Microsoft posted better-than-expected first-quarter earnings, but its stock saw its steepest drop in two years as investors reacted to a cautious outlook for the current quarter. The tech giant’s shares fell 6% on Thursday, marking the largest single-day decline since October 2022. Microsoft projected revenue for the December quarter between $68.1 billion and $69.1 billion, which implies 10.6% growth at the midpoint, slightly below analysts’ expectations of $69.83 billion.
Despite the dip in investor confidence, Microsoft’s Q1 results were strong. Revenue grew 16% year-over-year to $65.59 billion, surpassing the $64.51 billion estimate, while earnings per share reached $3.30, beating the $3.10 expected by analysts. Net income rose 11% to $24.67 billion, compared to $22.29 billion in the same quarter last year. Microsoft’s cloud division, Azure, recorded a 33% revenue increase, though CFO Amy Hood indicated growth in constant currency will moderate to 31-32% in the December quarter.
Supply chain issues impacted Microsoft’s data center infrastructure, limiting its ability to fully meet demand for the current quarter. CEO Satya Nadella reassured investors that he anticipates supply and demand to align better in the second half of the fiscal year. However, the forecasted supply constraints and tempered Q2 outlook contributed to the stock’s sharp decline.
Microsoft’s continued investment in artificial intelligence remains a significant area of interest. The company has allocated close to $14 billion to OpenAI, which recently reached a valuation of $157 billion. These AI investments are part of a broader strategy to expand Microsoft’s infrastructure and meet rising demand for AI-driven capabilities, particularly in Azure and Office. The company also noted a $1.5 billion expected hit to income this quarter due to anticipated losses from the OpenAI investment.
Spending on property and equipment grew 50% from the previous year, reaching $14.92 billion, surpassing the Capital IQ estimate of $14.58 billion, as Microsoft ramps up capacity to support future growth. In comparison, competitors Google and Amazon also reported strong growth in cloud infrastructure, with Google Cloud up 35% year-over-year and Amazon expected to reveal similarly robust results.
While Microsoft shares remain up over 8% for the year, they have underperformed the Nasdaq, which has risen 21% over the same period. Despite the softer Q2 outlook, BofA Global Research analysts maintain a buy recommendation on Microsoft, acknowledging solid performance in core growth areas like Azure and Office while navigating supply challenges.
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