Microsoft's Azure Slowdown Sparks Largest Stock Drop in Two Years Amid AI Expansion Push
As of last week, Microsoft (MSFT) experienced a 0.99% increase in its stock price, although the price saw a 4.15% decline over the past week. Since the beginning of the year, the company's stock has risen by 9.79%, reaching a market capitalization of $3.051 trillion. Recently, however, the company's shares took a hit, partly influenced by the released forecast regarding its cloud business.
On October 30, Microsoft unveiled its earnings for the first quarter of fiscal year 2025 post-market. Despite an initial rise in after-hours trading due to robust profit growth, Microsoft's shares dropped 3.73% after providing a lackluster revenue growth forecast for Azure, the company's cloud division. In the first fiscal quarter, Microsoft's intelligent cloud revenue grew to $24.1 billion, marking a 20% year-over-year increase. After adjusting for currency fluctuations, Azure's revenue saw a growth of 34%, marking a slowdown from the previous quarter's 35% growth. The company forecasts Azure's revenue to grow by 31%-32% in the second fiscal quarter, attributing the deceleration to delayed third-party supply.
The productivity and business processes division outperformed expectations with revenues of $28.3 billion, a 12% increase from the previous year. This growth was driven notably by business cloud products, with commercial Microsoft 365 revenue rising 15%. Moreover, the acquisition of Activision Blizzard impacted overall operating profit growth by two percentage points, although it significantly boosted Xbox content and services sales by 61%. Microsoft's outlook suggests a more moderated growth rate of 10%-11% for this segment in the next quarter.
Microsoft's capital expenditures soared by a notable 78.6% year-over-year, reaching $20 billion in investments, which included significant allocations toward long-term assets and server-related equipment necessary for AI and cloud services. The company's innovative Copilot product was utilized by nearly 70% of Fortune 500 companies, showing a substantial increase in enterprise usage.
Looking forward, Microsoft has flagged potential risks, including challenges in AI monetization and heightened competitive pressures. The deep integration with OpenAI and the return on investment in R&D are also seen as areas requiring careful attention.
Beyond its fiscal earnings, Microsoft announced a significant partnership with CoreWeave, an AI infrastructure startup, committing to around $100 billion in expenditures over the upcoming years to bolster its server capabilities. This is part of Microsoft's broader strategy to enhance its presence in the AI and cloud computing domains.
Amidst fluctuating market conditions, Microsoft's stock registered its largest single-day drop in two years, driven by the anticipated slowdown in Azure's growth amid the ongoing demands of AI-driven services. As Microsoft strives to accelerate its data center expansions, it aims to align its growth pace with AI service delivery expectations.