Microsoft (MSFT) Stock: Why Wall Street Sold After a Solid Earnings Beat

TLDR

• Microsoft posted $4.14 per share earnings on $81.3 billion revenue, topping analyst estimates but shares fell 6.8% after hours
• Azure cloud revenue increased 39% year-over-year but represented a slowdown from the prior quarter’s 40% growth
• Capital expenditures reached $37.5 billion for AI infrastructure, up 66% from last year and above expectations
• The company revealed 15 million annual subscribers for its M365 Copilot AI assistant priced at $30 per month
• OpenAI accounts for 45% of Microsoft’s $625 billion commercial backlog, raising questions about partner dependency

Microsoft exceeded Wall Street expectations Wednesday but watched its stock tumble in extended trading. The company reported adjusted earnings of $4.14 per share with revenue of $81.3 billion for its fiscal second quarter.

Analysts had forecast $3.91 per share on $80.3 billion in revenue. Despite clearing these hurdles, shares dropped 6.8% after hours. The disconnect between strong results and negative reaction centers on cloud growth trends and AI spending levels.

Azure cloud platform revenue grew 39% during the October-December period. While this beat the 37.8% analyst estimate, it marked a deceleration from last quarter’s 40% pace. Investors are watching Azure closely as Microsoft’s primary growth engine.

Microsoft Corporation, MSFT

CFO Amy Hood projected third-quarter Azure growth between 37% and 38% in constant currency. This guidance fell roughly in line with the 37.6% Wall Street estimate but signals continued slowdown. The company also forecast overall revenue with a midpoint of $81.2 billion, matching consensus.

Record AI Spending Raises Eyebrows

Microsoft spent $37.5 billion on capital expenditures during the quarter. This represents a 66% jump year-over-year. About two-thirds went toward computing chips and AI infrastructure.

The spending exceeded analyst predictions of $34.31 billion by over $3 billion. Some investors questioned whether the massive outlays will generate adequate returns. Revenue grew 17% while cost of revenue increased 19%, a trend that sparked concern.

CEO Satya Nadella disclosed that M365 Copilot now has 15 million annual users. The $30 monthly AI assistant represents Microsoft’s flagship AI product for businesses. This marked the first time the company shared specific user metrics for the tool.

OpenAI Relationship Under Scrutiny

The OpenAI partnership produced mixed results. Microsoft’s “Other” segment swung to $10 billion income from a $2.3 billion loss last year. The change stems from how Microsoft accounts for its 27% stake following OpenAI’s restructuring.

Commercial remaining performance obligations hit $625 billion, up 110% year-over-year. However, OpenAI alone drove 45% of this backlog. The AI startup has pledged to spend at least $281 billion with Microsoft over time.

Excluding OpenAI, cloud backlog grew 28%. This figure includes a $30 billion deal with Anthropic. The heavy reliance on OpenAI concerned some analysts as competition intensifies from Google’s Gemini and other AI models.

Google recently won Apple as a major customer for its AI technology. This challenges Microsoft’s early mover advantage in artificial intelligence. The company has invested over $200 billion in AI since fiscal 2024 began.

Hood said capital spending will decline slightly in the current quarter. She warned that rising memory chip costs will pressure cloud margins over time. Total quarterly revenue rose 17% to $81.3 billion, ahead of the $80.27 billion estimate.

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