week, social-media company Snap Inc.
SNAP,
-3.22%
raised more fears among investors about internet ad spending, and its stock plunged as the overall economy battles with inflation, changing consumer patterns and higher interest rates.

Microsoft and Google were able to avoid the same fate, though it’s possible that it will just take longer for the slowdown to actually affect companies so large, and with dominant positions in important industries. But make no mistake, there is a slowdown, and it is affecting Big Tech, just maybe not to the degree that it will result in big chunks taken out of their gargantuan market caps — yet.

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Business

Shopify Says It Will Lay Off 10% of Workers, Sending Shares Lower

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Shopify Inc.

SHOP -14.06%

is cutting roughly 1,000 workers, or 10% of its global workforce, rolling back a bet on e-commerce growth the technology company made during the pandemic, according to an internal memo.

Tobi Lütke,

the company’s founder and chief executive, told staff in a memo sent Tuesday that the layoffs are necessary as consumers resume old shopping habits and pull back on the online orders that fueled the company’s recent growth. Shopify, which helps businesses set up e-commerce websites, has warned that it expects revenue growth to slow this year.

Shopify’s shares fell 14% to $31.55 on Tuesday after The Wall Street Journal first reported on the layoffs. The shares have fallen more than 80% since they peaked in November near $175 adjusting for a recent stock split. The company reports quarterly results on Wednesday.

Mr. Lütke said he had expected that surging e-commerce sales growth would last past the Covid-19 pandemic’s ebb. “It’s now clear that bet didn’t pay off,” said Mr. Lütke in the letter, which was reviewed by the Journal. “Ultimately, placing this bet was my call to make and I got this wrong.”

The Ottawa-based company will cut jobs in all its divisions, though most of the layoffs will occur in recruiting, support and sales units, said Mr. Lütke. “We’re also eliminating overspecialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products,” he wrote. Staff who are being let go will be notified on Tuesday.

Shopify’s job cuts are among the largest so far in a wave of layoffs and hiring freezes that is washing over technology companies. Rising interest rates, supply-chain shortages and the reversal of pandemic trends, including remote work and e-commerce shopping, have cooled what was once a red-hot tech sector.

Shopify’s job cuts are the first big layoffs the company has announced since Tobi Lütke founded it in 2006.



Photo:

Cate Dingley/Bloomberg News

Netflix Inc.

cut about 300 workers in June as it deals with a loss in subscribers.

Twitter Inc.,

now mired in a legal standoff with

Elon Musk,

laid off fewer than 100 members of its talent acquisition team. Mr. Musk’s own company, electric-vehicle maker

Tesla Inc.,

late in June laid off roughly 200 people, after announcing it would cut 10% of salaried staff.

Other firms, including

Microsoft Corp.

and

Alphabet Inc.’s

Google, said they would slow hiring the rest of the year.

Tuesday’s announcement is Mr. Lütke’s first big move after Shopify’s shareholders approved a board plan to protect his voting power. The job cuts are the first big layoffs the company has announced since Mr. Lütke started the company in 2006.

Shopify’s workforce has increased from 1,900 in 2016 to roughly 10,000 in 2021, according to the company’s filings. The hiring spree was made to help keep up with booming business. E-commerce shopping surged during the pandemic, and many small-business owners created online stores to sell goods and services.

Shopify reported annual revenue growth of 86% in 2020 and 57% in 2021 to about $4.6 billion. However, the company reported a softening this year, and warned that 2022’s numbers wouldn’t benefit from the pandemic trends.

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Did the pandemic have a lasting effect on your shopping habits? Join the conversation below.

In his memo on Tuesday, Mr. Lütke said, “What we see now is the mix reverting to roughly where pre-Covid data would have suggested it should be at this point. Still growing steadily, but it wasn’t a meaningful 5-year leap ahead.”

Shopify has been expanding its business in recent years to provide more services for merchants. It has developed point-of-sale hardware for retailers, launched a shopping app for its merchants to list products and created a network of fulfillment centers to ship orders for its business partners.

In May, Shopify agreed to buy U.S. fulfillment specialist Deliverr Inc. for $2.1 billion in cash and stock. It announced partnerships with Twitter in June and with YouTube earlier this month, allowing users to buy items that Shopify merchants post on those platforms.

Shopify is offering 16 weeks of severance to the laid-off workers, plus one week for every year of service.

Write to Vipal Monga at vipal.monga@wsj.com

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Business

Lyft Lays Off About 60 Employees, Folds Its Car Rentals for Riders

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Lyft Inc.

has shed about 60 people while hitting the brakes on renting its cars to riders and consolidating its global operations team, according to people familiar with the matter and an employee memo reviewed by The Wall Street Journal.

The cuts covered less than 2% of staff and mainly affected employees who worked in operations, the people said. In a memo to some staff sent Tuesday, the company said it was folding the part of its business that allowed consumers to rent its fleet of cars on the app.

“Our road to scaling first party rentals is long and challenging with significant uncertainty,” according to the memo, sent by Cal Lankton, vice president of fleet and global operations at Lyft. Mr. Lankton wrote that conversations about exiting the business started last fall and “then accelerated as the economy made the business case unworkable.”

Lyft shares rose around 8% Wednesday to close at $14.70, while the tech-heavy Nasdaq Composite Index climbed less than 2%.

The company said it is going to continue working with big car-rental companies. Lyft’s car-rental business had five locations while it has car-rental partnerships with

Sixt

SE and

Hertz Global Holdings Inc.

in more than 30 locations, a spokeswoman said.

“This decision will ensure we continue to have national coverage and offer riders a more seamless booking experience,” the spokeswoman said in a statement.

The company also is reorganizing its global operations team, consolidating from 13 to nine regions and closing a location in Northern California and its Detroit hub, according to the memo.

Lyft joins other tech companies that are trimming staff or scaling back hiring plans as economic challenges cool the once-hot sector. The industry has been hiring at a rapid pace for years, but easy money is drying up and share prices have been plunging amid the reversal of some pandemic trends, high inflation, supply-chain shortages and growing worries about an economic slowdown.

Lyft’s stock has fallen more than 70% in the past 12 months compared with the less than 20% decline in the Nasdaq Composite Index.

In May, rival Uber Technologies Inc. said it would slow hiring. Its stock has halved over the same period.

Last week, Alphabet Inc.’s Google said it will slow hiring for the rest of the year while Microsoft Corp. cut a small percentage of its staff, attributing the layoffs to regular adjustments at the start of its fiscal year. Rapid-delivery startup Gopuff cut 10% of its staff last week, citing growing concerns about the economy.

Earlier this month,

Facebook

-parent Meta Platforms Inc.’s head of engineering told managers to identify and push out low-performing employees, according to an internal post. Snap Inc. Chief Executive

Evan Spiegel

recently told staff the company would slow hiring, warning that the economy “has definitely deteriorated further and faster than we expected.”

In May, Lyft President

John Zimmer

said in a staff memo the company planned to slow hiring, reduce the budgets of some of its departments and grant new stock options to some employees to make up for its eroding share price. At the time, Mr. Zimmer said the company didn’t plan to cut staff.

After enduring the pandemic, ride-share companies like Uber and Lyft are now facing a new world of high inflation, driver shortages, and dwindling passenger numbers. WSJ’s George Downs explains what they’re doing to try and survive. Illustration: George Downs

Write to Preetika Rana at preetika.rana@wsj.com and Emily Glazer at emily.glazer@wsj.com

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Business

Microsoft Cuts Earnings and Revenue Forecasts

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Microsoft cited the impact of foreign-exchange rates as the U.S. dollar has strengthened.



Photo:

Mike Segar/REUTERS

Microsoft Corp.

MSFT -2.25%

cut sales and earnings guidance for the current quarter, citing the impact of foreign exchange rates as the stronger U.S. dollar takes a toll.

The software giant said in a securities filing Thursday that it now expects fiscal fourth-quarter sales of between $51.94 billion and $52.74 billion, down from its prior guidance of $52.4 billion to $53.2 billion. The quarter ends June 30.

Earnings are expected to be between $2.24 a share and $2.32 a share, down from prior guidance of $2.28 a share to $2.35 a share.

Microsoft shares fell 2.5% in early trading to $265.60. They are down nearly 21% year to date.

Economic weakness in other parts of the world has helped propel the U.S. dollar to multi-decade highs against its trading partners, which comes as U.S. inflation is at or near its highest level in nearly 40 years. The U.S. Dollar Index, which tracks the currency against a basket of others, is up more than 6% so far this year and hit its highest level since 2002 last month. The greenback’s climb has sent the euro, British pound and Japanese yen tumbling.

A strong dollar allows Americans to buy goods from other countries at lower prices. But it can also hurt U.S. manufacturers by making products more expensive for foreigners, and it means U.S. businesses receive fewer dollars for their exports.

Microsoft said in its earnings report earlier this month that a stronger dollar reduced the software company’s revenue, even though it notched higher profits last quarter.

Microsoft is the latest multinational giant to warn of the stronger dollar’s impact on financials.

Salesforce Inc.

earlier this week cited the stronger dollar in lowering its sales outlook for the year. The business-software company doubled the impact that it expects this year from the stronger dollar to $600 million from its $300 million forecast in March.

“I think the dollar might have even had a stronger quarter than we did,” Salesforce Co-Chief Executive

Marc Benioff

said on the company’s conference call Tuesday.

This article will be updated.

Write to Will Feuer at will.feuer@wsj.com

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Business

Warren Buffett Says Markets Have Become a ‘Gambling Parlor’

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OMAHA, Neb.—As recently as February,

Warren Buffett

lamented he wasn’t finding much out there that was worth buying. 

That is no longer the case.

After a yearslong deal drought, Mr. Buffett’s

Berkshire Hathaway Inc.

BRK.B -2.55%

is opening up the spending spigot again. It forged an $11.6 billion deal to buy insurer

Alleghany Corp.

Y -0.62%

, poised to be Berkshire’s biggest acquisition in six years. It bought millions of shares of

HP Inc.

HPQ -2.53%

and

Occidental Petroleum Corp.

OXY -3.40%

And it dramatically ramped up its stake in

Chevron Corp.

CVX -3.16%

, making the energy company one of Berkshire’s top four stock investments.

The big question: Why?

“It’s a gambling parlor,” Mr. Buffett said Saturday of the markets over the past few years. He added that he blamed the financial industry for motivating risky behavior among investors. While he finds speculative bets “obscene,” the pickup in volatility across the markets has had one good effect, he said: It has allowed Berkshire to find undervalued businesses to invest in again following a period of relative quiet. 

“We depend on mispriced businesses through a mechanism where we’re not responsible for the mispricing,” Mr. Buffett said.

Mr. Buffett, 91 years old, shared his thoughts on the state of the markets, Berkshire’s insurance business and recent investments at the company’s annual shareholder meeting in downtown Omaha.

Berkshire also held votes on shareholder proposals, with investors ultimately striking down measures that asked Berkshire to make its board chairman independent and called for the company to disclose climate risk across its businesses. 

Shareholders eager to score prime seats lined up for hours before the doors opened in the arena where Mr. Buffett; right-hand-man

Charlie Munger,

98; and Vice Chairmen

Greg Abel,

59, and

Ajit Jain,

70, took the stage. As Mr. Buffett entered, a lone audience member took the opportunity to send a message. “We love you,” the person shouted. 

Mr. Buffett appeared equally enthused to see the thousands of shareholders sitting before him. 

It was a lot better being able to be with everyone in person, he said.

Up until recently, Berkshire had largely been sitting on its cash pile. Its business thrived; a recovering economy and roaring stock market helped push net earnings to a record in 2021. But it didn’t announce any major deals, something that led many analysts and investors to wonder about its next moves. Berkshire ended the year with a near record amount of cash on hand. (After Berkshire’s buying spree, the size of the company’s war chest shrank to $106.26 billion at the end of the first quarter, from $146.72 billion three months earlier.)

Mr. Buffett’s feeling that there were no appealing investment opportunities for Berkshire quickly gave way to excitement in late February, he said Saturday, when he got a copy of Alleghany Chief Executive

Joseph Brandon’s

annual report.

The report piqued his interest. He decided to follow up with Mr. Brandon, flying to New York City to talk about a potential deal over dinner. 

Warren Buffett headed in to speak to shareholders at Berkshire Hathaway’s annual meeting in Omaha, Neb., on Saturday.



Photo:

SCOTT MORGAN/REUTERS

If the chief executive hadn’t reached out, “it wouldn’t have occurred to me to write to him and say, ‘Let’s get together,’” Mr. Buffett said.

Berkshire’s decision to build up a 14% stake in Occidental also came about with a report. Mr. Buffett said he had read an analyst note on the company, whose stock is still trading below its 2011 high, and decided the casino-like market conditions made it a good time to buy the stock.

Over the course of just two weeks, Berkshire scooped up millions of shares of the company. 

“I don’t think we ever had anything quite like we have now in terms of the volumes of pure gambling activity going on daily,” Mr. Munger said. “It’s not pretty.” 

But the amount of speculation in the markets has given Berkshire a chance to spot undervalued businesses, Mr. Munger said, allowing the company to put its $106 billion cash reserve to work.

“I think we’ve made more because of the crazy gambling,” Mr. Munger said.

Another business that caught Berkshire’s eye? Chevron. Berkshire’s stake in the company was worth $25.9 billion as of March 31, up from $4.5 billion at the end of 2021, according to the company’s filing. That makes Chevron one of Berkshire’s four biggest stockholdings, alongside

Apple,

American Express Co. and Bank of America Corp.

Neither Mr. Buffett nor Mr. Munger specifically addressed Berkshire’s decision to increase its Chevron stake.

But the two men offered a defense of the oil industry. It is a good thing for the U.S. to be producing more of its own oil, Mr. Buffett said. Mr. Munger went further, saying he could hardly think of a more useful industry. 

At the meeting, Mr. Buffett also revealed that Berkshire has increased its stake in

Activision Blizzard Inc.

The company now holds a 9.5% position in Activision, a merger-arbitrage bet from which Berkshire stands to profit if

Microsoft Corp.’s

proposal to acquire the videogame maker goes through.

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Do you agree with Warren Buffett’s market outlook? Why or why not? Join the conversation below.

At the end of the day, Berkshire doesn’t try to make its investments based on what it believes the stock market will do when it opens each Monday, Mr. Buffett said.

“I can’t predict what [a] stock will do…We don’t know what the economy will do,” he said.

What Berkshire focuses on is doing what it can to keep generating returns for its shareholders, Mr. Buffett said. Berkshire produced 20% compounded annualized gains between 1965 and 2020, compared with the S&P 500, which returned 10% including dividends over the same period.

“The idea of losing permanently other people’s money…that’s just a future I don’t want to have,” Mr. Buffett said.

Write to Akane Otani at akane.otani@wsj.com

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Business

Amazon Breaks Record for One-Day Gain in Market Cap

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Investors in big technology stocks have a serious case of whiplash.

Amazon.com Inc.

AMZN 13.54%

on Friday notched the largest-ever one-day gain in market value for a U.S. company—just a day after Facebook parent

Meta Platforms Inc.

suffered the largest-ever loss.

The dramatic moves suggest investors are moving quickly to draw distinctions among the growth prospects of some of the biggest U.S. companies as they reassess their valuations in anticipation of higher interest rates.

Both stocks have surged so far, so fast in recent years that any big move can rattle the broader market and set various records. Amazon is the fourth-biggest company in the U.S. by market value, behind

Apple Inc.

AAPL -0.17%

,

Microsoft Corp.

and

Alphabet Inc.,

with a market capitalization of about $1.6 trillion, while Meta is No. 7, even after Thursday’s declines. 

In recent days, investors have shown more faith in the tech companies whose services are seen as staples than in those whose offerings are more elective, said

John Lynch,

chief investment officer at Comerica Wealth Management, which manages $175 billion.

“Within tech we’re starting to see a delineation between necessities and wants,” he said. “In a rising rate environment, you’re going to have noncorrelated moves in the market.”

Amazon relieved investors with a near doubling in profit in the holiday period and said it is raising the price of its Prime membership in the U.S. to $139 a year from $119. The results showed Amazon was able to control labor and supply costs better than had been expected. The company also saw growth in its cloud-computing and advertising businesses.

“The big thing was more of a sigh of relief with Amazon because there’s been so many worries in regards to that stock in terms of the comparisons after the pandemic being much more difficult,” said

Daniel Morgan,

senior portfolio manager at Synovus Trust Co.

Shares surged 14% Friday, their biggest one-day jump in almost seven years. The added $191 billion to Amazon’s market value, eclipsing the record

Apple

set just last week when it added $181 billion after posting quarterly results that shattered previous records.

Amazon’s rally helped the broader market stabilize Friday, as did a stronger-than-expected monthly jobs report. The S&P 500 added 0.5%, and the tech-focused Nasdaq Composite rose 1.6%.

Meta, meanwhile, warned it expects revenue growth to slow because users are spending less time on more lucrative services. The 26% drop in its shares Thursday erased $232 billion in market value.

Investors are grappling with the question of whether the company’s bet on the metaverse as its future growth engine will work out, Mr. Morgan said.

“That’s what the mystery behind Facebook (is) right now,” he said. “A lot of people can see their core business is really maturing.”

Investors are intensely focused on the Federal Reserve’s plans to begin raising interest rates in mid-March, ratcheting back the monetary stimulus that has helped power stocks since early in the Covid-19 pandemic. Near-zero rates pushed investors into risky assets like stocks and particularly into corners of the market that are valued based on growth far into the future.

The pace and scale of rate increases will depend in part on incoming data on inflation and the jobs market, leaving investors without a clear sight into the ultimate environment for stocks. Friday’s employment report showed the U.S. economy added more jobs in January than had been expected, a development that some investors said could support a more hawkish attitude from the Fed.  

“The uncertainty created by the mere possibility of rate hikes contributes to the large moves that we’re seeing from stocks,” said Andy Kern, senior portfolio manager at asset management firm New Age Alpha.

In another outsize move,

Snap Inc.

shares leapt 59%, more than unwinding Thursday’s 24% slide, when Meta’s report prompted investors to dump shares of social-media companies.

Prompting the turnaround: Snap posted its first quarterly profit. The image-sharing firm also signaled it is adjusting to disruptions in the digital-advertising market caused by Apple privacy-policy changes that are affecting Meta.

Pinterest Inc.

reversed course, too, climbing 11% following a 10% skid in Thursday’s session. After markets closed Thursday, Pinterest reported a 20% rise in sales in the fourth quarter from a year earlier.

Companies such as Apple, Microsoft, Amazon,

Alphabet Inc.

GOOG 0.26%

and Meta have powered the stock market higher in recent years. They have become so big that their moves can cause swings in the S&P 500 index, whose members are weighted by market capitalization. As of Thursday, Apple, Microsoft, Amazon, Alphabet, Meta,

Tesla Inc.

and

Nvidia Corp.

accounted for more than 25% of the weighting of the index, according to S&P Global.

Write to Karen Langley at karen.langley@wsj.com and Joe Wallace at joe.wallace@wsj.com

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Business

Stocks Close Higher on Final Day of Tumultuous Month

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The S&P 500 rose Monday but closed out its worst month since March 2020 as expectations for higher interest rates erode enthusiasm for stocks.

The broad U.S. stock index retreated 5.3% in volatile trading in January as investors wrestle with the question of how tighter monetary policy will influence equity valuations. High inflation and a strong labor market have led Federal Reserve officials to accelerate their plans for unwinding support for the economy.

The central bank last week signaled that it would begin steadily raising rates in mid-March. Adding to investors’ anxieties in recent weeks: the possibility of a Russian invasion of Ukraine and the surge of the Omicron variant of Covid-19.

The suite of concerns has led to declines across the stock market, with 10 of the S&P 500’s 11 sectors retreating in the new year. Only energy stocks have bucked the downward trend.

“January really snuck up on a lot of people,” said

Wayne Wicker,

chief investment officer at MissionSquare Retirement. “Everybody was predicting volatility, but I think the declines in January probably exceeded expectations.”

The shift by the Federal Reserve unsettles a key support for stocks. Investors credit the central bank’s near-zero short-term interest rates and program of bond-buying with helping fuel the stock market’s run from its lows of March 2020. Even after pulling back in recent weeks, the S&P 500 is trading at about double that month’s closing low.

On the final trading day of January, the S&P 500 advanced 83.70 points, or 1.9% to 4515.55. The Dow Jones Industrial Average gained 406.39 points, or 1.2%, to 35131.86. The tech-heavy Nasdaq Composite advanced 469.31 points, or 3.4%, to 14239.88, chipping away at its monthly losses. The day’s gains built on a rally Friday for all three indexes.

Technology stocks have slumped this month as investors consider how rising interest rates could weigh on the group’s pricey valuations, which are based in part on expectations for growth far into the future.

Microsoft

shares dropped 7.5% in January, while

Nvidia’s

slumped 17%.

The Nasdaq Composite fell 9% in January, its largest one-month decline since March 2020. The Dow Jones Industrial Average fared better, losing 3.3% for the month.

“Tech was just very highly valued, very overbought,” said

Dustin Thackeray,

chief investment officer at Crewe Advisors. “It was certainly due for a pullback.”

Amateur investors took the stock market by storm a year ago, buying up shares of meme stocks like GameStop and AMC Entertainment. Many remember it as a revolution against Wall Street, but in the end, they largely just lined the pockets of major financial firms. WSJ’s Dion Rabouin explains. Illustration: Sebastian Vega

Trading in January has featured big days both up and down, as well as sharp intraday reversals.

“There has been extreme volatility so far this year,” said

Louise Dudley,

an equities portfolio manager at Federated Hermes. “People are particularly worried with the interest-rate expectations continuing to get higher. We’re definitely seeing from the U.S. that they’re very on top of the inflation numbers—they’re going to do everything they can.”

Ms. Dudley said she expects that volatility will lessen as investors get more clarity over whether inflation has peaked and how companies expect to be impacted by higher prices for energy, labor and materials.

Investors are listening for clues about companies’ expectations as corporate earnings season continues. Analysts expect that profits from companies in the S&P 500 rose 24% in the fourth quarter from a year earlier, according to FactSet. About one-third of companies in the index have reported.

Strong earnings reports, coupled with the depth of the stock-price declines in January, make some investors think the market may rise from here.

“I think there’s a good chance that last week marked a short-term bottom,” said

Andrew Slimmon,

senior portfolio manager at Morgan Stanley Investment Management. “The fundamentals have not validated the weakness”

Among individual stocks, shares of

Netflix

jumped $42.78, or 11%, to $427.14 on Monday after a ratings upgrade from

Citigroup

and share purchases by Co-Chief Executive

Reed Hastings.

Still, the stock ended January down 29%, its worst month since April 2012.

U.S.-listed shares of

Sony

rose $4.82, or 4.5%, to $111.66 after Sony Interactive Entertainment LLC said it is buying videogame developer Bungie. Earlier in January Microsoft said it would buy videogame giant

Activision Blizzard.

Citrix Systems

shares fell $3.61, or 3.4%, to $101.94 as the cloud-computing company said it would be taken private in an all-cash acquisition valued at $16.5 billion.

Shares of

L3Harris Technologies

dropped $9.38, or 4.3%, to $209.29 after the aerospace and defense company gave a downbeat revenue outlook. 

Some investors are worried that the reversal of easy-money policies will weigh on tech stocks.



Photo:

Allie Joseph/Associated Press

In bond markets, the yield on the benchmark 10-year U.S. Treasury note was little changed, edging up to 1.780% Monday from 1.779% Friday. The monthly yield gain was the largest since March 2021. Yields rise as bond prices fall.

Global oil benchmark Brent crude gained 17% for the month to $91.21 per barrel, its highest settle value since October 2014. Some analysts predict the price of oil will head even higher.

The price of gold slipped in January, losing 1.8% to $1795.00 per troy ounce. Bitcoin fell 17% in January to $38,443.54 at 5 p.m. ET Monday.

Overseas, the pan-continental Stoxx Europe 600 gained 0.7% for the day. In Asia, markets were closed in China and South Korea for a holiday. Hong Kong’s Hang Seng and Japan’s Nikkei 225 each added more than 1%. 

Macau Legend Development

shares fell 19% in Hong Kong after media reports of the arrest of its chief executive over the weekend, on suspicion of money laundering and illegal gambling, including operating online casinos.

Write to Karen Langley at karen.langley@wsj.com and Caitlin Ostroff at caitlin.ostroff@wsj.com

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Business

Elliott and Vista Near Deal to Buy Citrix Systems

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Elliott Management Corp.’s private-equity arm, Evergreen Coast Capital, and Vista Equity Partners are near an agreement to pay $104 a share for the software company, according to people familiar with the matter.

The deal could be announced Monday, the people said, assuming the talks don’t fall apart or drag out.

Should it go forward, the takeover would be the biggest leveraged buyout in recent months, ending the lull that followed a flurry of them in 2021.

With interest rates near historic lows, private-equity firms have amassed billions of dollars of cash from investors that they must put to work to begin earning fees on it.

In all, private-equity firms announced more than $900 billion worth of deals in the U.S. last year, including buyouts and exits, according to Dealogic.

Software companies like Citrix, with their predictable revenue, have become some of the most sought-after targets for private-equity firms because they can carry significant amounts of debt.

Vista is among the firms that specialize in software buyouts, and this would be among its biggest deals. Based in Austin, Texas, Vista manages more than $86 billion in assets and its chief executive,

Robert Smith,

is the wealthiest Black person in the U.S., worth $6.7 billion, according to Forbes. Founded in 2000, Vista is known for using a detailed playbook aimed at maximizing profits at the companies it buys.

The firm has been relatively quiet on the large-buyout front since October 2020, when Mr. Smith admitted to criminal tax evasion and agreed to pay $139 million in back taxes and penalties.

Citrix makes software that allows users to virtually access desktops as well as other cloud-computing capabilities.

Citrix, like many legacy software companies, has had a rocky transition to a subscription-based model for its core virtual-desktop services. Converting customers into subscribers instead of licensees provides more recurring revenue, which investors like and have come to expect from software companies.

Citrix’s

David Henshall

in October stepped down as president and chief executive after investor pressure to explore a sale of the company. He also left as a director along with another board member, a move that reduced the board’s size to eight. The company tapped Chairman

Bob Calderoni

as interim CEO.

But Citrix has had some success lately, benefiting along with peers as more daily life takes place on the cloud and as the number of people working remotely soars. The company said in November that annualized recurring revenue in its third quarter grew 13% from a year earlier.

Its shares closed Friday at $105.55, and had already jumped on speculation of a deal over the past few months. Bloomberg reported Jan. 14 that Elliott and Vista were in advanced talks to buy Citrix.

The hardware and software infrastructure

Amazon.com Inc.,

Microsoft Corp.

, Google and others provide is commonly referred to as the cloud.

The migration to the cloud has been happening for about a decade as companies have opted to forgo costly investments in in-house, information-technology infrastructure and instead rent hardware and software from the likes of Amazon and Microsoft, paying as they go for storage and data-processing. That has made cloud computing one of the most fiercely contested battlefields among business-IT providers and the companies that provide it a hot commodity among investors and acquirers.

That trend appears poised to continue.

Citrix’s modest size compared with that of peers such as

VMware Inc.

and spotty results over the years have made it the subject of periodic takeover speculation. Indeed, it has drawn the attention of private-equity firms and industry competitors in the past, though no deal was struck.

Citrix is expected to be combined with Tibco, a software company Vista agreed to buy in a $4 billion deal in 2014 and has tried to sell multiple times since then, some of the people said. That could afford opportunities to cut costs from overlapping functions and create a company more attractive to another buyer down the road or to public investors if and when the buyout firms decide to take it public again.

Elliott, founded by billionaire

Paul Singer,

manages roughly $48 billion in assets and has been one of the most visible activist investors in recent years, challenging companies including

AT&T Inc.

and

Duke Energy Corp.

While best known for its activist investments, Elliott has been expanding its private-equity practice. Outside of Evergreen, which focuses on technology investments, Elliott owns other companies including bookseller Barnes & Noble Inc.

Elliott has a long history with Citrix. It holds a more than 10% stake worth over $1 billion and had been pushing it to take steps to boost its share price, The Wall Street Journal reported in September.

Elliott took a stake in Citrix in 2015 and held a seat on its board until last spring. The hedge fund has gone on to buy other companies it agitated at, including health-data company Athenahealth Inc., which it agreed to sell last year.

Remote Work, Hybrid Work and the New Office

Write to Cara Lombardo at cara.lombardo@wsj.com and Miriam Gottfried at Miriam.Gottfried@wsj.com

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Business

IBM Sells Watson Health Assets to Investment Firm

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International Business Machines Corp. agreed to sell the data and analytics assets from its Watson Health business to investment firm Francisco Partners, the companies said Friday.

The deal is the latest step by IBM to refocus its core business around the cloud. The Wall Street Journal reported last year that IBM was exploring a sale of its healthcare-analytics business as a way to streamline the computing giant’s operations and sharpen its focus on computing services provided via the internet. The Watson Health business uses artificial intelligence to analyze diagnostic tests and other health data and to manage care.

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Technology

Microsoft’s Activision Blizzard Deal to Power Its Netflix-of-Gaming Aspirations

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Microsoft Corp.’s

MSFT 1.96%

acquisition of

Activision Blizzard Inc.

ATVI -0.27%

aims to shake up the game industry by expanding the software giant’s library of blockbuster videogames and bolstering its efforts to entice consumers to its cloud-gaming service.

The planned $75 billion deal would be Microsoft’s biggest ever and its most ambitious investment yet in its plan to turn its Game Pass subscription service into the

Netflix

of gaming. Once the acquisition closes, Microsoft said it would be the world’s third-largest game company by sales, with 30 game studios under its belt, including the developers of popular franchises Call of Duty, World of Warcraft and Candy Crush.

Around a decade ago, Microsoft shifted to bringing its corporate clients to subscription-based cloud services. The move has helped lift its market value to $2 trillion and maintain its status as one of the world’s top tech companies. The Activision acquisition positions Microsoft to use the same tactic on consumers by persuading gamers to abandon their expensive hardware and play on the cloud.

“Together with Activision Blizzard, we have an incredible opportunity to invest and innovate, to create the best content, community and cloud for gamers to build substantial new value for our shareholders,” said Microsoft Chief Executive

Satya Nadella

on an investor and media call Tuesday.

With more gamers playing on smartphones rather than pricey game consoles and computers, companies around the world are racing to develop services for streaming high-end games to all kinds of devices the same way movies and TV shows are streamed.

Amazon.com Inc.,

Alphabet Inc.’s

Google,

Sony Group Corp.

and a host of smaller players are trying, but Microsoft has taken a large early lead in the emerging cloud-game space by spending billions of dollars on acquisitions and infrastructure, analysts said.

“Microsoft has big aspirations in gaming,” said

Mark Moerdler,

a Bernstein Research analyst. “Microsoft has been buying a number of studios because of what they’re trying to build with Game Pass and subscription gaming.”

If the company can convert some of Activision’s nearly 400 million monthly active users into subscribers, it could significantly bolster its cloud-game business, Mr. Moerdler said.

Subscribers to Microsoft’s Game Pass have increased 39% in the past year to 25 million, the company said. A billboard in New York pitching Activision’s ’Call of Duty: Vanguard.’



Photo:

Richard B. Levine/Zuma Press

Cloud gaming is an emerging technology that allows people to stream games using nearly any internet-connected device with a screen, much as they stream videos on Netflix, Hulu and other platforms. Streaming games is more challenging, though, because games are interactive and require a lot more data to run smoothly. While Netflix moved into mobile games last year, it has so far offered only a handful of games that subscribers must download to an Android or iOS device—not games that can be streamed via the cloud.

Consumer spending on cloud-game services reached $3.7 billion last year, with Microsoft’s Game Pass accounting for 60%, according to research firm Omdia, which forecasts total cloud-game revenue will hit $12 billion by 2026.

Along with announcing its planned acquisition, Microsoft said Tuesday that subscribers to Game Pass—which includes cloud gaming, online multiplayer support and access to a large, rotating library of games—have increased 39% in the past year to 25 million.

Mr. Nadella said Microsoft plans to bring as many Activision games as it can to Game Pass. As it has done with games from developers it has acquired previously, Microsoft could make future games from Activision exclusive on Game Pass and Xbox consoles, analysts said.

“We do think our investment in cloud creates a unique capability for triple-A content to reach any screen on any device,” Microsoft game chief

Phil Spencer

said after the Activision deal was announced.

Growing its cloud-game business will help Microsoft diversify further into consumer-facing businesses. That could narrow the leads Sony’s PlayStation has on Microsoft in game hardware and Amazon’s in cloud services. Mr. Nadella’s broader strategy for Microsoft puts cloud computing at the center of a collection of disparate businesses, from corporate software and enterprise data storage to social media and digital advertising.

Microsoft’s commitments to gaming and the cloud have been years in the making. Since taking over in 2014, Mr. Nadella has leaned heavily on offering the company’s enterprise customers cloud-computing services to power their businesses. This strategy has been the primary driver behind Microsoft’s ascent to become the world’s second-most-valuable company behind

Apple Inc.,

with a market valuation of nearly $2.3 trillion.

Ms. Wu, a target of the GamerGate scandal, says Activision Blizzard’s CEO led a culture of non-accountability, during an interview at WSJ’s Women In: The Tech Industry event.

For years, gaming took a back seat at Microsoft, where consumer-facing businesses got less attention, former and current employees said. The Xbox team was slotted under the Windows operating system and didn’t directly report to the CEO, as Mr. Nadella focused on selling the Office 365 business-software suite and developing the cloud-computing business. The Xbox group struggled to find its place in this structure, the employees said, as the unit was always competing with Windows priorities for investments, typically without success, they said.

“Under Windows, we had to make trade-offs between investing in big gaming initiatives and features for Windows enterprise customers,” said

Richard Irving,

who spent 12 years working on Xbox before leaving Microsoft in 2016. “That was the challenge of being in the Windows division.”

A Microsoft spokesman declined to comment on the company’s previous management of its game business.

A few years ago, Microsoft decided to become more aggressive about expanding its cloud usage to gaming, its main touch point with consumers. Internally, there has been concern that Microsoft is too dependent on enterprise for growth, said people familiar with company strategy. The decision to do more in gaming came after Microsoft looked at the possibility of buying consumer-facing businesses including TikTok,

Pinterest

and Discord, the people said.

It started snapping up game makers, spending more than $10 billion to buy game studios and build a vast library. The company has added popular titles such as the Doom franchise, acquired last year.

Microsoft isn’t alone. The global videogame industry has been riding a wave of consolidation and investing in recent years. Spending on mergers and acquisitions nearly tripled to $26.2 billion in 2021 from $8.9 billion in 2020, data from PitchBook show. And venture-capital deals nearly doubled to a record $11.2 billion from $6.4 billion, according to the private-market-data firm.

Write to Aaron Tilley at aaron.tilley@wsj.com and Sarah E. Needleman at sarah.needleman@wsj.com

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