Top Line
Microsoft’s strong profits weren’t enough to satisfy Wall Street amid unusually tense times for investors in big technology companies, as the company’s shares plummeted after its artificial intelligence business reported weaker than expected results.
Microsoft CEO Satya Nadella speaking at a conference in May.
AFP via Getty Images
Key Facts
It was good news for Microsoft, as the company beat expectations on both revenue and profit. The company reported diluted earnings per share of $2.95 for the three months ended June 30, slightly above the analyst consensus of $2.94 and up 10% from a year ago. It also reported quarterly revenue of $64.7 billion, beating expectations of $64.4 billion and up 15% from a year ago.
However, Microsoft’s shares fell about 7% after the earnings report and have already fallen more than 8% in the past three weeks.
The drop came after Microsoft’s key AI business saw weaker-than-expected growth: Its cloud-computing division, Azure, grew 29%, below expectations of 31%, and its AI-heavy Intelligent Cloud division posted revenue of $28.5 billion, below expectations of $28.7 billion.
If Microsoft’s shares fall below $400 in after-hours trading, it would be its lowest intraday level since May 2, and a 7% drop would be its worst day since October 2022, although after-hours trading tends to bring more volatility.
tangent
Last quarter was Microsoft’s most revenue-rich quarter ever, beating the previous record of $62.02 billion in the December quarter, and ending the company’s fiscal year with a bang. Microsoft’s net income of $88.1 billion (earnings per share of $11.80) for the fiscal year from July 2023 to June 2024 is expected to beat last year’s previous record of $72.4 billion, and its revenue of $245.1 billion is well above its previous record of $211.9 billion for 2023. The market reaction to Microsoft’s overall strong performance was similar to that of Google parent Alphabet’s earnings report last week, when the company’s shares fell 5% despite beating two expectations.
Amazing facts
According to gross domestic product (which measures the total value of all goods and services produced in a country), Microsoft’s revenue in fiscal 2024 would be roughly equivalent to the entire economies of Greece and New Zealand last year — quite an accomplishment for a company whose origins can be traced back to high-school computer clubs in the 1960s.
Main Background
A leader in all things technology for decades, profitable but often unassuming, Microsoft has stunned in the past two years as analysts have declared it the immediate winner of the artificial intelligence boom. Microsoft’s immediate profit boost from its cloud computing products (operating profits at its AI-focused cloud division rose about 40% in the quarter ending June 2022 compared with the previous quarter) and broader positioning with an equity investment in generative AI startup OpenAI helped drive the stock soaring. The Washington-based company’s shares have risen more than 50% in the past two years, dwarfing the S&P 500’s roughly 30% rise, and Microsoft’s market capitalization has topped $3 trillion, a record high. Microsoft’s profits and revenues have nearly doubled from fiscal 2019 to fiscal 2024 as the veteran technology company leaned heavily into the artificial intelligence wave. And that growth has been driven by its AI-heavy Intelligent Cloud division, which has increased its operating profit from $13.9 billion to about $50 billion over five years.
Points to note
Microsoft is among a string of major technology companies reporting earnings this week, including Facebook parent Meta on Wednesday afternoon, Amazon and Apple on Thursday.
tangent
Microsoft is closing in on Apple as the most profitable company in the U.S. The rivalry dates back to when Apple co-founder Steve Jobs and Microsoft co-founder Bill Gates were CEOs, but Microsoft is expected to make less than $90 billion in profits in fiscal 2024, well below Apple’s expected $102 billion for the same year. But analysts expect the two companies to be roughly equal by 2026, with consensus estimates compiled by FactSet predicting Apple will post net income of $118 billion and Microsoft $116 billion. That’s a far cry from the more than $30 billion gap that separated the two companies in 2022. The last time Microsoft’s profits surpassed Apple’s was in 2010.
