Microsoft plunges 11.5% on Azure slowdown, record AI spending
Cloud growth moderates to 39%, $37.5B capex sparks investor concern over ROI timing
Microsoft shares suffered their steepest single-day decline since the Covid-19 panic, plunging 11.5% on Thursday despite the technology giant reporting quarterly results that topped analyst expectations. The stock dropped $56.47 to $425.16, wiping more than $400bn from the company's market capitalisation as investors punished the company for moderating cloud growth and record artificial intelligence investments.
The Redmond, Washington-based company reported fiscal second-quarter adjusted earnings of $4.14 per share on revenue of $81.27bn, exceeding Wall Street expectations of $3.91 per share on $80.31bn in sales. However, the market's focus shifted to Microsoft's cloud computing division, where Azure revenue growth decelerated to 39% year-over-year from 40% in the prior quarter.
The slight slowdown in Azure growth, which represents Microsoft's primary engine of AI-related revenue, disappointed investors who had been anticipating an acceleration rather than stabilisation. The company's guidance for the current quarter projects Azure growth of 37% to 38% in constant currency, which met analyst expectations but failed to reassure a market demanding clearer evidence that massive AI infrastructure investments are translating into faster commercial adoption.
More troubling for investors was Microsoft's revelation that capital expenditures surged to $37.5bn during the quarter, a 66% increase from the previous year. The spending primarily reflects massive investments in AI infrastructure, including data centres and specialised chips needed to train and deploy large language models. While chief executive Satya Nadella emphasised that Microsoft is in the "early stages of AI diffusion" and has already built an AI business larger than some of its major franchises, investors are increasingly demanding shorter timelines for returns on these investments.
"We are pushing the frontier across our entire AI stack," Nadella said on the earnings call, seeking to frame the elevated spending as necessary to maintain competitive advantage in the AI arms race.
Adding to investor anxiety, Microsoft disclosed that OpenAI accounts for approximately 45% of its $625bn in remaining commercial performance obligations, representing a significant concentration risk that some analysts find troubling. While Nadella emphasised the company's strategy of diversification across Microsoft 365, GitHub, and Copilot products, the dependency on a single AI partner for nearly half of its contracted revenue has raised questions about the structure of Microsoft's AI strategy.
"Some Wall Street analysts questioned the potential risks associated with such a high concentration," according to Forbes, which noted that the OpenAI disclosure "highlighted a considerable reliance on a single AI partner."
Analysts responded swiftly to the earnings report, with several firms reducing price targets despite acknowledging the strength of Microsoft's underlying business. Evercore ISI maintained an "Outperform" rating but trimmed its price target to $580 from $640. Piper Sandler analyst Hannah Rudoff also lowered her target to $600, suggesting that Azure's growth is being constrained by capacity allocation decisions rather than weak demand.
"Customer demand continues to surpass available supply, necessitating difficult allocation decisions between Azure customers, first-party AI products like Microsoft 365 Copilot, and research and development teams," explained chief financial officer Amy Hood, attempting to contextualise the capacity constraints as evidence of robust demand rather than commercial challenges.
Not all analysts joined the bearish chorus. Gregg Moskowitz of Mizuho Securities reiterated a "Buy (Outperform)" rating and maintained his price target at $620, arguing that the market's reaction was disproportionate to the underlying fundamentals. The average 12-month price target from Wall Street analysts remains approximately $617, suggesting significant upside from current levels if the company can demonstrate accelerating AI revenue growth in coming quarters.
Microsoft's plunge contributed to broader pressure on software stocks, with the iShares Expanded Tech-Software Sector ETF on pace for its biggest one-day decline since April, as CNBC reported that "software stocks enter bear market on AI disruption fear." The sector-wide sell-off contrasts sharply with the performance of Meta Platforms, which surged on Wednesday after demonstrating that its AI investments were driving tangible growth in its core advertising business.
The divergent market reactions to Microsoft and Meta highlight growing investor scepticism about big technology companies' multibillion-dollar AI spending programmes. While investors rewarded Meta for showing clear returns on AI investment, Microsoft's report raised questions about whether the company's strategy of building comprehensive AI infrastructure across its entire product portfolio will deliver similar commercial success.
Looking ahead, investors will focus on whether Microsoft can accelerate Azure growth rates while demonstrating that record capital expenditures are translating into meaningful revenue and profit growth. The company's ability to diversify beyond its OpenAI dependency and show ROI timelines on AI investments will likely determine whether the stock can recover from its worst single-day drop since the pandemic-induced market volatility of March 2020.
With the software sector entering bear market territory and investor patience for AI spending waning, Microsoft faces increasing pressure to convert its technological leadership in artificial intelligence into accelerating financial performance in the coming quarters.