TLDR
- Microsoft (MSFT) stock dropped 10% on Thursday, its biggest single-day decline since 2020, erasing $357 billion in market value
- Azure cloud growth came in at 39%, slightly below the 39.4% analyst expectations, down from 40% last quarter
- Microsoft beat revenue and earnings estimates but investors focused on slower cloud growth and capacity constraints
- CFO Amy Hood said cloud results could have been higher if more data center capacity went to customers instead of internal AI needs
- The stock now trades at a P/E ratio of 25 and is down over 20% from its October peak
Microsoft’s stock took a beating Thursday, plunging 10% in its worst single-day performance since 2020. The drop wiped out $357 billion in market value. Ouch.
The decline came despite the company actually beating analyst expectations. Revenue climbed 17% to $81.3 billion. Earnings per share jumped 24% to $4.14. Operating income rose 21% to $38.3 billion.
So what spooked investors? The answer lies in the cloud.
Azure Growth Misses the Mark
Microsoft’s Azure cloud platform grew 39% in the quarter. That sounds impressive, but it fell short of the 39.4% growth analysts expected. Last quarter, Azure grew 40%.
Wall Street zeroed in on this tiny miss. Investors had bet big on Azure’s AI momentum continuing to accelerate.
CFO Amy Hood offered an explanation during the earnings call. She said Microsoft chose to allocate data center capacity to its own AI projects rather than external customers. That decision held back Azure’s growth numbers.
The company prioritized internal needs like Copilot and AI research over pure revenue growth. Management believed this strategy would pay off long-term, even if it meant disappointing investors short-term.
Barclays analyst Raimo Lenschow noted that most investors judge Microsoft’s entire business by Azure growth alone. He said the company likely won’t accelerate Azure further from current levels due to capacity constraints and strategic choices.
Microsoft’s third-quarter guidance added to investor concerns. The company forecast flat sequential revenue of $80.65 billion to $81.75 billion. That represents 15% to 17% growth year-over-year.
The forecast showed slowing growth in consumer businesses like Windows. Microsoft projected cost of goods sold would grow 22% to 23%, which could squeeze margins. Capital spending would decrease slightly due to normal quarterly variations.
The AI Investment Question
Microsoft has poured billions into AI infrastructure. The company invested $1 billion in OpenAI back in 2019. It added another $10 billion in 2023. After OpenAI’s restructuring, Microsoft now owns a 27% stake valued at $135 billion.
These investments position Microsoft at the center of the AI revolution. But they come with massive capital requirements. Free cash flow is declining as spending ramps up.
The company said it remains capacity-constrained in its cloud business. That explains the ongoing heavy spending. Microsoft’s backlog of remaining performance obligations hit $625 billion, signaling strong future demand.
Bernstein analyst Mark L. Moerdler defended Microsoft’s approach. He said management made a conscious decision to focus on long-term value rather than short-term stock gains.
Wells Fargo maintained an overweight rating on the stock. The firm cited Microsoft’s early AI lead and strong market position as justification for its valuation.
Not all analysts shared the pessimism. Several noted that Microsoft’s core business fundamentals remain strong. Operating margin hit 47%. Azure still posted 39% growth, even if it missed estimates slightly.
The stock traded up just 0.55% in Friday premarket trading. It now sits at an eight-month low, down more than 20% from its October peak.
Microsoft’s P/E ratio has fallen to 25 based on fiscal 2026 earnings estimates. That’s below the S&P 500 average. The company still expects mid-to-high-teens revenue growth in coming quarters.
Azure growth is forecast at 37% to 38% for the current quarter. Microsoft reported $32.9 billion in intelligent cloud segment revenue, up from the previous period.
The company continues facing capacity constraints as it builds out AI infrastructure to meet customer demand and support internal projects.
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