Why Is Microsoft Stock Down After Earnings?

Before earnings season, the market's main concerns about Microsoft included:

1, the company's investment in AI and its impact on financial results. Including the revenue generation from integrating AI into other products such as Bing, GitHub and Azure to understand the actual business demand for AI.

2. the expected growth of Microsoft's key business segments, particularly the core business, Cloud Computing. This business has been its growth engine for many years, but due to concerns about the health of the global economy, growth has slowed from 51% in Q2 2021 to 27% in Q1 this year, for this quarter, the market generally expects this part of the business revenue growth will be recorded at 25%.

What kind of answer has Microsoft delivered to this question?

According to the financial report, Microsoft's fourth-quarter revenue, net income and all business revenue slightly exceeded expectations. Among them, the core business Azure and other cloud services business revenue after deducting the Foreign exchange rate change year-on-year growth rate of 27%, compared with the last quarter's growth rate of 31%, a further slowdown.

On the post-earnings call, Microsoft management said Azure accounts for more than 50% of the $110 billion in cloud sales in FY2023. Azure revenue is expected to grow at a rate of 25% to 26% in the first quarter of fiscal 2024, which means that the growth rate of this Microsoft "cash cow" business will slow down further.

Tuesday after the U.S. stock market after the release of Microsoft's financial results, Microsoft's after-hours stock price fell nearly 3%, but then the decline continued to narrow, during the call, the decline was narrowed to 0.5% or less, but then due to the results guidance on Azure's growth rate is expected to slow down again, the decline quickly expanded, once reached more than 4%.

Due to the recent AI fever, the market has a good expectation of the performance growth that AI can bring to Microsoft, but not only this quarter's results did not materialize, but also the guidance for the next quarter also lacks bright spots.

Revenue guidance for the three major segments is basically at the same level as the current quarter in terms of absolute total and year-on-year growth, meaning that AI will still fail to bring significant incremental revenue to Microsoft in the next quarter.

In addition, at the results, Microsoft CFO Amy Hood said, with Microsoft to support AI to build new data centers to push up the cost of Microsoft's capital expenditures will continue to rise throughout the 2024 fiscal year every quarter, capital expenditures will be used for data centers, CPU chips, GPU chips and networking equipment.

However, in response to a barrage of questions from Wall Street, company executives did not give specific numbers for the upcoming capex binge, nor did they predict how strong the revenue growth from artificial intelligence might be.

But Microsoft management said it was excited by demand signals for AI products, customer response and requests received in paid previews.

Microsoft CFO Amy Hood expects that while Copilot is not yet ready for full release, demand for Microsoft's AI services is strong and leading, with the impact of the product line coming in the second half of fiscal 2024.

In fact, for Microsoft, Wall Street is concerned about the prospects for growth opportunities in cloud computing and artificial intelligence in the coming years, which it believes will ultimately drive Microsoft's growth over the next few years.

Previously, Goldman Sachs analyst Kash Rangan reiterated Microsoft's "Buy" rating and raised his price target from $350 to $400 after the company announced 365 Copilot pricing and other related details. Rangan noted that Microsoft's 365 Copilot will be available to 380 million users at a cost of $30 per month per user. He estimated that the potential market size for the product would be more than $135 billion over the long term. He expects Microsoft to capture 15-30% of that market by FY26, assuming it launches in mid-to-late FY24.

Andrew Marok, an analyst at Rigel Financial, reiterated his outperform rating on Microsoft on Monday, raising his price target on the stock to $400 from $320.

"With AI dominating much of the discussion in the technology space and Microsoft having an enviable position at the forefront of new technologies, market sentiment is very optimistic about Microsoft stock," he wrote in a research note. he wrote in the research note.

According to Marok, investors want to see no more signs of slowdown in the Azure business and are looking forward to the outlook for cloud computing in fiscal 2024, as well as being able to give some quantitative judgment on the outlook for artificial intelligence.

However, these expectations were not able to get a direct response from Microsoft management at the financial meeting, which, combined with the disappointing cloud business growth expectations, may be the main reason for the decline in Microsoft's share price after the trading session.

After all, Microsoft's current valuation has been hit with a lot of future AI may bring incremental performance expectations, relying only on the current actual results can not support, need to see whether the subsequent AI application landing in line with expectations.

Stefan Slowinski, analyst at BNP Paribas Securities Exane, said before Microsoft's results announcement: "It may be too early to see the impact of AI on revenues, but we may see that with the development and distribution of the technology, costs will rise, which could be a problem from the perspective of profitability. Microsoft's fundamentals are clearly quite strong and it will benefit from AI, but at this valuation level you have to scrutinize the risks more."

Is Microsoft's stock price expensive today? The answer depends on whether the future revenue from AI can meet expectations.

We can only leave it to time to see.

Microsoft and Google released their earnings reports on the same day, but their stock prices reacted very differently. Deepwater Asset Management (Deepwater Asset Management) managing partner Gene Munster (Gene Munster) said that Microsoft and Google conveyed "the same message about the inflection point", "but the difference is that Microsoft investors want to see more.

In the short term, the market may penalize Microsoft stock in the short term with a less-than-expected earnings update, but for those who have been investing for a longer period of time or who have faith in Microsoft or AI technology, this becomes an opportunity to buy the stock now.