Microsoft (Ticker: MSFT) stock price, which fell nearly 4% despite the announcement of good third quarter earnings, is not taking advantage of the improved market atmosphere after Trump's election victory. I am especially upset because this news comes at a time when we are hearing that the inflow of funds into software is accelerating even among AI-related stocks. In this article, we will look into the reasons for such stock price movements.
Source: Microsoft, Investor Relations
For your information, as you can see in the photo above, it is not a typo to say that it is the first quarter of 2025 performance. In the United States, more companies than expected are announcing adjusted fiscal quarter settings.
Microsoft FY25 1st Quarter Performance Summary (July - September 2024)
Category Figures/PerformanceChanges compared to the same period last yearKey detailsTotal revenue (Revenue)$65.59B+16%$1.03B above market expectations ($64.56B)Operating Income (Operating Income)$30.6B+14%Operating margin 46.6% (140bps above market expectations)Net profit (Net) Income)$24.67B+10.7%The main reasons for the increase in net income were sales growth and cost efficiencyEarnings per share (EPS)$3.30+10.4%$0.20 above market expectations ($3.10)Operating Cash Flow$34.18B+11.8%Adjusted operating cash flow was $40.71B, +44.6% IncreaseCapEx (CapEx)$14.92B - Primarily used to expand data center and cloud infrastructureBuybacks and dividends$3.40B (stock buybacks), $5.57B (dividends)Buybacks: Decrease, Dividends: +10.3%
In fact, it is a flawless performance. A 16% figure may seem disappointing to anyone accustomed to the explosive growth rates of growth stocks, but for a company with quarterly sales of $91.4 trillion to grow 16% is impressive. Operating profit, net profit, and cash flow also increased, and there were share buybacks and dividends, so it can be said that this is actually a satisfactory performance for shareholders.
Disappointing guidance?
What investors were disappointed in was the guidance. It was expected that there would be a slowdown in Windows sales (More Personal Computing sector) and a decrease in subscriber growth for the Microsoft 365 product line due to the weak PC market. In addition, losses reflected to Microsoft were expected to increase due to investment in OpenAI. Microsoft's OpenAI-related losses are expected to range from about $683 million this quarter to $1.5 billion next quarter.
Source:Microsoft 1Q25, Earnings Call Slides
However, the main factor that brought down Microsoft's stock price was, of course, AI, the biggest topic in the market.
Source: Microsoft 1Q25, Earnings Call Slides
This figure is 31-32%, a decrease of about 2% compared to the previous quarter, and it is believed that it is impossible for the growth rate to decrease compared to the exploding demand for AI.
It is definitely a war-like time when it comes to AI-related investment and customer attraction, so it is understandable that people are losing their minds even with a drop of only(?) 2%.
However, the reason the growth rate is decreasing is interesting. Microsoft CEO Satya Nadella cited server expansion and power issues as reasons for the decline in Azure's growth rate in an earnings announcement.
In summary, there is still demand for AI, but it is necessary to secure the supply and demand of AI-related hardware and the power infrastructure to run it smoothly.
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"But in the long run, we do need effectively power, and we need DCs. And some of these things are more long lead, but I feel pretty good that going into the second half of even this fiscal year, that some of that supply demand will match up."
Satya Nadella, Microsoft CEO, FY25 First Quarter Earnings Conference Call
However, this is a short-term issue and is expected to normalize in the next quarter.
conclusion
It is understandable that the demand for AI is so explosive that power and server capacity are even problems. However, it feels like the focus is on providing AI servers rather than on adding value, or improving sales, through AI. It can be confirmed that AI is being introduced in Office, Copilot, etc., but it is unclear whether this will increase the convenience of current users, in other words, maintain the status quo, and serve as an inducement for the influx of new users.
The more I analyze Microsoft's earnings announcement, the more interested I become in other companies. In the hardware sector, NVIDIA and power-related stocks, and in the software sector, stocks that are already producing results by utilizing Microsoft's AI server may be better choices for now.