Market Response to Microsoft’s Earnings Report
On Wednesday, Microsoft shares are anticipated to open lower after the tech behemoth unveiled earnings surpassing expectations, yet fell slightly short in the anticipated growth of a crucial revenue source.
Microsoft (MSFT) concluded Tuesday at 2.92, a decrease of 0.9% for the day. However, following the announcement of the fourth-quarter earnings report, shares plummeted nearly 8% to 9.20 shortly thereafter.
The report initiated a debate among investors, splitting them into bullish and bearish camps, with the latter prevailing. Shares peaked at 7.61 at 4:55 p.m. but then retraced, according to Nasdaq data. The closing trade just before 8 p.m. ET recorded the stock at 1.25, down almost 2.8% from the previous close.
Pre-market trading on Wednesday indicates that Microsoft may open in the range of 9 to 3, based on Nasdaq data.
If this prediction holds, analysts might start adjusting their price targets for Microsoft downward. According to Zack’s Research, the average price target for the stock is 0, with the highest target also at 0.
Investor Sentiment and AI Investment Hurdles
Microsoft presented its earnings report in what could be described as an unwinnable situation.
The company reported earnings of .95 a share, slightly exceeding Wall Street predictions. Revenue increased by 15.1% to .7 billion, surpassing analysts’ estimates of .4 billion.
However, Microsoft’s Azure cloud division, its foremost growth initiative, reported a revenue growth of 29%, just missing the street’s expectation of 30%. Overall, Intelligent Cloud revenues grew by 19% to .52 billion, just below the street’s forecast of .7 billion.
Simultaneously, the previous excitement surrounding artificial intelligence that surged in 2023 and continued into 2024 has sharply diminished in recent weeks.
The ongoing concern is clear: substantial investments are being directed towards the development of artificial intelligence and associated applications. Consequently, many investors are becoming restless.
This has resulted in some selling activity. The Nasdaq Composite Index has declined by 8.2% since reaching an all-time high on July 11. Nvidia (NVDA) has experienced a 26% drop since hitting a peak of 0.76 on June 20.
For Microsoft, capital expenditures reached billion in the fiscal fourth quarter alone, nearly a 78% increase from the previous year, resulting in a total of .7 billion for the fiscal year.
“The street is lacking in patience,” stated Daniel Morgan, senior portfolio manager at Synovus Trust, in an interview with Reuters. “They observe billions in spending and expect corresponding revenue growth.” The firm owns shares in Microsoft.
AI initiatives have yet to produce substantial revenue for advocates other than perhaps Nvidia (NVDA), resulting in some stock declines. Recently, Google-parent Alphabet’s shares slid 6% due to concerns regarding excessive spending.
Nonetheless, Microsoft CEO Satya Nadella assured during Tuesday’s earnings call that profitability is on the horizon. (The transcript, provided by the Motley Fool, can be found on Nasdaq’s website.)
Microsoft has successfully encouraged numerous companies to adopt its AI solutions, with Nadella noting positive feedback. However, during the call, CFO Amy Hood indicated that one reason for the revenue growth falling short of expectations was weak demand in certain European markets and constraints on the availability of AI-related hardware.
In other words, companies like Nvidia are overwhelmed with orders and cannot satisfy the demand immediately.
The key message from Nadella and Hood is that investing in AI requires both time and financial resources, both of which are vital for Microsoft’s future.
Thus, while the stock may decline in the short term, if and when profits manifest, shares are likely to rise. Microsoft had to endure significant criticism while developing its cloud computing capabilities and is now valued at over a trillion.
Furthermore, if there is any comfort for Microsoft, other companies will face similar challenges. Facebook parent Meta Platforms (META) will report earnings on Wednesday, followed by Apple (AAPL) and Amazon.com (AMZN) on Thursday.
