Microsoft stock drops after results fall short in latest AI disappointment

Microsoft (MSFT) released its fiscal fourth quarter earnings after the bell on Tuesday, beating on the top and bottom lines, but missing on cloud revenue expectations.

For the quarter, Microsoft reported earnings per share (EPS) of $2.95 on revenue of $64.7 billion. Wall Street was anticipating EPS of $2.94 on revenue of $64.5 billion, according to data compiled by Bloomberg. Microsoft reported EPS of $2.69 and revenue of $56.2 billion during the same period last year.

Microsoft’s overall cloud revenue came in at $36.8 billion, in line with expectations of $36.8 billion, but the company’s Intelligent Cloud revenue, which includes its Azure services, fell short, coming in at $28.5 billion versus expectations of $28.7 billion.

Shares of Microsoft were about 2% lower in pre-market trading on Wednesday, having fallen over 7% earlier in the wake of the results.

While Microsoft’s cloud business missed expectations, overall revenue still rose 21% year over year. Intelligent Cloud revenue, meanwhile, increased 19% year over year. What’s more, Microsoft said AI services contributed 8 percentage points of growth to its Azure and other cloud services revenue, which increased by 29%.

Microsoft’s AI miss sent shares of fellow AI-heavy companies like Meta lower in after-hours trading. The social media giant was off more than 3% on the news.

The report follows rival and Google parent Alphabet’s (GOOG, GOOGL) earnings announcement last week, during which the company said it is seeing an uptick in cloud revenue partially due to interest in AI products.

Still, Google didn’t offer specific numbers on the impact of AI on the cloud business, leaving some analysts like UBS’s Stephen Ju to predict that revenue benefits from the company’s AI spending might not come until the first half of 2025 at the earliest.

According to UBS analyst Karl Keirstead, Microsoft has also been grabbing more market share from Google and Amazon.

“In terms of share shifts among AWS, Microsoft Azure, and Google Cloud, the most consistent theme in this round of checks was the number of customers and partners that cited share gains by Microsoft resulting from its early lead on the AI front,” Keirstead wrote in a recent note about the three major cloud players.

“This has been a recurring theme from checks over the last 6-12 months and the commentary about Azure’s relative strength felt consistent with prior checks,” he added.

During Alphabet’s earnings call, CFO Ruth Porat said the company spent $13 billion on capital expenditures, up from $12 billion in the prior quarter, adding that the vast majority of that spending is going toward AI.

Amazon (AMZN) is set to report earnings on Aug. 1.

Shares of Google are up 22% year to date, while shares of Amazon are up 23%.