Microsoft (NASDAQ: MSFT ) The stock was in free fall Thursday, falling more than 12% despite posting earnings Wednesday afternoon that looked strong on the top and bottom lines.
Revenue and earnings numbers beat estimates in blowout fashion. The technology giant saw revenue rise 17% to $81.3 billion, while net income jumped 60%. $38.5 billion, or $5.16 per share, which blew away estimates of $3.92 per share.
Where to invest $1,000 now? Our analyst team recently revealed what they believe 10 Best Stocks Join Stock Advisor when you buy now. View Stock »
Microsoft’s cash cow, its cloud computing business, passed $50 billion in revenue for the first time, up 26% year over year. Its Intelligent Cloud business, which primarily encompasses its artificial intelligence (AI) cloud business, including Azure, grew 29% to $32.9 billion. Azure, the largest piece of the intelligent cloud pie and the growth driver, saw revenue grow 39% in the quarter.
Again, these look like good numbers, but Microsoft investors saw some troubling trends that sparked the sell-off.
Two trends stuck out for investors that led to the selloff. One, Azure cloud growth slowed slightly, from 40% the previous quarter to 39% this quarter. This is certainly a small decline, but combined with the expected growth for Azure of 37% to 38% in the third fiscal quarter, it begins to form a trend.
At the same time, Microsoft reported $37.5 billion in capital expenditures (capex) in the quarter—a record for the company and a 66% increase over the same quarter a year ago.
In the earnings call, CFO Amy Hood said that two-thirds of the capex was primarily spent on GPUs and CPUs to meet AI demand. But that raised a red flag for many investors who questioned the lack of bang for the AI buck amid slowing Azure growth and rising capital spending.
So what does this mean for Microsoft stock?
Coming into the year, Wall Street analysts were more bullish on Microsoft than any other S&P 500 The stock, 97% rated Microsoft as a buy.
While Microsoft stock received several price target downgrades after the earnings report, all analysts maintained their buy ratings.
Before the earnings release, Microsoft had an average price target of $625 per share, suggesting a 12-month return of 47%.
While the latest upgrades, which range from about $650 per share Morgan Stanley From about $550 per share JP Morgan ChaseBringing it down a bit, it would still be in the $600-per-share range, which would still be a 41% year-over-year increase.
