Microsoft (MSFT 0.15%) stock was in free fall on Thursday, dropping more than 12% despite posting earnings Wednesday afternoon that appeared to be strong on the top and bottom lines.
The revenue and earnings numbers beat estimates in blowout fashion. The technology giant saw revenue climb 17% to $81.3 billion, while net income jumped 60% to $38.5 billion, or $5.16 per share, which blew away estimates of $3.92 per share.
Image source: Getty Images.
Microsoft's cash cow, its cloud computing business, crossed $50 billion in revenue for the first time, up 26% year over year. Its intelligent cloud business, which primarily encompasses its artificial intelligence (AI) cloud business, including Azure, jumped 29% to $32.9 billion. Azure, the largest part of the intelligent cloud pie and the growth driver, saw revenue increase 39% in the quarter.
Again, these look like good numbers, but Microsoft investors saw some perhaps troubling trends that sparked the sell-off.
Slowing cloud growth, rising AI spending
Two trends stuck out for investors that caused the sell-off. One, Azure cloud growth declined slightly, from 40% the previous quarter to 39% this quarter. It's certainly a small drop, but when combined with anticipated growth for Azure of 37% to 38% in the third fiscal quarter, it starts to form a trend.
At the same time, Microsoft reported $37.5 billion in capital expenditures (capex) in the quarter -- a record for the company and 66% higher than the same quarter a year ago.
On the earnings call, CFO Amy Hood said about two-thirds of the capex was spent primarily on GPUs and CPUs to keep up with AI demand. But that raised a red flag for many investors questioning the lack of bang for the AI buck with Azure growth slowing and capex spending rising.
So what does this mean for Microsoft stock?
What will Microsoft stock be worth in a year?
Coming into the year, Wall Street analysts were more bullish on Microsoft than any other S&P 500 stock, with 97% rating Microsoft as a buy.
NASDAQ: MSFT
Key Data Points
While Microsoft stock got a slew of price target downgrades after the earnings report, all of the analysts maintained their buy ratings.
Prior to the earnings release, Microsoft had a median price target of $625 per share, which would suggest a 12-month return of 47%.
While the latest upgrades, which ranged from about $650 per share from Morgan Stanley to around $550 per share from JPMorgan Chase, might bring that down a bit, it would still likely be in the $600-per-share range, which would still be 41% growth in a year.
Why it matters
This matters for a couple of key reasons. First, it means that despite the increase in AI spending and concerns about AI cloud growth, Wall Street analysts remain very bullish on Microsoft, with almost all who cover it rating the stock as a buy.
Second, the 41% to 47% expected return for Microsoft stock over the next 12 months makes it the most promising of all the "Magnificent Seven" stocks.
No other Magnificent Seven stock has a higher expected return over the next year, based on the median price target. The next closest is Nvidia with a projected 32% gain.
And today's dip might provide a good opportunity to scoop up some shares.
