Microsoft would have posted bigger growth in artificial intelligence revenue in the December quarter had the company not been capacity constrained in its data centers, executives said. Microsoft stock dropped Thursday following the company's fiscal second-quarter earnings report and outlook.
The Redmond, Wash.-based software giant late Wednesday beat analyst estimates for total revenue and earnings in fiscal Q2, but came up short with its March-quarter sales guidance. Also, its Azure cloud computing infrastructure growth and outlook disappointed.
Microsoft's Azure business grew 31% year over year in fiscal Q2, at the low end of its guidance range and a deceleration from prior quarters. The company predicted Azure growth in the current quarter of 31% to 32% in constant currency, dashing hopes for a re-acceleration of growth in the second half of the fiscal year.
Azure growth in the December quarter included 13 percentage points from AI services, which increased a greater-than-expected 157% year over year.
"Demand continued to be higher than our available capacity," Chief Financial Officer Amy Hood said on a conference call with analysts.
She added, "While we expect to be AI capacity constrained in Q3, by the end of FY2025, we should be roughly in line with near-term demand, given our significant capital investments."
Microsoft Stock Gets Price-Target Cuts
At least three Wall Street firms lowered their price targets on Microsoft stock after the earnings report.
Mizuho Securities analyst Gregg Moskowitz reiterated his outperform rating on Microsoft stock but trimmed his price target to 500 from 510. He pointed to Microsoft's revenue guidance miss for the current quarter as the reason.
"Despite the disappointment, we remain confident that Microsoft's revenue growth opportunities over the medium term and beyond are greater than many realize, and we continue to be very bullish on its tangible GenAI (generative artificial intelligence) adoption and monetization levers," Moskowitz said in a client note. "MSFT remains one of our top picks for calendar 2025."
MSFT Stock Retreats After Report
On the stock market today, Microsoft stock sank 6.2% to close at 414.99.
In the December quarter, Microsoft earned $3.23 a share, up 10% year over year, on sales of $69.6 billion, up 12%. Analysts polled by FactSet had expected Microsoft to earn $3.11 a share on sales of $68.9 billion.
For the March quarter, Microsoft targeted revenue of $68.2 billion, vs. the consensus estimate of $69.8 billion, based on the midpoint of its outlook. Foreign exchange rate effects likely will lower its total revenue by about $1 billion in the period, Hood said.
Focused On Full Tech Stack
Chief Executive Satya Nadella said Microsoft is focused on providing the full technology stack for AI. That includes the cloud infrastructure layer with Azure, the data layer with Microsoft Fabric, and the platform and tools layer with Microsoft 365, GitHub Copilot and other applications.
"We have more than doubled our overall data center capacity in the last three years, and we have added more capacity last year than any other year in our history," Nadella said on the call.
The company's capital expenditures in the December quarter rose 62% year over year to $15.8 billion, vs. the consensus estimate of $15.6 billion.
Management indicated that capex spending will remain "at similar levels" in the March and June quarters.
Microsoft stock is in the IBD Long-Term Leaders Portfolio.
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