Microsoft Cloud Revenue Misses Expectations, Shares Tumble

Key financial results: Microsoft reported strong overall performance for its fiscal fourth quarter, but missed expectations on a key cloud revenue metric:

• The company posted earnings per share (EPS) of $2.95 on revenue of $64.7 billion, beating analyst expectations of $2.94 EPS and $64.5 billion in revenue.
• However, Microsoft’s Intelligent Cloud revenue, which includes its Azure services, came in at $28.5 billion, falling short of the expected $28.7 billion.

Impact on Microsoft’s stock and the broader market: The disappointment in Microsoft’s cloud revenue, particularly in the context of the current AI hype, led to a significant drop in the company’s stock price and affected other AI-focused companies:

• Microsoft shares fell more than 7% in after-market trading following the earnings report.
• The news also sent shares of Meta, another AI-heavy company, lower by more than 3% in after-hours trading.

Growth in cloud revenue and the role of AI: Despite missing expectations on Intelligent Cloud revenue, Microsoft still reported substantial growth in its overall cloud business and highlighted the contribution of AI services:

• Microsoft’s overall cloud revenue rose 21% year over year to $36.8 billion, in line with expectations.
• Intelligent Cloud revenue increased 19% year over year, with AI services contributing 8 percentage points of growth to Azure and other cloud services revenue, which grew by 29%.

Comparison to competitors and market share: Microsoft’s earnings report comes on the heels of Google’s announcement last week, which also emphasized the impact of AI on its cloud business:

• Google reported an uptick in cloud revenue partially due to interest in AI products but did not provide specific numbers on the impact of AI on the cloud business.
• According to UBS analyst Karl Keirstead, Microsoft has been gaining market share from both Google and Amazon in the cloud sector.

Broader implications and looking ahead: While Microsoft’s overall performance remains strong, the miss on cloud revenue highlights the market’s skepticism about the economics of AI.

• The disappointing cloud revenue numbers, despite the emphasis on AI contributions, suggest that translating AI hype into tangible financial results may take longer than anticipated.
• As more tech giants, including Amazon and Google, continue to invest heavily in AI and report on its impact, the market will be closely watching to see how these investments materialize into revenue growth and market share shifts.
• The pressure on Microsoft and other AI-focused companies to deliver on the promise of AI will likely intensify, as investors seek clear evidence of the technology’s transformative potential and its ability to drive sustainable growth in an increasingly competitive market.