Microsoft's Cloud Underperformance: A Blip or a Trend?

Microsoft's underperformance in the cloud segment has been a topic of concern for investors, with the company's stock underperforming other large cap software companies over the past three months. As Microsoft prepares to report its fiscal second-quarter results, analysts and investors are looking to the cloud for growth opportunities. However, the company's cloud segment, particularly Azure, has faced several challenges that have contributed to its underperformance.



One of the main factors contributing to Microsoft's cloud underperformance is the slowing growth of Azure. Despite owning a major stake in OpenAI and securing exclusive rights for its APIs on Azure, the company's cloud growth has slowed for two straight quarters. In the second quarter of 2025, Azure's growth is expected to be 31.8%, slower than the previous quarter's 33% growth (Visible Alpha). This slowdown is a significant factor in Microsoft's underperformance, as Azure is expected to grow at a slower rate than other large cap software companies.

Another factor contributing to Microsoft's cloud underperformance is the strong dollar impact. Like other U.S. companies with a large global presence, Microsoft is expected to take a hit from a strong dollar. The greenback firmed nearly 8% in the last three months of 2024, which could negatively impact Microsoft's earnings (Reuters). This currency headwind is an additional challenge for Microsoft's cloud segment, as it operates in a global market.

Investor sentiment has also shifted negative due to a "wall of worry" around gross margins, capital expenditure, generative AI monetization, and the OpenAI relationship. Despite Microsoft's early bet on OpenAI, investor doubts have been growing about the company's ability to make money from AI technology (Reuters). This uncertainty has contributed to Microsoft's underperformance in the cloud segment.



Microsoft's capital expenditure (capex) and gross margins have also raised concerns among analysts. Morgan Stanley analysts lowered their price target for Microsoft's stock due to these concerns, noting that the company has underperformed other large cap software companies over the past three months (Morgan Stanley). These financial metrics are crucial for Microsoft's cloud segment, as they directly impact the company's ability to invest in growth and maintain profitability.

Despite these challenges, Microsoft's cloud segment still has significant growth potential. The company's "cloud-first, mobile-first" strategy has been a driving force behind its cloud growth, and Microsoft's integration of AI into its cloud services has allowed it to offer more advanced and innovative services. Additionally, Microsoft's strategic partnerships and acquisitions, such as its acquisition of OpenAI, have given the company a competitive edge in the cloud market.

In conclusion, Microsoft's cloud underperformance is a result of several factors, including slowing Azure growth, strong dollar impact, investor concerns about AI monetization, and financial metrics such as capex and gross margins. However, the company's cloud segment still has significant growth potential, driven by its strategic approach to cloud services and AI integration. As Microsoft continues to invest in its cloud segment and address the concerns of investors, it is well-positioned to capitalize on the growing demand for cloud services and maintain its competitive edge in the market.