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Important points
Microsoft’s stock price fell 10% after the earnings report on Thursday, marking its biggest single-day decline since 2020, before failing to recover in pre-market trading on Friday. As of 6:44 a.m. ET, the stock is trading 0.55% higher than Thursday’s closing price. This is despite the company’s second-quarter profit beating analysts’ revenue expectations. Like other hyperscalers, Microsoft has invested heavily in building out its AI infrastructure. However, Meta reported huge AI spending on the same day, and the company’s stock price rose 8%. Why did Microsoft’s stock fall? Investors focused on the growth of Microsoft’s Azure cloud computing platform and other cloud services, but the growth rate was 39% below the Street consensus of 39.4%. These areas saw 40% growth in the first quarter. Amy Hood, the company’s chief financial officer, said the company’s cloud business could have performed better if it had allocated more data center infrastructure to customers instead of prioritizing internal needs. Implicit operating margins for the third quarter were also short, with Microsoft reporting revenue of about $12.6 billion from its More Personal Computing division, which includes Windows, which was below the StreetAccount consensus of $13.7 billion. ANALYST OPINION Barclays analyst Raimo Renshaw said in Thursday’s post-earnings report that most investors are only looking at Azure growth to gauge the health of Microsoft’s business, particularly its AI-related performance. “The company is unlikely to seriously accelerate Azure going forward, as the law of scale and excess capacity is being used for high-margin in-house products such as Co-Pilot and its own AI R&D efforts,” he said. “We think investors need to understand that management has made a conscious decision to focus on what’s best for the company over the long term, rather than driving the stock higher this quarter, last quarter, or even next quarter and coming quarters (as capacity constraints are likely to ease),” Bernstein analyst Mark L. Mädler said in a note Thursday. Many in the market remained bullish on Microsoft stock. Wells Fargo rated the stock overweight in a note Thursday, adding that the company’s “early AI lead and strong existing position in a tight market” justified its high trading price.
