Microsoft Faces Stock Plunge Despite Record Q3 Earnings

Microsoft Corporation, the tech giant based in Redmond, Washington, reported astonishing third-quarter earnings that marked the highest figures in its five-decade history. Despite these impressive results, Microsoft’s stock experienced a significant decline, marking its worst day on the stock market in nearly a year.

In an earnings report released on Wednesday, Microsoft announced a record $3.30 earnings per share (EPS) and a net income of $24.7 billion, surpassing analyst expectations of $3.10 EPS and $23.2 billion in net profit, according to data from FactSet. The company’s revenue for the quarter ending September 30 reached $65.6 billion, outpacing estimates of $64.6 billion and slightly exceeding the previous quarter’s record of $64.7 billion.

A notable highlight of the report was the 34% year-over-year growth in sales from Microsoft’s cloud computing service, Azure, on a constant currency basis. This growth exceeded projections of 30.7% and is considered one of the key drivers behind Microsoft’s public-facing generative artificial intelligence initiatives. Azure has been a focal point for Microsoft, and its strong performance reflects the company’s strategic focus on cloud services.

However, despite these stellar earnings, Microsoft shares plummeted approximately 6% by midday Thursday, reversing an initial after-hours gain. This steep decline is poised to become the company’s worst single-day performance since October 2022. The sell-off can largely be attributed to the cautious guidance provided by Microsoft management for the upcoming quarter. The company indicated that it anticipates a slowdown in year-over-year growth for Azure, projecting a range of 31% to 32%, down from previous expectations. Additionally, the intelligent cloud segment, which heavily relies on artificial intelligence, is expected to see growth of 18% to 20%, a decrease from the 21% growth recorded in the previous quarter.

Moreover, Microsoft’s management pointed to anticipated operating losses from OpenAI, the startup it backs that is responsible for the widely-used generative AI chatbot, ChatGPT. The cautious outlook from Microsoft’s leadership led to widespread concerns among investors, triggering a wave of selling activity. The downturn in Microsoft stock significantly impacted the broader market, contributing to a decline in the S&P 500, which fell by approximately 1.5%, and a more pronounced drop in the tech-focused Nasdaq, which decreased by about 2.3%. This marked the worst trading day for both indexes since early September.

The sheer scale of the loss was staggering, with Microsoft shedding roughly $175 billion in market capitalization in a single day, an amount comparable to the entire market valuation of Disney. This drop underscores the volatility and pressures facing technology stocks, particularly in an environment where investor sentiment can shift rapidly based on guidance and outlooks.

This earnings report comes during a week packed with financial disclosures from major tech companies. Following Google’s earnings release on Tuesday, Microsoft’s results were closely watched in anticipation of further updates from fellow industry giants, Amazon and Apple, which are set to announce their earnings on Thursday afternoon.

This quarter marked a significant shift for Microsoft as it was the first following an adjustment in how the company reports its business segment performance. Analysts believe this restructuring aims to better reflect competition between Azure and Amazon Web Services, a rival enterprise cloud computing service. However, Bernstein analyst Mark Shmulik cautioned that this change might lead to “confusion” among investors, particularly as they recalibrate their expectations regarding Microsoft’s diverse array of business segments.

In the previous quarter, Microsoft reported $24.1 billion in revenue for its intelligent cloud unit, reflecting a year-over-year decline in that segment despite Azure’s impressive growth of over 30%. This juxtaposition illustrates the complexities of Microsoft’s business dynamics, where growth in one area does not necessarily translate to overall segment success.

Notably, Microsoft remains one of the most profitable companies globally, boasting $88 billion in net income for its most recent fiscal year, trailing only behind tech behemoths Apple and Berkshire Hathaway among U.S. corporations. Even with the recent stock decline, Microsoft’s stock had surged by 87% over the past two years leading up to Wednesday’s close, outpacing the S&P 500’s increase of 54% and rival Apple’s gain of 50%, as reported by FactSet data that includes reinvested dividends.

As investors digest the implications of Microsoft’s latest earnings report, the company faces a pivotal moment in balancing its robust growth in cloud services against the emerging challenges in the rapidly evolving landscape of artificial intelligence and technology markets. The next quarter will be crucial for Microsoft as it strives to reassure stakeholders and investors that it can maintain its trajectory of success amidst changing market conditions and heightened expectations.

Looking ahead, analysts will closely monitor how Microsoft navigates these challenges, especially in a competitive environment where innovation and adaptability are paramount. The tech sector’s performance will also be influenced by broader economic conditions, investor sentiment, and ongoing developments in generative AI, which remains a key focus area for Microsoft and its strategic future.