Microsoft (MSFT) stock decreased on Wednesday after the company released mixed financial results for the December quarter and provided a below-average forecast. The stock price fluctuated greatly during intraday trading in response to the news.
Microsoft, based in Redmond, Washington, reported mixed results for its fiscal second quarter, with earnings slightly above expectations but sales below expectations. Additionally, the company’s revenue forecast for the March quarter was significantly lower than what analysts had predicted. The company earned an adjusted $2.32 per share on sales of $52.7 billion in the December quarter. Analysts had expected Microsoft to earn $2.29 per share on sales of $53 billion. This represents a 6% decrease in earnings and a 2% increase in sales compared to the same quarter the previous year. This is the first drop in earnings for Microsoft in five years, since the December quarter of 2017.
On the stock market today, MSFT stock experienced a significant decrease of as much as 4.6% during morning trades before recovering to a slight increase in afternoon trades. MSFT stock closed the regular trading session at a 0.6% decrease to 240.61.
During the December quarter, Microsoft’s Azure infrastructure and other cloud computing services reported higher-than-expected growth. However, the rate of growth for Azure is slowing down. According to the company’s Chief Financial Officer, Amy Hood, “Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year over year as our commercial offerings continue to drive value for our customers.” This statement was included in a news release.
Out of Microsoft’s three business segments, the Intelligent Cloud segment performed the best in the December quarter. The revenue for this segment increased 18% year over year to $21.5 billion. It includes server products and cloud services such as Azure. Azure and other cloud services posted a revenue growth of 31%, or 38% in constant currency, which exceeded the expected growth rate of 37% in constant currency. This growth rate was 42% in the previous quarter. In contrast, the Productivity and Business Processes unit experienced a 7% increase in sales to $17 billion. This division includes Office productivity software, as well as the Dynamics and LinkedIn businesses.
Lastly, Microsoft’s More Personal Computing unit reported a 19% decrease in sales to $14.2 billion. This unit includes Windows PC software, Xbox video games, Surface computers, internet search and advertising. Windows licensing revenue experienced a 39% decline in the holiday sales quarter due to the decrease in PC sales. Devices revenue also dropped by 39%. Furthermore, Xbox content and services revenue decreased by 12% in this period.
An analyst from Jefferies, Brent Thill, stated that Microsoft’s results were “better than feared” and maintains a “buy” rating on MSFT stock with a target price of 275. However, during a conference call with analysts, Microsoft management forecasted sales that were below estimates for its fiscal third quarter. The company predicted sales of $50.5 billion to $51.5 billion for the current quarter, with the midpoint of $51 billion being significantly lower than Wall Street’s projection of $52.4 billion for the March quarter. This is also lower than the sales in the same quarter last year, which was $49.4 billion.
Microsoft also forecasted continued slowing of Azure sales growth to approximately 30% or 31% in constant currency. This has led BMO Capital Markets analyst Keith Bachman to lower his rating on MSFT stock to “market perform” or neutral, from “outperform” or buy. In a note to clients, he cited “ongoing uncertainty on Azure” as the reason for the downgrade. He further added that “Until Azure growth stabilizes, we envision the stock being range-bound” and lowered his price target on MSFT stock to 265 from 267.
The earnings report comes after Microsoft announced significant layoffs and a cost-cutting plan last week. The company is cutting 10,000 jobs, which is about 4.5% of its workforce. Microsoft took a $1.2 billion charge in the recent quarter related to severance costs and other restructuring expenses, which lowered its earnings by 12 cents per share. The company also warned that customers were cutting back on their spending due to the difficult macroeconomic conditions. However, Microsoft stated that it will still be adding staff and investing in growth areas such as cloud computing and artificial intelligence.
On Monday, Microsoft announced a new investment, reported to be worth $10 billion, in the artificial intelligence startup OpenAI. OpenAI is the organization behind popular AI models such as text generator ChatGPT and image generator Dall-E. This is not the first investment of Microsoft in OpenAI, as the company invested in OpenAI in 2019 and 2021 as well. Microsoft is providing its Azure cloud computing infrastructure to OpenAI and is also integrating OpenAI models into its consumer and enterprise software products.
MSFT stock has a middling Composite Rating of 58 out of 99 according to IBD Stock Checkup. This ranks it second out of six stocks in the IBD’s Computer Software-Desktop industry group. IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating, and the best growth stocks have a Composite Rating of 90 or higher.