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July 18, 2024

Microsoft Slumps After Mixed Earnings Report

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Feb 1, 2024

Microsoft shares fell over 4% in extended trading after the company reported mixed results for its fiscal second quarter. While Microsoft beat expectations on earnings and revenue, growth slowed for its key Azure cloud platform, raising concerns among investors.

Earnings Top Estimates But Growth Slows

Microsoft posted earnings of $2.32 per share on revenue of $52.75 billion. Analysts were expecting earnings of $2.29 per share on revenue of $52.94 billion.^^[1]^^

However, Azure cloud platform revenue grew 31%, down from 50% growth last quarter.^^[2]^^ This slowdown disappointed Wall Street and sent Microsoft’s stock lower in late trading.

Financial Metric Result Expectation
Earnings Per Share $2.32 $2.29
Revenue $52.75 billion $52.94 billion
Azure Revenue Growth +31% +50%

While the revenue beat was modest, Microsoft’s profits were supported by healthy demand across business software, cloud services and personal computers. However, analysts noted increased economic uncertainty and a strong U.S. dollar may have started to curb overseas tech spending.

Outlook Remains Cautious Amid Macro Worries

Microsoft said that exchange rates would knock 4% off its profit forecast for the following quarter. Combined with slowing Azure growth, the company’s outlook was more cautious than hoped by investors.

Microsoft expects revenue next quarter between $52.9 billion and $53.8 billion, compared to analyst estimates around $56 billion.^^[3]^^ The underwhelming guidance reflects CEO Satya Nadella’s concern that a potential economic downturn could start to impact tech spending.

“We are seeing customers exercise caution as some parts of the world are in a recession and other parts are anticipating one,” said Nadella on the earnings call.^^[4]^^

Rising interest rates, soaring inflation and fears of recession are forcing businesses to cut costs. This is leading many to trim cloud and software budgets. High energy prices and the strong dollar are also headwinds for global tech firms like Microsoft.

What’s Next For Microsoft

Microsoft is attempting to adjust to a weakening economy by moderating its hiring plans. After nearly doubling its headcount in the past five years, Microsoft is slowing the pace of hiring across the board. CFO Amy Hood said Microsoft is being “quite prudent” about where it adds headcount going forward.^^[5]^^

Microsoft will likely face further volatility ahead amid an uncertain macro environment. However, most analysts remain positive on the stock long-term. While near-term growth is slowing faster than expected, the overall demand environment remains solid.

As businesses continue shifting technology workloads to the cloud, Microsoft is well positioned to benefit over the coming years. The company has a strong presence across cloud, software and security, which are critical areas of IT investment.

Oppenheimer analyst Timothy Horan notes that economic cycles don’t typically impact long-term secular growth drivers like digital transformation and cloud adoption.^^[6]^^ As such, he recommends buying Microsoft shares on the post-earnings weakness.

Whether the economy avoids recession or not, Microsoft will need to demonstrate it can revive Azure’s growth rate. Continued strong demand from corporate customers is needed to justify Microsoft’s premium valuation.

The coming quarters will test whether Microsoft can accelerate momentum for Azure while navigating FX headwinds and cost control pressures across the global tech industry.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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