TLDR
- Microsoft (MSFT) plunged 10% Thursday, losing $357 billion in market cap in its worst trading day since 2020
- Azure cloud services grew 39% but missed the 39.4% analyst forecast, triggering investor concerns
- The company beat earnings expectations with revenue up 17% to $81.3 billion and EPS rising 24% to $4.14
- Microsoft chose to dedicate data center resources to internal AI projects like Copilot instead of customer growth
- Shares trade at a P/E of 25, down over 20% from October highs despite solid fundamentals
Microsoft suffered its ugliest trading day in four years Thursday. The stock crashed 10%, vaporizing $357 billion in shareholder value. Friday brought little relief with shares barely moving in premarket trading.
The selloff stunned many observers because Microsoft actually crushed earnings. Revenue jumped 17% to $81.3 billion. Earnings per share soared 24% to $4.14. Operating income climbed 21% to $38.3 billion with a healthy 47% margin.
But none of that mattered to Wall Street.
Investors fixated on one metric: Azure cloud growth. The platform expanded 39% year-over-year. Sounds great, right? Not when analysts expected 39.4%. That tiny 0.4% shortfall triggered panic selling.
Why Azure Growth Disappointed
CFO Amy Hood explained the miss during the earnings call. Microsoft deliberately redirected data center capacity away from external customers. Instead, the company funneled resources into internal AI initiatives.
Projects like Copilot and proprietary AI research got priority over pure revenue generation. Management views this as a smart long-term play, even if it hurts near-term results.
Barclays analyst Raimo Lenschow said investors judge Microsoft’s entire business through the Azure lens. He believes growth won’t accelerate much from current levels due to capacity limits and strategic decisions about resource allocation.
Bernstein analyst Mark L. Moerdler backed management’s approach. He noted the company chose long-term value creation over short-term stock price gains.
Microsoft’s third-quarter outlook added fuel to the fire. The company guided for flat sequential revenue between $80.65 billion and $81.75 billion. That translates to 15% to 17% annual growth.
The forecast revealed slowing momentum in consumer divisions including Windows. Microsoft expects cost of goods sold to rise 22% to 23%, pressuring profit margins. Capital expenditures will tick down slightly from quarter to quarter.
The AI Investment Debate
Microsoft has bet the farm on artificial intelligence. The company invested $1 billion in OpenAI in 2019, then pumped in another $10 billion in 2023. Microsoft now holds a 27% stake worth $135 billion after OpenAI’s restructuring.
These investments position Microsoft as an AI leader. But they require enormous capital spending. Free cash flow is shrinking as infrastructure costs mount.
The company remains capacity-constrained in cloud services. That explains the continued heavy spending on data centers. Microsoft’s backlog of remaining performance obligations reached $625 billion, signaling robust future demand.
Wells Fargo kept an overweight rating, citing Microsoft’s early AI advantage and strong competitive position. The firm believes the market overreacted to minor speed bumps.
Some analysts see opportunity in the chaos. Microsoft’s P/E ratio dropped to 25 based on fiscal 2026 estimates. That’s cheaper than the S&P 500. The company still projects mid-to-high-teens revenue growth.
Azure is forecast to grow 37% to 38% in the current quarter. The intelligent cloud segment generated $32.9 billion in revenue, up substantially from last year.
The stock now trades at an eight-month low, down more than 20% from its October peak. Friday’s premarket session showed a meager 0.55% gain.
Microsoft continues wrestling with capacity constraints while building AI infrastructure. The company must balance customer needs against internal development priorities as it navigates the AI revolution.
