Wall Street Gives Investors "Deja Vu" As Microsoft Plummets 4% Despite Earnings Beat - Here's Why...

Am I having Deja Vu or am I having Deja Vu? 

Microsoft just reported its fiscal first-quarter results, and while the numbers were solid, Wall Street gave it the AMD “not-so happy ending” as shares oozed -4% after hours. Why? Because like AMD, even though Microsoft beat both top and bottom line expectations, it was their guidance for next quarter that didn’t exactly get analysts all horned up on confidence. Side Note: Why do we call it earnings season when guidance is what truly matters in 2024? Just a thought. 

(Source: CNBC) 

For starters, Microsoft posted earnings per share of $3.30, breezing past the $3.10 analysts had penciled in. Revenue? A hefty $65.6 billion, again beating the Street’s expectations of $64.5 billion (a.k.a 16% bump in revenue YoY). Crushing it, right? Not exactly. 

(Source: Giphy) 

You see, Microsoft's guidance for the current quarter implies revenue growth of only 10.6%, which is just a hair below what analysts were looking for - and just enough for a spontaneous YEET session on Microsoft's beloved share price. Tough crowd, tough crowd. 

On the other hand, while guidance screwed the pooch yesterday, the real MVP was none other than Microsoft’s Azure business. Simply put, Microsoft’s cloud services revenue shot up by 33%, beating expectations and giving a nod to the company’s AI-driven strategy. ICYMI, AI is clearly the belle of the ball here, contributing a full 12 points of that growth. In other words, Microsoft’s going all-in on AI, and it’s paying off—well, sort of. 

(Source: GeedWire) 

The bad news is that while Microsoft is feasting on AI, supply chain issues are a thing, even for a behemoth like Microsoft. Delays in data center infrastructure mean the company won’t be able to meet all its cloud demand in the fiscal second quarter. Now CEO Satya Nadella is hoping things smooth out in the back half of the year, but in the meantime, investors are 100% side-eyeing those supply shortages.

(Source: Giphy) 

Additionally, Microsoft’s partnership with OpenAI is a bigly deal. Like, a $13 billion bigly deal. But just like in a happy marriage life, it’s the motion of the ocean, not the size of the boat that matters - or in this case, even with a massive $13 billion partnership, Microsoft is starting to feel the financial weight of an investment that’s not exactly printing money at the moment. 

For example, the company racked up a $683 million expense last quarter, thanks to its stake in OpenAI—and that’s just the start. CFO Amy Hood warned that this hit could balloon to $1.5 billion next quarter. Translation: Not good for investor confidence. 

(Source: CNBC) 

Now with that said, it’s not all doom and gloom. Nadella is adamant that this AI investment is a long-term play. He’s betting big that AI will become Microsoft’s fastest-growing business ever, and honestly, he might be onto something. After all, Azure’s AI services are already bringing in serious cash as mentioned above. 

But, but, but… even with that, let’s not forget that Microsoft is playing in a crowded sandbox. Amazon, Google, and even Salesforce are all gunning for a piece of the AI pie. In fact, Google’s cloud business grew 35% last quarter, and Amazon is set to report its numbers soon as well. Meaning, sure Azure is making progress, but the competition is ripe… and just one lackluster mistake could be catastrophic to market share. 

(Source: Giphy) 

Especially considering that Microsoft’s spending (overall) is through the roof. For instance, capital expenditures jumped 50% year-over-year to $14.92 billion, largely driven by AI infrastructure. Meaning even though Nadella is Bible thumping the “long play” with AI, it’s definitely becoming a play that’s burning through cash faster than a VC-backed startup during the crypto boom. 

(Source: IT Pro) 

In the end, sure Microsoft is doing a lot of things right—cloud revenue is soaring, AI investments are starting to pay off, and earnings beat expectations. But Wall Street is clearly spooked by the weaker-than-expected guidance and the hefty price tag of its AI ambitions.

Bottom line? Microsoft’s stock might be down, but if you believe in the AI hype (as much as Nadella and everyone else who breathes Oxygen), this could be a classic “buy the dip” moment on Microsoft. Now of course, do what you will with this information and please act accordingly (a.k.a. Don’t be dumb, friends). 

In the meantime, stay safe and stay frosty! Until next time… 

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Stocks.News holds positions in Microsoft, Amazon, Meta, and Google as mentioned in the article.