Microsoft shares dip three per cent as cloud growth slows

The slowdown in cloud revenue, which has been a significant driver of Microsoft’s earnings, sparks unease among investors

• Eastern Eye
• 31 July, 2024

By: Eastern Eye

MICROSOFT reported strong quarterly earnings on Tuesday (31), with a profit of $22 billion (£17.12bn) on $64.7bn (£50.36bn) in revenue for the recently ended quarter, reflecting growth from the same period a year earlier.

However, the company’s shares dipped nearly three per cent to $411.40 (£320.27) in after-market trades, as its crucial cloud computing unit posted revenue of $36.8bn (£28.64bn), falling short of investors’ expectations and raising concerns about the sustainability of its growth.

The slowdown in cloud revenue, which has been a significant driver of Microsoft’s earnings, sparked unease among investors, leading to the decline in share price.

Despite the overall solid performance, the hint of a potential deceleration in cloud growth was enough to prompt a cautious response from the market.

“While there will be some knee-jerk reaction in Microsoft stock after hours, we believe the takeaways for the broader tech sector is this AI monetisation story is real,” Wedbush analyst Dan Ives said in a note to investors.

Microsoft is among the major contenders in the race to build out artificial intelligence systems, pouring billions of dollars into the technology in the hope it will pay off.

Microsoft is keen to monetise generative AI, having moved the fastest to implement it across all its products, and pouring $13bn (£10.11bn) into OpenAI, the start-up stalwart behind ChatGPT.

CFRA Research viewed the earnings results as “largely in line” across Microsoft’s core businesses and believes that Microsoft is “incrementally improving” the money it makes from AI, according to senior equity analyst Angelo Zino.

“Still, we acknowledge that the better-than-expected cloud results from Alphabet last week had investors looking for more,” Zino said.

Google cloud reports profit 

Google-parent Alphabet reported profit and revenue that beat expectations as its AI-amped cloud and search ads businesses thrived.

Winning the big bet on AI is “crucial” for the group, said Jeremy Goldman of Emarketer, “but the market is willing to give them a level of patience.”

The AI frenzy has helped Microsoft’s cloud computing business grow in the double digits, which analysts said could be hard to sustain.

Microsoft’s big stake in OpenAI along with its own Copilot AI help it maintain a leadership position in AI, according to Emarketer senior analyst Gadjo Sevilla.

Revenue from Microsoft’s AI-infused “Intelligent Cloud” unit was $28.5bn (£22.18bn), a 19-per cent increase from the same quarter a year earlier, according to the earnings figures.

Microsoft CEO Satya Nadella said on an earnings call that use of its AI offerings is ramping up, from workplace software to Bing search and Copilot AI relied on by developers.

“I’m energised about the opportunities ahead,” Nadella said. “We are investing for the long term in our fundamentals, in our innovation and in our people.”

Microsoft’s Azure platform drove a strong increase in revenue from server products and cloud services, according to the company.

Nadella said the company is “focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era.”

Microsoft reported a net income of $88.1bn (£68.58bn) for its fiscal year on revenue of $245.1bn (£190.81bn), up 22 per cent and 16 per cent respectively.

Money taken in by Microsoft’s Xbox video game unit leaped 61 per cent, boosted by the acquisition of Activision, according to earnings figures.

Microsoft said costs to attract visitors to its search and news services rose 19 per cent, as it pressed to compete with Google. (AFP)