Microsoft shares experienced a significant decline in early Thursday trading, pulling down other tech giants and major market indices, as the company’s latest earnings report revealed challenges in its artificial intelligence strategy. Despite being an early leader in AI through its OpenAI partnership, the tech giant faces mounting concerns over the substantial costs and timeline associated with implementing its AI initiatives.
The company’s performance in 2024 has been notably underwhelming compared to its Magnificent 7 peers, with only a 16.6% increase year-to-date, falling short of the Nasdaq’s 26% gain. This comes as Microsoft has slipped behind both Apple and Nvidia in market capitalization rankings.
During Wednesday’s earnings call, CEO Satya Nadella highlighted the company’s progress in AI integration, noting that AI-driven
transformation is revolutionizing various aspects of work and business processes. The company expects its AI business to exceed $10 billion in annual revenue run rate next quarter, marking the fastest growth of any division in Microsoft’s history.
However, this AI expansion comes with considerable financial implications. The company’s capital expenditure reached $55.4 billion last year for AI infrastructure development and hardware acquisition. Analysts project this spending could increase to approximately $80 billion in the current fiscal year, with $20 billion already invested in the September quarter alone.
The first-quarter results showed earnings of $3.30 per share, surpassing analysts’ expectations of $3.10, while revenue grew 16% to $65.6 billion. However, the Azure cloud division, central to Microsoft’s AI strategy, posted a 33% growth rate that slightly missed market expectations, with projections indicating further deceleration in the coming quarter.
Microsoft’s revenue guidance of $68.6 billion for the current quarter fell approximately $1 billion short of Wall Street’s forecast, contributing to investor concerns. Analysts have begun adjusting their outlook, with D.A. Davidson’s Gil Luria reducing his price target to $425, citing concerns about Microsoft’s competitive position in data center infrastructure compared to rivals AWS and Google Cloud.
Barclays analyst Raimo Lenschow maintained an overweight rating with a $475 price target but cautioned that investors might need to exercise patience before seeing returns on AI investments. The impact of current AI investments may not become fully apparent until April 2025, when third-quarter results are released.
Morgan Stanley’s Keith Weiss offered a more optimistic view, raising his price target to $548 and suggesting that patient investors would ultimately benefit once supply constraints ease. Microsoft’s CFO Amy Hood reinforced this perspective, expressing confidence in accelerated growth during the second half of the fiscal year as AI capacity expands.
CFRA analyst Angelo Zino maintained a strong buy rating with a $490 target, highlighting the company’s improving AI contribution to Azure growth and potential benefits from AI integration across various business units, including the new Microsoft 365 Consumer cloud division.
The stock’s premarket trading showed a 3.8% decrease to $416.15, potentially reducing its year-to-date gains to approximately 10.7%. These developments highlight the complex balance Microsoft faces between maintaining its AI leadership position and managing the substantial investments required to realize its ambitious AI strategy.