Microsoft Stock Slips Despite Strong Earnings. Here’s Why.

The stock’s after-hours decline accelerated later in the evening after the company provided guidance on its quarterly earning conference call. Shares were down more than 3% after the outlook.

Microsoft’s (ticker: MSFT) Azure cloud computing business grew 26% in the June quarter, a little ahead of the Wall Street consensus forecast, but perhaps not as much as some bulls had hoped. Revenue topped estimates in all three of the company’s business segments.

For the quarter, Microsoft posted revenue of $56.2 billion, up 8%, or 10% in constant currency. That topped the Wall Street consensus of $55.5 billion. Profits were $2.69 a share, up 21% from a year ago, and above consensus at $2.55 a share. Gross margin was 70%, up 2 percentage points from a year ago, while operating margin was 43%, up 4 percentage points.

Microsoft topped the high end of its revenue guidance for all three of its primary business segments. Intelligent Cloud, which includes Azure, had revenue of $24 billion, up 15%, and above the guidance range of $23.6 billion to $23.9 billion. The company said overall Microsoft Cloud revenue was $30.3 billion, up 21%, or 23% adjusted for currency.

Commercial bookings were down 2% year-over-year in the quarter, or 1% adjusted for currency, against a difficult year-earlier comparison; the company had said bookings would be about flat in the quarter.

The Productivity and Business Processes segment , which includes Office and other apps, had revenue of $18.3 billion, up 10%, and above the company’s target range of $17 billion to $18.2 billion.

The More Personal Computing segment, which includes Windows, Xbox, and other consumer products, had revenue of $13.9 billion, down 4%, but above the forecasted range of $13.35 billion to $13.75 billion.

The company had previously said that June quarter results would include about one point of growth for Azure from AI related business. Today’s earnings press release gave few additional details about the impact of the company’s AI push on financial results, although it was the topic of CEO Satya Nadella’s quote.

“Organizations are asking not only how—but how fast—they can apply this next generation of AI to address the biggest opportunities and challenges they face— safely and responsibly,” CEO Nadella said in the release.

Microsoft did not comment in the release about the performance of Bing, the company’s search engine, which now includes generative AI features. Search and news advertising excluding traffic acquisition costs were up 8%.

Microsoft bought back $4.6 billion of stock in the quarter.

On the company’s conference all with analysts, Microsoft CFO Amy Hood issued guidance by operating segment.

For Intelligent Cloud, the company sees revenue up 15% to 16%, to between $23.3 billion and $23.6 billion, at the midpoint of the range a hair light of consensus at $23.5 billion. Azure is projected to grow 25% to 26% at constant currency, with two points of growth related to generative AI applications, a couple of points ahead of Street estimates.

For Productivity and Business Processes, the company sees revenue up between 9% and 11%, to between $18 billion and $18.3 billion, at the middle of the range a bit ahead of the Street at $18.1 billion.

For More Personal Computing, the company sees revenue of between $12.5 billion and $12.9 billion, down between 3% and 6%, and well below consensus at $13.2 billion.

Overall, that implies revenue of $53.8 billion to $54.8 billion, falling shy of the Street consensus at $55.045 billion, according to FactSet.

On the call, Hood said that the company will be making accelerating investment in the cloud, with capital spending increasing sequentially each quarter throughout the year. She also said that margins for the full year ending in June 2024 are expected to be flat with the June 2023 fiscal year. Hood also said foreign exchange is expected to add about a point to growth for the year.

Microsoft shares have rallied 44% so far this year, recently setting a record high. With a market cap above $2.5 trillion, the software giant is worth more than any other company aside from

Apple

; It has a $1 trillion lead on third-place

Alphabet
.
The latest surge reflects investor enthusiasm for the company’s aggressive push into generative AI, including a new version of its Bing search engine and AI “copilot” tools for many of its applications, including the Microsoft 365 application suite.

Corrections & amplifications: Wall Street has forecast September quarter revenue of $55 billion for Microsoft. An earlier version of this article incorrectly said it was $55 million.

Write to Eric J. Savitz at [email protected]