Microsoft (MSFT) stock fell Wednesday after the software giant offered a disappointing sales outlook and disclosed increased capital spending requirements for its artificial intelligence initiatives.
The Redmond, Wash.-based company late Tuesday beat expectations for its fiscal fourth quarter, thanks to continued growth in its cloud computing businesses.
Microsoft earned $2.69 a share on sales of $56.2 billion in the quarter ended June 30. Analysts polled by FactSet had expected Microsoft earnings of $2.55 a share on sales of $55.5 billion. On a year-over-year basis, Microsoft earnings rose 21% while sales climbed 8%.
“We delivered a solid close to the fiscal year driven by Microsoft Cloud quarterly revenue of $30.3 billion, up 21% year over year,” Chief Financial Officer Amy Hood said in a news release.
Microsoft’s Azure infrastructure business and other cloud services posted revenue growth of 26% in the quarter, edging above views for 25% growth.
MSFT Stock Pulls Back On Outlook
For the current quarter, Microsoft predicted sales of $54.3 billion, based on the midpoint of its outlook. However, Wall Street had called for fiscal first-quarter sales of $55 billion.
Also, Microsoft executives said they expect increased capital spending on AI initiatives throughout fiscal 2024. Plus, Hood forecast “gradual” adoption of AI services by customers.
“In the short term, the debate will center on the timing of when these stepped-up investments will pay off,” Goldman Sachs analyst Kash Rangan said in a note to clients.
“Historically, when Microsoft ramped up capex in its cloud business, Azure growth rate got a meaningful boost and margins rebounded, thereby supporting stock appreciation,” Rangan said. “Microsoft has a strong track record of proving that its capex acceleration is owed to increased business confidence.”
Rangan reiterated his buy rating and price target of 400 on Microsoft stock.
In midday trades on the stock market today, Microsoft stock sank 4.1% to 336.56. During the regular session Tuesday, MSFT stock rose 1.7% to close at 350.98.
Demand for generative AI will fuel Microsoft’s cloud business, Chief Executive Satya Nadella said in a statement Tuesday.
“We remain focused on leading the new AI platform shift, helping customers use the Microsoft Cloud to get the most value out of their digital spend, and driving operating leverage,” Nadella said.
Microsoft Stock Is On Two IBD Lists
MSFT stock notched an all-time high of 366.78 on July 18. Microsoft reached that record high after the company announced pricing details for Microsoft 365 Copilot, an artificial intelligence-based productivity tool.
Of Microsoft’s three business segments, Intelligent Cloud was the top performer in the June quarter. Revenue in the segment increased 15% year over year to $24 billion. The unit includes server products and cloud services such as Azure.
Microsoft’s Productivity and Business Processes unit saw sales rise 10% to $18.3 billion. The division includes Office productivity software as well as the Dynamics and LinkedIn businesses.
And finally, Microsoft’s More Personal Computing unit saw sales decline 4% to $13.9 billion. The unit includes Windows PC software, Xbox video games, Surface computers, internet search and advertising.
Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.
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