Microsoft’s Mixed Bag: Beating Estimates but Falling Short on Cloud Expectations
Earnings Report Highlights
Microsoft’s second-quarter earnings report, released on Wednesday, brought a mix of good and bad news for investors. The tech giant beat estimates on both revenue and earnings per share, but its Intelligent Cloud business fell short of expectations.
Cloud Revenue Growth, But Not Enough
Microsoft’s Commercial Cloud segment revenue saw a 21% year-over-year increase, reaching $40 billion. While this is an impressive growth rate, it was shy of Wall Street’s expectations of $41.1 billion. The company’s intelligent cloud business, which includes its Azure platform, saw revenue of $25.5 billion, missing the expected $25.8 billion mark.
AI Services Drive Azure Growth
Despite the miss, Microsoft’s Azure platform saw 13 percentage points of growth driven by AI services. The company’s artificial intelligence build-out, however, led to a decrease in cloud gross margin to 70%. CEO Satya Nadella emphasized the company’s focus on innovation, stating that Microsoft’s AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year.
Guidance Sends Shares Lower
During the earnings call, Microsoft provided guidance for its Intelligent Cloud revenue in the current quarter, expecting it to land between $25.9 billion and $26.2 billion. This sent shares lower, as investors digested the news.
AI Investments Under Scrutiny
The earnings announcement comes at a time when the tech industry is reeling from the impact of DeepSeek’s AI model, which uses less power and costs a fraction of leading AI chips. This has raised questions about whether Silicon Valley’s investments in AI data centers are wise. Microsoft plans to spend $80 billion in fiscal 2025 alone, but investors are wondering if this is the right strategy.
Earnings Per Share and Revenue
Microsoft reported earnings per share of $3.23 on revenue of $69.6 billion, beating analyst estimates of $3.13 on revenue of $68.8 billion. This marks a significant increase from the same quarter last year, when the company reported EPS of $2.93 on revenue of $62 billion.
Stock Performance Lags Behind
Despite being a major beneficiary of the AI boom, Microsoft’s stock price has lagged behind its competitors. Over the last 12 months, Microsoft shares were up just 5%, while its peers saw significant gains.
AI-Powered PCs: The Next Frontier?
Microsoft is also exploring new opportunities with its Copilot+ PC lineup, which aims to run AI applications natively rather than via the cloud. However, the jury is still out on whether these applications will be enough to drive PC sales. For now, hardware updates remain the main reason consumers want new PCs.
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