Microsoft (NASDAQ:MSFT) announced its fiscal fourth-quarter earnings after the bell on Tuesday, posting top and bottom-line beats but falling short on cloud revenue expectations. This disappointment sent shares of the tech giant tumbling more than 7% in after-market trading.
Earnings Overview
For the quarter, Microsoft reported earnings per share of $2.95 on revenue of $64.7 billion. Wall Street had anticipated EPS of $2.94 on revenue of $64.5 billion, according to Bloomberg data. During the same period last year, Microsoft posted an EPS of $2.69 and revenue of $56.2 billion.
Cloud Revenue Shortfall
While Microsoft’s overall cloud revenue met expectations at $36.8 billion, its Intelligent Cloud revenue, which includes Azure services, fell short at $28.5 billion, missing the expected $28.7 billion. This shortfall contributed to the post-earnings stock drop despite a year-over-year revenue increase of 21%.
AI Growth Impact
Microsoft’s AI services contributed 8 percentage points to the growth of Azure and other cloud services, which saw a 29% increase. However, the AI miss sent ripples across the market, with shares of other AI-focused companies like Meta (NASDAQ:Meta) falling over 3% in after-hours trading.
Competitive Landscape
The report came shortly after Alphabet’s (NASDAQ:GOOG) earnings announcement, which noted an uptick in cloud revenue partly due to AI product interest. However, Alphabet did not provide specific figures on AI’s impact, leading analysts like UBS’s Stephen Ju to predict significant revenue benefits from AI spending might not materialize until 2025.
UBS analyst Karl Keirstead highlighted that Microsoft has been gaining market share from Google and Amazon (NASDAQ:AMZN). “In terms of share shifts among AWS, Microsoft Azure, and Google Cloud, the most consistent theme in this round of checks was the number of customers and partners that cited share gains by Microsoft resulting from its early lead on the AI front,” Keirstead noted. This theme has been recurring over the last 6-12 months, emphasizing Azure’s relative strength.
Market Reactions
Despite the earnings miss, Microsoft’s overall revenue growth and its advancements in AI signify a strong market presence. The company’s strategic focus on AI and cloud services is expected to drive future growth, though immediate market reactions reflected investor disappointment.
Shares of Alphabet have risen 22% year-to-date, while Amazon’s shares are up 23%. The broader market response to Microsoft’s earnings report underscores the competitive pressures and high expectations surrounding AI and cloud computing advancements.
Capital Expenditures and Future Outlook
During Alphabet’s earnings call, CFO Ruth Porat revealed that the company spent $13 billion on capital expenditures in the quarter, primarily directed towards AI. This mirrors the substantial investments major tech companies are making in AI to maintain competitive edges.
Amazon is set to report its earnings on August 1, which will provide further context on the competitive dynamics within the tech and AI sectors.
Conclusion
Microsoft’s Q4 earnings report highlights the ongoing challenges and high stakes in the AI and cloud computing markets. Despite posting solid overall financial results, the shortfall in Intelligent Cloud revenue underscores the intense competition and high investor expectations.
As Microsoft continues to innovate and invest heavily in AI and cloud services, its ability to capitalize on these investments will be crucial for maintaining its market position and driving future growth. The upcoming earnings reports from Amazon and other tech giants will further illuminate the landscape and provide additional insights into the evolving dynamics of the industry.
Featured Image: Pixabay©efes
