Microsoft (MSFT) delivered another impressive quarter of growth with its second quarter results, but analysts attribute the stock drop to high capital expenditures and Azure’s revenue growth coming in only a hair above company expectations.
Shares were down 6% during pre-market trading on Thursday.
“Azure revenue rose 38% in constant currency, modestly ahead of 37% guidance, and F3Q Azure growth guidance of 37–38% – despite a roughly 4-point tougher comparison – came in slightly above expectations,” said Evercore analysts, led by Kirk Materne, in a Thursday investor note.
“The debate, however, is no longer about demand; it is about capacity timing (and perhaps allocation),” he added. “While Azure growth at these levels remains impressive and continues to suggest market share gains, capex rose 66% year over year, and investors are increasingly looking for clearer evidence that this elevated investment is translating into incremental Azure acceleration.”
Evercore maintained its Outperform rating but decreased its price target to $580 from $640.
“Additionally, despite Microsoft reporting approximately $345bn in backlog (+28% y/y) from customers excluding OpenAI (OPENAI), ongoing concerns around OpenAI’s funding outlook and Microsoft’s exposure continue to represent a modest overhang,” Materne noted. “We believe this concern should diminish over time, but it remains a headwind today.”
Meanwhile, RBC reiterated its Outperform rating and $640 price target on Microsoft, which also remained the financial firm’s “top large cap pick.”
“All in, a strong quarter with solid execution and improving visibility,” said RBC analysts, led by Rishi Jaluria, in a note. “MSFT’s AI footprint and cloud growth remain underappreciated, in our view, and we would be buyers on the pullback.”
Finally, Morgan Stanley reiterated its Overweight rating and $650 price target but removed Microsoft from its “top pick” status.
“For a stock currently trading at 21X our CY27 EPS estimates, 21% cc EPS growth would appear constructive for the share price,” said Morgan Stanley analysts, led by Keith Weiss, in a note. “However, investor focus has narrowed more tightly towards areas seen as the key indicators of GenAI fitness, namely Azure growth and M365 Commercial Cloud. In that regard, Azure growth of 38% cc or 1% ahead of the guide came in a point below Street expectations of a 2% beat, while M365 Commercial Cloud growth at 17% YoY or 14% cc was just stable with prior quarters.”
Weiss also highlighted Microsoft’s constraint issues.
“The company’s ability to exceed targets in this supply-constrained environment will largely be dictated by the pace of capacity build-outs, which may have less variability than investors imagined,” he added. “In addition to the physical constraints, Microsoft management is making allocation decisions for the limited supply GPUs, balancing the growing needs of first-party applications like M365 Copilot and internal research efforts against Azure growth.”
Microsoft Chief Financial Officer Amy Hood mentioned this during Wednesday night’s earnings call.
“Our customer demand continues to exceed our supply,” Hood said. “Therefore, we must balance the need to have our incoming supply better meet growing Azure demand with expanding first-party AI usage across services like M365 Copilot and GitHub Copilot, increasing allocations to R&D teams to accelerate product innovation, and continued replacement of end-of-life server and networking equipment.”
Microsoft competitors, such as Oracle (ORCL) and Amazon (AMZN) were down slightly, 1% and 0.3%, respectively. Cloud giant Google (GOOG)(GOOGL) had ticked up 1.6%.