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Microsoft (MSFT) reported its fiscal fourth-quarter (Q4) financial results on July 30, which exceeded market expectations for revenue and earnings per share (EPS). The technology giant’s revenue for the quarter reached $64.73 billion, a 15% increase year-over-year, surpassing the Street’s expectations of $64.39 billion. Additionally, its EPS climbed 10% to $2.95, exceeding analysts’ forecasts of $2.93.
As for the full year, Microsoft’s annual revenue was over $245 billion, up 15% year-over-year. Further, its revenue surpassed $135 billion, up 23%.
Despite these strong numbers, Microsoft stock came under pressure immediately following the earnings release. The stock initially dipped in after-hours trading, but recovered slightly to close approximately 1% lower on July 31.
Here’s What Irked Investors
Investor sentiment was tempered by concerns over the growth rate of Microsoft’s Intelligent Cloud division, which includes Azure. Although the division generated $28.52 billion in revenue, reflecting a 19% increase year-over-year, it fell slightly short of analysts' consensus estimate of $28.68 billion. Azure's revenue grew 29% during the quarter, missing expectations for 31% growth and showing a slowdown compared to previous quarters.
In contrast to Microsoft, Google’s Cloud division demonstrated solid growth in the recently reported quarter, driven by artificial intelligence (AI) initiatives. Google’s quarterly Cloud segment revenues surpassed the $10 billion mark for the first time. What stood out is that Google’s Cloud segment’s year-over-year growth rate accelerated to 29%, up from 28% in Q1 2024 and 26% in Q4 2023.
Adding to the challenges, the significant investments to scale AI infrastructure have weighed on Microsoft’s Cloud business margins. Microsoft, similar to its peers like Amazon (AMZN) and Alphabet (GOOGL), has been investing heavily in scaling its AI infrastructure and attracting more customers. Microsoft’s leadership emphasized during the Q4 conference call that the spending on AI infrastructure is necessary to support demand for AI services. The company's management said that these investments will be monetized over 15 years and beyond. However, a slowdown in growth rate will not sit well with the investors.
Furthermore, Microsoft expects fiscal first-quarter Azure revenue growth to arrive between 28% and 29% in constant currency, slightly below market expectations. Capacity constraints pose additional challenges to meeting AI-driven demand and sustaining revenue growth rates.
Should MSFT Investors Worry?
While the slowdown in Microsoft’s Cloud segment growth has raised concerns, there are some silver linings. AI services accounted for a larger portion of Azure's revenue increase in the June quarter, which is positive. Of the 29% growth in Azure and other cloud services, 8% came from AI services, which is also encouraging. Further, Azure’s market share gains accelerated this year, driven by AI.
Azure AI now has over 60,000 customers, up nearly 60% year-over-year. Moreover, the average spend per customer continues to grow - and the demand for Azure AI services remains higher than the available capacity, implying that the company’s investments to expand capacity and meet demand will lead to higher revenues in the upcoming years.
Microsoft’s management emphasized during the Q4 conference call that the company continued to achieve market share gains across many of its businesses. Moreover, it witnessed record commitments for the Cloud platform. Commercial bookings exceeded expectations, increasing 17%, driven by growth in $10 million-plus and $100 million-plus contracts for both Azure and Microsoft 365.
In summary, Microsoft is well-positioned to deliver solid growth in the long term, driven by its investments in Cloud and AI offerings.
The Bottom Line on Microsoft Stock
Microsoft stands out as a compelling investment in the technology sector, thanks to its diverse range of products, strong competitive positioning in the AI space, and strategic investments. The company’s strong focus on its cloud business positions it to benefit from long-term trends such as generative AI and digital transformation. Microsoft Azure is expected to gain significant market share as more customers leverage its platforms and tools to develop AI solutions.
One of Microsoft’s key strengths is its variety of AI accelerators, featuring the latest offerings from Nvidia (NVDA) and Advanced Micro Devices (AMD). Additionally, Azure OpenAI Service is now used by most Fortune 500 companies, underscoring its growing influence in the enterprise sector. Microsoft has also expanded its data center footprint across four continents, establishing long-term assets to drive growth over the next decade and beyond.
Microsoft is the market leader in productivity software, and enjoys competitive advantages over its peers. The company's gaming revenue is also rising, contributing to its overall financial performance. With these factors combined, Microsoft is well-positioned for sustained growth and is expected to drive revenue and earnings at a healthy pace.
Analysts share this optimistic view, with most of them recommending the stock as a buy. Out of 38 analysts covering MSFT, 34 rate it as a “strong buy,” three as a “moderate buy,” and one as a “hold,” translating to a consensus rating of “Strong Buy.”
The average price target for Microsoft stock is $501, suggesting a potential upside of approximately 17.4% from its current levels.
On the date of publication, Amit Singh did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
