Microsoft shares fall as cloud revenues miss expectations, expenses rise 77%

Microsoft (MSFT) reported its Q4 FY2024 earnings, delivering a strong performance that exceeded analyst expectations for both revenue and EPS. The company posted EPS of $2.95, slightly above the consensus estimate of $2.93, and revenue of $64.7 billion, surpassing the expected $64.388 billion. Despite these positive results, shares fell over 7% post-earnings due to lower-than-expected growth in its Azure and other cloud services.

Shares of MSFT came under immediate pressure following the news. The stock was in a precarious position as it was in a descending triangle formation heading into the report. MSFT sat on support around $430 and it needed to produce a beat and raise quarter to avoid further selling. The miss on cloud and elevated expenses were enough to send investors to the exit. The stock fell down through support at the 200-day moving average ($402) and touched the May low ($390) before settling. The stock has bounced back to $408 following its conference call.

Azure, a key revenue driver for Microsoft, reported a 29% increase in revenue, slightly below the 30.6% growth estimate. This slowdown in Azure's growth rate, from 31% in the previous quarter, was a significant concern for investors. Azure's performance remains crucial, given the strong emphasis on cloud and AI services. Microsoft's Intelligent Cloud segment, which includes Azure, reported revenue of $28.5 billion, missing the analyst estimate of $28.68 billion.

The Productivity and Business Processes segment performed well, with revenue of $20.32 billion, slightly above the estimate of $20.21 billion. This growth was driven by increases in Office 365 subscriptions, LinkedIn revenue, and Dynamics 365. The More Personal Computing segment also exceeded expectations, with revenue of $15.90 billion versus the $15.54 billion estimate, supported by strong Windows and Xbox content and services performance.

A significant area of concern is the rising costs associated with Microsoft's expansion in cloud and AI infrastructure. Capital expenditures, including finance leases, rose 77.6% in Q2 to $18 billion, up from $14 billion in the previous quarter. This substantial increase in capex is necessary to meet the growing demand for cloud and AI services but has made investors nervous about the potential impact on margins.

For the upcoming Q1 FY2025, Microsoft provided guidance that included revenue expectations of $63.80-64.80 billion, which falls slightly below the consensus of $65.07 billion. The company anticipates continued growth in its key segments: Productivity and Business Processes (revenue of $20.3-20.6 billion), Intelligent Cloud (revenue of $28.6-28.9 billion), and More Personal Computing (revenue of $14.9-15.3 billion).

Microsoft highlighted the strong performance in its various segments. The Productivity and Business Processes segment saw Office 365 Commercial revenue growth of 13%, while LinkedIn revenue increased by 10%. The More Personal Computing segment benefited from a 61% growth in Xbox content and services, driven by the Activision Blizzard acquisition. However, devices revenue decreased by 11%.

Overall, Microsoft's Q4 results underscored its strong position in the cloud and AI markets but also highlighted the challenges associated with rising costs and meeting high investor expectations. The company remains focused on capitalizing on AI opportunities and expanding its cloud infrastructure, even as it navigates through the financial implications of these significant investments.