Microsoft reported a double beat but rising expenses are threatening profitability, leading to the stock’s decline.
Microsoft stock was down 4% after the company posted strong third-quarter earnings which was tempered by concerns over rising costs.
Microsoft’s better-than-expected earnings were fueled by growth in its Azure cloud business, the company’s fastest-growing segment, driven by billions of dollars in AI investment. Azure revenue climbed by 22%, as noted in a company press release. A day earlier, Google’s parent company, Alphabet, reported a 35% growth in its cloud business, reaching $11.35bn, beating analyst estimates.
The software giant posted earnings of $3.30 per share, topping expectations of $3.10, and brought in revenue of $65.59 billion, up 16% year-over-year, beating Wall Street estimates of $64.51 billion. Net income rose 11% to $24.67 billion from $22.29 billion in the same quarter last year.
Microsoft CEO Satya Nadella highlighted the company’s expanding partnerships, driven by strong AI offerings and promising growth prospects. However, the cost of scaling AI capabilities prompted some investors to reevaluate their positions, contributing to the stock’s initial dip.
For the September quarter, Microsoft’s capital expenditures surged to $14.9 billion, mainly due to heavy investment in AI data centers, a 50% increase over the same period last year. Despite this, projected returns are modest; Microsoft anticipates revenue from its AI business to reach $10 billion this quarter and has warned that current-quarter revenue may not be as strong as anticipated. Shares of Microsoft are up 17% year-to-date.
Investors are increasingly cautious about big tech’s substantial AI investments and are looking for clarity on when these commitments will yield returns. Collectively, the seven tech giants — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla — represent $12 trillion in market cap, or roughly 20% of the S&P 500, yet the group has trailed the broader market over the past three months, with a collective decline of 3.5% since early July.
