Microsoft stock prices drop on weaker cloud earnings

Company's net profit jumps to $22bn in the three months to the end of June

Microsoft has committed to build Azure into an AI supercomputer for the world. Bloomberg

Microsoft shares dropped almost 7 per cent in after-hours trading on Tuesday after the company reported softer earnings from its cloud division in its fiscal 2024 fourth quarter.

Revenue in Microsoft’s intelligent cloud division, which includes Azure public cloud, increased 19 per cent annually to $28.5 billion in the three months ending June 30, lower than the $28.6 billion consensus of analysts surveyed by StreetAccount.

Industry analysts said that the smaller-than-expected cloud revenue growth figures indicate that “Azure may have limited growth potential in the short term”.

Without substantial revenue from Azure, Microsoft's ability to invest and grow in all areas is limited, particularly in emerging technologies such as artificial intelligence, said Thomas Monteiro, senior analyst at Investing.com.

“Despite Microsoft's best-in-breed product offering and unmatched revenue diversification, it still can't grow fast enough to garnish the capital needed to grow across all segments, AI included, without a significant boost from Azure,” Mr Monteiro told The National.

“That's even more important when we consider the current pressure on the company's margins, which has led it to halt head-count growth and invest only in top-level talent.”

Sales from Azure and other cloud services, which Microsoft does not report in dollars, grew by about 29 per cent.

Since 2016, Microsoft has committed to building Azure into an AI supercomputer for the world, serving as the foundation of its vision to democratise AI as a platform.

“Considering that Apple has now joined the AI race and Alphabet is taking significant steps towards a diversified AI offering similar to Microsoft's, the company's unchallenged leadership in the segment up until now may be growing thin,” Mr Monteiro said.

After the earnings announcement, Microsoft’s stock was trading 6.25 per cent down at $396.50 a share at 5.40pm New York time.

Earlier, it closed 0.89 per cent down at $422.92, giving the company a market cap of $3.14 trillion.

Its net profit jumped 10 per cent on an annual basis to $22 billion in the June quarter. Microsoft’s financial year ends in June.

Revenue during the April-June period jumped 15 per cent to nearly $64.7 billion, exceeding analysts' expectations of $64.3 billion.

For the full financial year, the company’s net income surged 22 per cent to $88.1 billion, while revenue increased 16 per cent to $245.1 billion.

Microsoft projects its revenue for the first quarter of the 2025 fiscal year, ending on September 30, to be between $63.8 billion and $64.8 billion, representing a 13.8 per cent increase at the midpoint of the range.

It expects the first-quarter Azure revenue growth between 28 per cent and 29 per cent and a faster growth in the second half of the fiscal year, Amy Hood, executive vice president and chief financial officer of Microsoft, said during the earnings call.

“Our strong performance this fiscal year speaks both to our innovation and to the trust customers continue to place in Microsoft," said Satya Nadella, chairman and chief executive of the company.

“As a platform company, we are focused on meeting the mission-critical needs of our customers across our at-scale platforms today, while also ensuring we lead the AI era."

The company's productivity and business processes division, which includes its Microsoft Office business and revenue from LinkedIn, surged 11 per cent to $20.3 billion in the June quarter.

LinkedIn revenue increased almost 10 per cent annually. Microsoft did not give a dollar figure for its LinkedIn revenue and did not disclose the number of users.

Subscribers to Microsoft 365 Consumer – a bundle of various apps – increased to 82.5 million at the end of the last quarter, up 2.1 per cent on a quarterly basis, the company said.

Sales in the personal computing division surged 14 per cent to $15.9 billion in the quarter.

Search and news advertising revenue excluding traffic acquisition costs increased 19 per cent, while devices revenue decreased 11 per cent.

Microsoft also returned $8.4 billion to shareholders in the form of share repurchases and dividends in the last quarter.

The company spent more than $8 billion on research and development, about 12.4 per cent of its total sales in the quarter.