Microsoft missed expectations, or did Wall Street run out of patience?
Microsoft's financial report shows that its Azure cloud business revenue growth is lower than expected, while AI capital expenditures have surged and are expected to continue to grow. This poor performance has raised concerns in the market, with some believing that the return on AI investment will take longer. Microsoft's stock price plummeted nearly 8% after hours, dragging down tech stocks such as Amazon and Meta. Despite the increased contribution of AI services to Azure's growth, overall revenue growth still falls short of expectations. Microsoft has stated that it will continue to increase investment in the AI field, but the market's impatience is evident as the billions of dollars invested have not resulted in a corresponding revenue growth
Overnight, tech stocks took another hit, with the "AI leader" Microsoft underperforming. Azure cloud business revenue growth fell short of expectations, and capital expenditures are expected to continue to rise, fueling market concerns - AI investments may require more time to yield returns.
Microsoft's financial report for the second quarter ending June 30 showed that Azure revenue grew by 29%, below the expected 30.6%. Additionally, Microsoft expects a growth of 28%-29% in the third quarter, also falling short of expectations.
At the same time, capital expenditures in the second quarter surged by 77.6%, with almost all of it allocated to AI-related expenses. Microsoft stated that it will continue to increase spending.
The disappointing growth trajectory, coupled with significant capital expenditures, indicates that Microsoft's massive investments in the field of artificial intelligence may take longer to pay off, dragging down the performance of other major tech stocks.
Microsoft's stock price plummeted nearly 8% after hours, currently narrowing to 2.72%, while Amazon and Meta both dropped over 3%, along with Datadog and Snowflake.
Slowing Cloud Business Growth, Revenue Growth Below Expectations
During Tuesday's analyst conference call, Microsoft projected that the growth rate of Azure cloud business in the July-September quarter will reach 28%-29% (calculated at fixed exchange rates), below analysts' expectations of 29.7%.
After the news was announced, Microsoft's stock price fell by 8% after hours, but narrowed to 3% after the company stated that Azure growth will accelerate in the second half of the 2025 fiscal year.
As a frontrunner in AI through its collaboration with OpenAI, Microsoft has been heavily investing in expanding its data center network. However, for the second quarter ending June 30, Azure revenue grew by 29%, below the expected 30.6%, marking the first time it fell below 30% since the third quarter of last year.
Although the contribution of AI services to Azure's growth increased from 7 percentage points in the previous quarter to 8 percentage points, the overall revenue of the Intelligent Cloud business, including Azure, grew by 19% to $28.5 billion, below the expected $28.68 billion.
Recent concerns among investors revolve around the massive investments by tech giants in AI, which may take longer to yield returns. Daniel Morgan, Senior Portfolio Manager at Synovus Trust, stated:
Wall Street doesn't have much patience; they see companies investing billions of dollars and expect to see a corresponding scale of revenue growth. If these companies' performance does not significantly exceed expectations, their stock prices will be impacted.
Sharp Increase in Capital Expenditures by 77.6%, AI Investment Returns May Take Longer
While Azure revenue fell short of expectations, Microsoft's capital expenditures surged and the company stated it will continue to increase spending.
In the second quarter, Microsoft's capital expenditures (including finance leases) increased by 77.6% year-on-year to $19 billion, significantly higher than the $14 billion in the previous quarter, pushing Microsoft's annual capital expenditures for the 2024 fiscal year past the $50 billion mark.Almost all of it is used for artificial intelligence-related expenses. Microsoft executives stated that about half of it is used for infrastructure needs, such as building and leasing data centers; the rest of the cloud and artificial intelligence-related expenses are mainly used for servers, including CPUs and GPUs.
Microsoft's Vice President of Investor Relations, Brett Iversen, stated that the company will continue to increase spending to meet "strong customer demand," with capital expenditures expected to exceed those of the 24 fiscal year by 2025. Meanwhile, Chief Financial Officer Amy Hood pointed out:
Microsoft's significant investment in artificial intelligence is expected to be monetized over "15 years or even longer."
Microsoft CEO Nadella reassured investors by stating:
The transformation involves knowledge and capital-intensive investments, emphasizing the importance of "long-term operating leverage." Microsoft has expanded its data footprint and increased AI chips from AMD and NVIDIA