Microsoft stock falls 2% despite cloud revenue surging 40%

Microsoft shares fell 2% in after market trading even after posting stronger-than-expected results for its fiscal third quarter, with cloud and artificial intelligence driving broad-based growth that offered some relief to investors who had grown wary of the company’s heavy spending on AI infrastructure.

Total revenue rose 18% year-over-year to $82.9 billion, beating analyst estimates of $81.4 billion.

Adjusted earnings per share came in at $4.27, well ahead of the $4.03 consensus, representing a 21% increase from the same period a year earlier.

Shares fell roughly 2.7% in extended trading following the release, though the stock remains down about 10% for the year.

Azure powers ahead as AI demand accelerates

The headline figure for Wall Street was Azure’s performance. Microsoft’s cloud-computing unit posted 40% revenue growth in the January-March quarter, matching consensus estimates and coming in at 39% when adjusted for currency fluctuations — narrowly ahead of the 38% analyst forecast on that basis.

The result offered reassurance that Microsoft’s costly build-out of AI data centre capacity is beginning to translate into tangible revenue.

The company’s AI business also crossed a notable milestone, with its annual revenue run rate surpassing $37 billion, up 123% year-over-year, according to CEO Satya Nadella.

Microsoft Cloud revenue overall rose 29% year-over-year.

The Productivity and Business Processes segment, which houses Microsoft 365 and Dynamics 365, grew 17%, rounding out a quarter in which every major division contributed to the beat.

Capital spending comes in below estimates

Despite the upbeat revenue picture, capital expenditures — closely tracked as a proxy for data centre investment — came in at $31.9 billion, below the average analyst estimate of $35.3 billion, including leases.

Microsoft has previously acknowledged that capacity shortages have held back revenue growth, using that argument to justify its aggressive spending programme.

Those outlays have put pressure on cash flows and contributed to cost-cutting measures across the industry.

Microsoft earlier this month launched its first employee buyout programme in more than five decades, joining Amazon and Meta, which have also announced job cuts affecting thousands of employees.

AI strategy hinges on OpenAI and expanding model choices

Much of Microsoft’s AI momentum is tied to its relationship with OpenAI, though that partnership is evolving.

Earlier this week, the company overhauled its agreement with the startup to secure a 20% cut of OpenAI’s revenue through 2030, regardless of whether it achieves key technological breakthroughs.

However, the revised deal also strips Microsoft of exclusive rights to resell OpenAI’s products on its cloud — a significant concession as competition from Alphabet and Amazon intensifies.

Amazon has already begun offering OpenAI’s latest models and its Codex coding tool on its own cloud platform.

To broaden its AI model options, Microsoft has also integrated Anthropic’s technology — including models from the maker of Claude — into its cloud services and Copilot products.

That strategy appears to be gaining commercial traction.

On Monday, Microsoft announced its largest-ever Copilot rollout, covering roughly 743,000 Accenture employees, a majority of the IT firm’s global workforce.

The results go some way toward addressing investor concerns about sluggish adoption of Copilot 365 and Microsoft’s dependence on OpenAI — risks that Jefferies analyst Brent Thill had flagged as key overhangs on the stock heading into earnings.

Whether the momentum can be sustained as competition in the cloud and AI market stiffens will be the central question for the quarters ahead.

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