Microsoft’s stock was largely flat on Friday, after the stock saw its biggest daily decline since 2020, sliding 10% Thursday after it reported earnings.
Shares fell despite the company’s second-quarter earnings beating analyst revenue expectations.
Like other hyperscalers, Microsoft has invested huge sums in its AI infrastructure buildout. But Meta reported huge AI spending on the same day and its stock jumped 8%.
Why did Microsoft’s stock drop?
Investors latched onto the growth of Microsoft’s cloud computing platform Azure and other cloud services, which came in at 39% below StreetAccount’s 39.4% consensus. Those areas saw 40% growth in the fiscal first quarter.
The company’s CFO Amy Hood said that the cloud business’ results could have been higher if the company had allocated more data center infrastructure to customers rather than prioritising in-house needs.
Implied operating margin for third-quarter also came up short, with Microsoft calling for about $12.6 billion in revenue from the More Personal Computing segment that includes Windows, which was lower than StreetAccount’s $13.7 billion consensus.
What analysts are saying
In a post-earnings note on Thursday, Barclays analyst Raimo Lenschow said most investors focused solely on Azure growth to judge the health of Microsoft’s business, especially in its performance around AI.
“It now looks like the company will not really accelerate Azure further from here, due to the law of large numbers and extra capacity being used for its own, higher-margin, first party offerings like Co-Pilot and its own AI R&D efforts,” he said.
“Investors need, we believe, to understand that management made a cognizant decision to focus on what is best for the company long term rather than driving the stock up this quarter or even over last quarter and a few quarters to come (as capacity constraints likely abate),” Mark L. Moerdler, analyst at Bernstein said in a Thursday note.
There was still plenty of bullishness in the market for Microsoft stock. Wells Fargo, in a Thursday note, rated shares as overweight, adding that its “early AI lead and strong incumbent position in a tight market” justify its high trading price.
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