Microsoft Shares Drop on Disappointing Cloud Growth Forecast
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(Bloomberg) -- Microsoft Corp. shares dropped in extended trading after the software maker forecast slower quarterly cloud revenue growth, reflecting the company’s struggle to bring data centers online fast enough to keep up with demand for artificial intelligence services.
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Sales from the closely watched Azure cloud-computing business will rise 31% to 32% in the current period, Microsoft executives said Wednesday on a call following its first-quarter earnings report. Azure revenue posted a 34% gain for that period, adjusted for currency fluctuations, which was a slight deceleration from the 35% growth a quarter earlier.
The dour outlook followed an otherwise upbeat report, during which the company said first-quarter revenue increased 16% to $65.6 billion and profit rose to $3.30 a share — beating estimates.
But on a call with analysts, Chief Financial Officer Amy Hood said some data center capacity Microsoft had been counting on for its push into artificial intelligence didn’t materialize. That will constrain revenue growth in the Azure business during the current quarter, which ends in December.
“We are in short supply, and so we remain focused on getting that into a more balanced position,” Hood said in an interview.
Microsoft shares fell 4.8% to $411.97 as the markets opened in New York on Thursday.
“Our fear is the more they throw into data center buildout, the more the drag is going to be on margins,” said Gil Luria, an analyst at D.A. Davidson & Co., who cut his rating on Microsoft shares to “neutral” during the September quarter. “That isn’t happening yet. They’ve been able to cut enough costs elsewhere to still expand margins.”
Chief Executive Officer Satya Nadella has overhauled the software maker’s product line with AI models from partner OpenAI. He’s now seeking to recruit enough paying customers to the souped-up software and services to drive Microsoft’s growth for years to come. At the same time, corporations are tapping the company’s data-center capacity to power development of their own AI applications, buoying demand in its closely watched Azure business.
Like cloud rivals Google and Amazon.com Inc., Microsoft has ramped up spending to construct and rent the data centers required to fuel power-hungry AI services. Microsoft even struck a deal recently to purchase nuclear power from a restarted reactor at Three Mile Island in an effort to ensure that it has sufficient electricity to meet its growing needs.