Some of the headwinds that have plowed through Microsoft’s (MSFT) stock are unlikely to abate in the near term.
Goldman Sachs analyst Gabriela Borges pinned the company’s 23% plunge this year to two factors in a new note on Monday.
First, upward revisions to capital expenditures without commensurate upward revisions to Azure cloud sales. This resurfaced concerns about returns on investment and Azure’s competitive positioning against peers such as Amazon’s (AMZN) AWS.
Second, ongoing concerns that Microsoft’s business worker applications, such as Office 365, may be disrupted by AI competition like Anthropic’s (ANTH.PVT) Claude Cowork. This is fueled by the perception that Copilot functionality lags the performance of other AI tools.
“We think risk/reward is balanced into the [earnings release] print: the near-term fundamental outlook is mixed but investor expectations are also lower,” Borges added.
Microsoft is slated to report earnings on April 29 after the market close.
The Satya Nadella-led tech giant needs to rebuild investor confidence after a badly received quarter on Jan. 28, which sent Microsoft stock tanking close to 10%.
Investors weighed a massive $37.5 billion in capex to build out the data centers needed to sustain its AI momentum. The read-through was that Microsoft would see pressured profit margins over the next few quarters.
“The Street wanted to see less cap-ex spending and faster cloud/AI monetization … and coming out of the gates it’s the opposite,” Wedbush tech analyst Dan Ives said. “We have said this is a multi-year journey and Redmond needs to focus on its data center buildout with more customers heading down the AI path.”
The Street’s outsized focus on capital expenditures overshadowed decent performance otherwise.
Microsoft reported solid earnings, with revenue reaching $81.3 billion, a 17% increase year-over-year. The performance was driven by the company’s Intelligent Cloud segment, particularly Azure, which saw revenue surge 39% as organizations accelerated their transition to AI-driven infrastructure.
Microsoft Cloud quarterly revenue surpassed $50 billion for the first time, reflecting deep market penetration of its Copilot and AI services.
The Street has held firm on its EPS estimates on Microsoft — likely a result of its strength in core business areas.
“In our view, the bigger picture is that Microsoft’s two largest business pillars are each running at roughly $100 billion—Azure, which is growing in the high 30% range despite capacity constraints, and Microsoft 365 Commercial, which is growing steadily in the mid-teens … at the same time the company has increased both operating income and earnings per share by more than 20% for three consecutive quarters,” JPMorgan analyst Mark Murphy said.
