Microsoft stock is getting crushed on Thursday.
The negative post-earnings reaction stems from investors' dismay over weaker-than-expected guidance in a key business area, alongside larger-than-expected spending on AI.
Microsoft earnings came in above both top and bottom line forecasts, with cloud revenue reaching $50 billion for the first time, but Microsoft stock still plunged 12%, its biggest decline since March 2020.
Wall Street analysts were laser-focused on AI spending heading into earnings, and the market's reaction to Microsoft and Meta's results shows that investors need to see strength elsewhere in the business to feel good about surging capex. Meta shares spiked on Thursday, and although its spending outlook jumped, that was offset by robust advertising business.
Microsoft's Azure cloud platform revenue grew 39% on an annual basis, coming in above the forecast 38.4% but still below the 40% it posted in the previous quarter. According to finance pros, this is the primary factor driving Microsoft stock down.
"Microsoft allocated scarce GPU capacity away from Azure to 1P products, but the fact that BOTH Azure and the M365 segments fell a bit short is the key negative we're hearing that is driving the modest after-market fade," stated UBS analyst Karl Keirstead.
Other Wall Street analysts think Microsoft could face challenges in the coming months if it can't find a way to boost its cloud revenue and win back Wall Street's confidence.
"I think sentiment around Microsoft is kind of negative right now. And if they don't really beat or re-accelerate Azure growth, the shares are probably not going to perform very well," Ryuta Makino of Gabelli Funds said.
Tech guru and University of Michigan professor Erik Gordon pointed to Microsoft's excessive spending as a catalyst for the stock's decline, noting that he sees it as a clear indication of a bubble in AI.
To get back to where it needs to be, though, Microsoft may need to spend even more. Blake Crawford, CIO of tech consulting firm Fusion Collective, raised the concern that much of its growth prospects hinge on the success of OpenAI.
"The number that sticks out like a sore thumb: remaining commercial obligations are up 110% to $625 billion, and OpenAI is a whopping 45% of that," he stated. "That's a lot of hope-and-a-prayer that OpenAI will be able to deliver. And recognizing any potential upside will require significant capex."
