Microsoft Corp. (NASDAQ:MSFT) delivered a better-than-expected quarter on both the top and bottom lines, but investors remain focused on whether the company's cloud and AI spending story showed enough momentum to reset expectations.
- MSFT stock is down after earnings. See the price action here.
Azure revenue grew 40%, topping consensus estimates of 39.3%, while Microsoft continued to show an improvement in operating margin.
The cloud print was the key line item for investors looking for evidence that demand for AI infrastructure and enterprise cloud services remains durable.
The quarter also showed some moderation in capital spending. Microsoft's capex slowed to $31.9 billion in the third quarter from $37.5 billion in the second quarter, coming in below the Street's expectation of $35 billion.
Copilot, Microsoft's AI assistant, also appears to be trending in the right direction.
Expert Ideas
Stephen Callahan, trading behavior specialist at Firstrade, said Microsoft's results lacked the kind of surprise that could materially change sentiment.
"The read is that the earnings are absent any surprises," Callahan told Benzinga.
"So, given how weak the stock has been it's not too bad. The numbers are consistent and stable, but there's no breakout play, so that's not going to get a positive reaction in the stock price."
Callahan said AI demand remains strong, particularly from companies building on top of cloud infrastructure, but the broader supply chain continues to face capacity constraints.
"There's a lot of demand from other companies building AI, but this food chain's capacity is constrained right now," he said.
"They can say whatever capex number they want, but what are you getting for it when there is scarcity in the hardware and pricing going up along that line?"
MSFT Stock Performance
The bigger issue, Callahan said, is that Microsoft entered the AI cycle with extremely high expectations but has not delivered the kind of stock performance investors anticipated.
"The bar for Microsoft's shares is so low," he said.
"Considering Microsoft was supposed to be the winner of AI, it's been a terrible laggard, underperforming the next closest of these hyperscalers by many percentage points."
Callahan warned that Microsoft may face pressure if the stock fails to rally despite lowered expectations.
He also pointed to competitive risks, noting that Google's backlog suggests Alphabet Inc. (NASDAQ:GOOGL) (NASDAQ:GOOG) is taking share from rivals.
"There's a lot of room for improvement," he said.
MSFT Price Action: Microsoft stock was down 5.95% at $399.21 at the time of publication on Thursday, according to Benzinga Pro data.
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