Microsoft CEO Satya Nadella Microsoft's earnings report disappointed some investors, causing the company's stock to plunge approximately 10% on Thursday, marking its largest single-day percentage drop since March 2020. This sharp decline erased $357 billion from the tech giant's market capitalization, which settled at $3.22 trillion by the market close on Thursday. The iShares Expanded Tech-Software Sector ETF tumbled 5% on Thursday. While the tech-heavy Nasdaq Composite Index closed marginally lower by 0.7%, not all technology stocks weakened. Meta impressed analysts by releasing strong results and quarterly revenue guidance yesterday, leading its stock to surge 10% on Thursday. Investors identified several areas of concern within Microsoft's earnings report. Revenue growth for Azure cloud services and other cloud businesses, a key performance indicator, came in at 39%, falling short of the 39.4% consensus expectation compiled by Wall Street data platform Street Account. The company forecasted fiscal third-quarter revenue for its "More Personal Computing" segment, which includes Windows, to be approximately $12.6 billion, below the market consensus of $13.7 billion. The implied operating margin for the new quarter also failed to meet expectations. Microsoft Chief Financial Officer Amy Hood indicated that the cloud business performance could have been stronger if the company had allocated more data center infrastructure to customers instead of prioritizing internal needs. She stated, "If I had taken all of the GPUs that came in the first and second quarter of this year and deployed them to Azure, we would have a higher number for that key performance indicator, certainly above 40%." Ben Reitzes, an analyst at Melius Research who has a Buy rating on Microsoft stock, commented on Thursday that Microsoft needs to accelerate the construction of its data centers. He said, "I think there is an execution issue in Azure right now, and they really need to speed up the pace of data center build-outs." An analyst team at UBS, led by Karl Keirstead, questioned Microsoft's allocation decisions for AI compute—prioritizing it for products like the Microsoft 365 Copilot, an add-on for the Office software suite that has seen far weaker market uptake compared to OpenAI's ChatGPT. The UBS analysts wrote in a report, "The M365 Copilot is not yet showing a revenue acceleration, with multiple checks pointing to weak usage growth (we plan to re-check to see if we missed usage inflection); plus, the LLM market is competitive and capital-intensive. We think Microsoft needs to prove these investments are worthwhile." Wall Street sentiment towards Microsoft is not uniformly negative. An analyst team at Bernstein, led by Mark Moerdler, which rates Microsoft the equivalent of a Buy, expressed support for the company's decisions. The team stated in a research note on Thursday, "We think investors need to understand that Microsoft's management is making a deliberate decision to prioritize the long-term health of the business, rather than trying to boost this quarter's, or even the next few quarters', numbers (the compute constraint is expected to gradually ease)." Amy Hood mentioned that the company's capital expenditures would decline slightly in the current quarter.
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