With technology stocks soaring off earnings beats, analysts broke down what's working — and what's not — in the sector.
"The earnings yesterday showed that money is in the cloud, and Amazon, Microsoft and Google showed you the money," Venky Ganesan, Menlo Ventures' managing director, told CNBC. "Paradoxically, in the same week, we have EMC and Dell merging, and IBM coming out with bad earnings. So you can see we know the …. haves and the have-nots in the big tech world."
While companies like Microsoft and Amazon are widening their lead in cloud computing over competitors such as HP, it's still up for debate whether bets on core search will pan out for Google's parent company, Alphabet, analysts said.
All three stock markets opened higher Friday, buoyed in part to an earnings sweep from Amazon, Alphabet and Microsoft. That's after other tech companies such as IBM and Yahoo got slammed in earnings earlier in the season.
The trio of stocks were up more than 7 percent Friday morning, on a day when the markets rallied between 1 and 2 percent. Alphabet beat estimates by 14 cents Thursday night, while Amazon posted earnings per share of 17 cents — blowing away the 13-cent loss expected by Wall Street. Microsoft posted a beat on both earnings and estimates and accounted for 31 points of the Dow's gains.
So what did Microsoft, Amazon and Alphabet do right?
Microsoft saw a boost from Windows 10 adoption and commercial cloud computing, while Amazon continued to post profits on the back of Amazon Web Services (AWS). Under a new reporting structure, Google's parent company Alphabet highlighted mobile search and return to shareholders.
"AWS has hit a tipping point, and because they hit a tipping point, Jeff [Bezos] has decided to break it down and show you the … revenue. The Street is looking at that and realizing that this is a game changer," Ganesan said.
Amazon has managed to shake its reputation for posting losses by posting yet another profitable quarter — a trend that could continue, with one major caveat, Mark Mahaney, internet analyst at RBC Capital Markets, told CNBC on Friday.
"We think they're about to launch a major investment cycle into Asia," Mahaney said. "That could depress earnings. But I think what the market will do is take a 'sum-of-the-parts' approach on this, and look at the ramping profitability in North American retail, and the ramping profitability in AWS, and the market will look through that. But that's the major investment cycle to worry about."
Ben Schachter, analyst at Macquarie Capital also predicted the upward trend would continue for Amazon, noting that competitors such as eBay and Walmart have not posed a "meaningful competitive response" to premium service Prime in a Friday research note.
Gene Munster, an analyst at Piper Jaffray, echoed Schacter's sentiments.
"If you look at Amazon, they grew their units at 26 percent last quarter. Ebay grew their GMV at 6 percent," he told CNBC.
Munster added that unit-growth is "the real story" — something investors should focus on as opposed to margin growth.
"The sustainability of commerce is probably a bigger, longer term theme," Munster said.
"Looking at the e-commerce business … growth rate this quarter, the fact that it re-accelerated, considering that they are already by far one the largest market share companies in the world, tells you that business should be worth a lot more," Youssef Squali, analyst at Cantor Fitzgerald, said. "The unfair competitive advantage that Amazon has that Wal-Mart doesn't have, that Target doesn't have, and that eBay doesn't have is the fact that AWS is highly profitable… . They can continue to subsidize the e-commerce business, and really undercut anybody and everybody in terms of pricing."
Though Schachter wrote that the sustainability of AWS is "unclear," the remote computing service seems to be unstoppable in the near term.
"AWS may be the single-most dominant trend in tech today," Mahaney said Friday on CNBC's "Squawk on the Street." "It's a very large market. This company's got eight times the share of its closest competitor. There's only really one big horse in this race, and it's a business that's a commodity business, so whoever has the most scale has the lowest costs, can charge the lowest prices, can gain the most market share."
Munster said on Friday's "Fast Money: Halftime Report" that he raised his price target on Amazon to a street-high of $800 because of Amazon's large gains in "the secular growth theme."
"An elementary student could tell you this, but it's still something that is an investable theme so we're very much on board with owning Amazon," he said.
However, this isn't without caution.
"You gotta think about traditional retailers. They're the ones feeling the most pressure right now and they're not going to give up," Munster warned. "So that could force Amazon into more of an investment phase and could cause investors confidence in the margin expansion to relapse. That's probably the biggest risk that' more near term."
Alphabet made strides in shareholder transparency in its first report under a new structure Thursday, emphasizing a focus on its constituents with a stock buyback program, Schachter wrote.
"The surprise last night was on mobile, when they [Alphabet] said that mobile now accounts for more than 50 percent of queries," Squali said. "It kind of reminds me a little bit of Facebook three years ago, when everybody was basically saying that Facebook has a mobile problem, and they turned it into a huge opportunity. I think you're going to see the same thing with Google right now."
Core search, Google's most well-known product, was particularly illuminated in the report.
"The business fundamentals seem to indicate that concerns about core search may be exaggerated," Schachter wrote.
"The market's been wrong on core search," Mahaney said. "The market's assumed that core search is heading toward single-digit growth, and therefore this company doesn't deserve a large growth multiple."
Mahaney believes the stock is undervalued, though he said he felt there was still more work to be done to disclose the impact of YouTube and advertising prices on the business.
"This is extremely stable revenue growth," Mahaney said. "I think that's something that's misunderstood about Google. This is now 11 straight quarters where the company's been able to grow its core advertising business somewhere between 16 and 21 percent. It's an accelerating growth story with what we think are stable to expanding margins in the core business. This stock should trade at a higher multiple, especially when you remove the management discount over failure to provide transparency."
On the tailwinds of the new Windows 10 operating system and a series of upgraded devices, the tech giant has signaled its commitment to staying lean, and led the way on a "renaissance of cloud growth," Daniel Ives of FBR & Co. wrote in a research note
"With many of the mature tech stalwarts (Oracle, Cisco, HPQ, IBM) on the 'innovation treadmill,' Satya Nadella has instead helped navigate Microsoft toward the cloud quicker and more successfully than its peers, and it clearly was on display for all to see this quarter," Ives wrote.
Ed McGuire of CLSA told CNBC's "Power Lunch" that Microsoft's increasing "hipness factor" is bearing fruit.
"They actually have some real cache with the new Surface Book and Surface 4 and you know maybe we'll see this drift into a Surface phone in the next few quarters ..." he said Friday.
In conjunction with its "hipness factor," investors might want to pay attention to the tech giant's new holograph computer project called HoloLens.
"I mean this whole concept of mixed reality is incredibly innovative," McGuire said. "Now, the question is, how quickly will developers be able to write applications that are going to be usable in daily applications ... this is some of the most amazing technology they've showcased."
"The consumer and the advertiser are very much alive," Squali said. "There was a lot of concerns around the health of the consumer, both in the U.S. and especially in Europe. And in both cases, whether it's Alphabet/Google or Amazon, they ended up showing accelerated topline growth at a time when they are also providing more visibility into some of the areas that were, up until very recently, somewhat clouded. So I think the combination of the two is really what surprised people to the upside."