World Stock Watch

Microsoft’s Stellar Results Mask Concerns Over AI Spending

A Rare Stumble for the Tech Giant

Microsoft’s stock plummeted 6.1% on Thursday, its largest single-day decline since October 2022. Despite a 1% rebound on Friday, the company’s year-to-date gains remain a modest 8%, lagging far behind the S&P 500’s 20.1% surge.

Impressive Financials, But Guidance Falls Short

Microsoft’s latest quarterly results were impressive, with revenue up 16%, operating income rising 14%, and diluted earnings per share increasing 10%. The company’s cloud segment, which includes Azure and other cloud services, saw revenue soar 22% to $38.9 billion, with a gross margin of 71%. This marks a significant milestone, as Microsoft Cloud now generates more revenue than the entire company did just four years ago.

Acquisitions Boost Growth

The acquisition of Activision Blizzard contributed significantly to Xbox content and services revenue, which jumped 61%. Excluding this acquisition, revenue growth would have been a more modest 8%.

AI Spending Raises Concerns

While Microsoft’s financials were stellar, its guidance and spending habits on artificial intelligence (AI) spooked investors. The company expects Intelligent Cloud revenue to grow 18-20% in constant currency next quarter, a slight deceleration from previous quarters. Moreover, Microsoft’s significant investments in AI, including its partnership with Nvidia, have yet to translate into near-term growth figures.

Capital Expenditures Soar

Microsoft’s capital expenditures, including finance leases, reached $20 billion, with nearly 30 cents of every dollar in revenue invested in capex. While the company believes these investments will drive long-term growth, investors are concerned about the short-term impact on profitability.

A Buying Opportunity?

Despite the sell-off, Microsoft’s stock remains a compelling buy for investors who agree with its capital allocation strategy. With a reasonable price-to-earnings ratio of 33.9, the company offers diversified exposure to AI, cloud computing, hardware, gaming, and more. Even with heightened spending, Microsoft is still growing its revenue and EPS at double-digit rates, making it an attractive option for blue-chip growth investors.