Microsoft’s Market Cap Plummets $357 Billion After Earnings Disappointment

Microsoft Shares Tumble as Investors Scrutinize Cloud Growth and AI Investments

Microsoft’s stock experienced a significant downturn on Thursday, shedding approximately 10% and marking its steepest daily decline since March 2020. This drop erased $357 billion from the tech giant’s market capitalization, bringing its valuation to $3.22 trillion by the close of trading. The sell-off occurred despite an overall resilient tech sector, with the Nasdaq Composite index only dipping by 0.7%.

The broader impact was felt across technology-related equities. The iShares Expanded Tech-Software Sector ETF, a bellwether for software companies, fell 5%. In contrast, Meta Platforms saw a surge of 10% following the release of its robust quarterly results and optimistic revenue guidance, highlighting a divergence in investor sentiment within the tech landscape.

Delving into Microsoft’s latest earnings report, investors pinpointed a few key areas that fueled the disappointment. The crucial growth metric for Azure, Microsoft’s flagship cloud computing service, came in at 39%, slightly below the StreetAccount consensus of 39.4%. Furthermore, the company projected revenue for its More Personal Computing segment, which encompasses Windows, at approximately $12.6 billion for the fiscal third quarter. This figure fell short of the StreetAccount consensus of $13.7 billion, and the implied operating margin for the upcoming quarter also presented a less favorable outlook.

Microsoft’s Chief Financial Officer, Amy Hood, offered an explanation for the Azure performance, suggesting that the cloud growth could have been higher if the company had prioritized allocating its newly acquired data center infrastructure, particularly GPUs, to external customers rather than its internal needs. “If I had taken the GPUs that just came online in Q1 and Q2 and allocated them all to Azure, the KPI would have been over 40%,” Hood stated.

This strategic decision regarding infrastructure allocation drew the attention of analysts. Ben Reitzes of Melius Research, while maintaining a buy rating on Microsoft, suggested that the company needs to accelerate its data center expansion. “I think that there’s an execution issue here with Azure, where they need to literally stand up buildings a little faster,” Reitzes commented on CNBC’s “Squawk on the Street.”

Adding to the scrutiny, analysts at UBS, led by Karl Keirstead, raised questions about Microsoft’s investment strategy for artificial intelligence computing capacity. They specifically pointed to products like the Microsoft 365 Copilot add-on, which has not yet achieved the widespread adoption seen with OpenAI’s ChatGPT. The UBS analysts noted in a research note, “M365 revs growth is not accelerating due to Copilot, many checks on Copilot don’t suggest a strong usage ramp… and the model market appears crowded and capital-intensive. We think Microsoft needs to ‘prove’ that these are good investments.”

However, not all market observers shared this cautious outlook. Analysts at Bernstein, led by Mark Moerdler, who also hold a favorable view on Microsoft shares, lauded the company’s long-term strategic vision. “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),” the Bernstein analysts wrote.

Looking ahead, Hood indicated that capital expenditures are anticipated to decline slightly in the current quarter. This forward-looking statement, coupled with the ongoing debate surrounding AI investment and cloud infrastructure, will likely remain key factors for investors as they assess Microsoft’s future trajectory.