Microsoft stock tanks 6% after disappointing revenue from AI business
What's the story
Microsoft's shares experienced a significant drop of over 6% in after-hours trading, following its fiscal fourth-quarter earnings report. The decline was primarily attributed to underwhelming performance in the company's artificial intelligence (AI) sector. Despite outperforming Wall Street's predictions for overall earnings and revenue, Microsoft fell short of cloud revenue forecasts, leading to a decrease in share value.
Financial performance
Microsoft reported Q4 revenue of nearly $65 billion, surpassing estimates
Microsoft reported earnings per share (EPS) of $2.95 on revenue of $64.7 billion, slightly exceeding Wall Street's projected EPS of $2.94 on revenue of $64.5 billion, according to Bloomberg data. However, the tech giant's Intelligent Cloud revenue, which includes Azure services, was reported at $28.5 billion versus expectations of $28.7 billion. This shortfall in cloud revenue contributed to the drop in Microsoft's stock value post-announcement.
Revenue growth
Microsoft's AI services contribute to cloud revenue growth
Microsoft disclosed that its AI services contributed 8% growth to Azure and other cloud services revenue, which increased by 29%. However, this growth rate was lower than the previous two quarters - Q3 saw a growth of 31% while Q2 reported a 30% increase in the Azure business. The company's total cloud revenue was reported at $36.8 billion, aligning with market expectations.
Market impact
Microsoft's AI shortfall impacts other tech giants
The disappointing performance of Microsoft's AI sector also affected other tech companies heavily invested in AI, including Meta. Meta saw its shares fall more than 3% in after-hours trading following Microsoft's earnings announcement. This comes on the heels of Alphabet's earnings report last week, which highlighted an increase in cloud revenue partly due to interest in AI products.
Business performance
Microsoft's gaming and advertising sectors see significant growth
Despite the AI and Azure services shortfall, Microsoft reported substantial growth in other areas. The company's gaming sector saw a significant boost with Xbox content and services revenue increasing by 61%, primarily due to the $69 billion acquisition of Activision Blizzard. However, Xbox hardware sales declined by 42%, indicating a slowdown in console sales. Additionally, server products and cloud services revenue rose by 21%, while search and news advertising revenue grew by 19%.
Division performance
Microsoft's Surface division continues downward trend
Microsoft's Surface division continued its negative trend with revenue declining 11%, marking the seventh consecutive quarter of decline for the company's device segment. On a positive note, the firm's Productivity and Business Processes division, which includes Office products, saw an 11% revenue increase to $20.3 billion. This growth in other sectors partially offset the impact of the AI and Azure services shortfall on Microsoft's overall financial performance.
Investment plans
Microsoft to increase AI infrastructure investment despite growth slowdown
Microsoft CEO Satya Nadella emphasized the company's focus on AI, stating, "As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era." The Q4 earnings report also revealed increased capital expenditures of $13.9 billion, 55% higher than the last year. Despite a slowdown in its cloud business growth, Microsoft plans to invest more money this fiscal year to expand its AI infrastructure.