(News Bulletin 247) – Microsoft’s Azure division generated lower-than-expected growth in the fourth quarter of its 2023-2024 fiscal year. The stock plunged before limiting its decline thanks to more optimistic comments on growth in the current fiscal year.

For now, the earnings season is proving to be a bad one for Wall Street’s “Magnificent Seven.” Alphabet and especially Tesla were punished by the market last week following their publications. Meta, Amazon and Apple will deliver their copies later this week, while Nvidia will do so at the end of August.

Microsoft, for its part, suffered in post-market trading on Tuesday evening, after revealing its results for the fourth quarter of its 2023-2024 fiscal year, which ended at the end of June. The stock lost more than 8% before containing its decline to 2.76%.

The overall group’s indicators exceeded expectations. Microsoft posted revenue for the period of $64.7 billion, up 15% year-on-year and 16% excluding currency effects. Earnings per share rose 10% and 11% excluding currency effects to $2.95. According to an LSEG consensus cited by CNBC, analysts had expected revenue of $64.4 billion and earnings per share of $2.93.

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Wall Street expected better

However, for several quarters, investors’ attention has been focused on the growth of Microsoft’s cloud computing services division, Azure. According to UBS, this division now represents 28% of the Redmond group’s revenues and 90% of its growth. Azure is in the spotlight in particular because it is supposed to be the first division to reap the benefits of Microsoft’s heavy investments in generative artificial intelligence (AI). The group has thus integrated OpenAI’s AI features and technologies into its cloud offerings.

But in the fourth quarter of 2023-2024, Azure growth slowed to 29% (and 30% excluding currency effects), compared to 31% in the previous quarter. This rate included an 8 percentage point impact from AI, according to CFO Amy Hood.

Moreover, the market expected better, with CNBC citing an internal consensus of around 31% while Wedbush analyst Dan Ives pointed out that Wall Street wanted 30% growth, which he considered “surpassable.”

“It’s really the cloud services number that’s driving it – it had to be a little bit higher,” Doug Clinton, managing partner at Deepwater Asset Management, said on Bloomberg Television.

The underperformance is enough to raise eyebrows among investors who are increasingly wary of whether big tech’s big spending on AI translates into tangible revenue streams. Alphabet’s stock faltered last week despite beating expectations as it warned it would spend more on AI than expected — $900 million more, to be exact.

Encouraging comments for the future

However, CFO Amy Hood provided more positive comments on the outlook for the 2024-25 financial year, which helped the stock recover in after-hours trading.

The executive warned that Azure is expected to continue to decelerate in the first quarter of this fiscal year, with growth expected to be between 28% and 29% excluding currency effects. Amy Hood nevertheless clarified that Azure’s growth should accelerate in the second half of the 2024-2025 fiscal year “as our investments will enable an increase in our AI capabilities to better serve the rapidly growing demand.”

“This was the most important takeaway from the call in our view, as Microsoft discussed AI monetization trends that are expected to accelerate in fiscal 2024-2025 as more enterprise customers move toward the Azure/Copilot roadmap and AI for their organizations,” said Wedbush’s Dan Ives.

“While the quarter itself was satisfactory without being mind-blowing (…), which could disappoint some who were hoping for more, the Stock Market will digest tomorrow morning a very optimistic commentary on global AI deployments, the growth of Copilot users and the foundations of a solid intelligent Cloud segment for the future,” he concludes.