Microsoft shares are set to open lower on Wednesday after the software giant reported better-than-expected earnings but missed slightly in the expected growth of a key growth driver.
Microsoft (MSFT) closed Tuesday at $422.92, off 0;9% on the day. But shares tumbled nearly 8% to $389.20 within minutes of the release of the company’s fourth-quarter earnings report.
The report set off a contest between investors who were bullish or bearish on the company.
The bears won. The shares reached reached as high as $427.61 at 4:55 p.m. before sliding back again, according to Nasdaq data. The last trade, just before 8 p.m. ET, had the stock at $411.25, down nearly 2.8% from the close.
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Pre-market trading on Wednesday suggests Microsoft will open at between $409 and $413, according to Nasdaq data.
If that occurs, the next question is if analysts will start revising their price targets on Microsoft lower. The average price target on the stock is $500, according to Zack’s Research. The high target is $600.
A slight miss on one business is hitting the stock
Microsoft released its earnings report into what may be best described as a can’t-win environment.
The company earned $2.95 a share, a penny ahead of Wall St. estimates. Revenue rose 15.1% to $64.7 billion, above analysts’ forecasts of $64.4 billion.
But revenues for Microsoft’s Azure cloud division, its biggest growth driver, were up 29%, just shy of the Street’s 30% forecast. Overall Intelligent Cloud revenues rose 19% to $28.52 billion, just missing the Street’s $28.7 billion forecast.
At the same time, the euphoria over artificial intelligence that erupted in 2023 and carried over into 2024 has faded dramatically in the last month or so.
The issue remains this: Billions of dollars are being spent on investments into artificial intelligence development and related applications. And many investors, as they are wont to do, are getting anxious.
And some have been selling. The Nasdaq Composite Index is off 8.2% since hitting an all-time high on July 11. Nvidia (NVDA) has fallen 26% since peaking at $140.76 on June 20.
In Microsoft’s case, capital expenditures totalled $19 billion in the fiscal fourth quarter alone, up nearly 78% from a year earlier, and $55.7 billion for the fiscal year.
Microsoft signage in New York City.
Not a lot of patience among many investors
“The street doesn’t have a lot of patience,” Daniel Morgan, senior portfolio manager at Synovus Trust, told Reuters. “They see you spending billions of dollars and they want to see a pickup in revenue of that amount.” The company holds shares in Microsoft.
AI projects have not yet generated a lot of revenue for their promoters except maybe Nvidia (NVDA) , and shares have been hit. Google-parent Alphabet shares fell 6% a week ago because of complaints about all the spending.
But the profits are coming, Microsoft CEO Satya Nadella insisted on Tuesday’s earnings call. (The transcript, generated by the Motley Fool, is available on Nasdaq’s site.)
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Microsoft has convinced thousands of companies to acquire its AI offerings, and Nadella said feedback is positive. But, during the call, CFO Amy Hood said one reason the revenue growth missed expectations was soft demand in some European markets and limits on the availability of AI-related hardware.
That’s a polite way of saying companies like Nvidia are so swamped with orders they can’t meet all the demand right away.
The point Nadella and Hood emphasized is investing in AI takes time and money, and both are critical to Microsoft’s future.
So, the stock will slump and when — and if — the profits roll in, the shares will move up. Microsoft had to endure a lot of complaining developing its cloud computing expertise. And it is now worth more than $3 trillion.
And if there’s any solace for Microsoft, others will face the same music. Facebook parent Meta Platforms (META) reports earnings Wednesday, with Apple (AAPL) and Amazon.com (AMZN) due Thursday.
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