Microsoft's stock performance underperforms tech peers as Azure cloud growth slows compared to rivals like Alphabet and Amazon.
Microsoft 's stock performance has lagged behind the Nasdaq and its fellow megacap tech companies over the past year. While the tech industry is booming with artificial intelligence, investors haven't seen the anticipated rewards reflected in Microsoft 's share price, which has climbed by less than 8% in the last year. This places Microsoft significantly behind the tech-heavy Nasdaq, which has surged by 25% during the same period.
This trend sets the stage for Microsoft's upcoming quarterly earnings report on Wednesday. As the company kicks off tech earnings season, all eyes are on its Azure cloud business. Despite the overall AI boom, Microsoft's Azure cloud growth has remained relatively stagnant for several quarters, a stark contrast to the acceleration witnessed by rivals like Alphabet and Amazon. Microsoft's CFO, Amy Hood, has projected an increase in Azure's growth rate in the first half of 2025, but for the December quarter, she anticipates a growth rate of 31% to 32% at constant currency, a slight dip from the previous period's 34%. This cautious outlook contributed to Microsoft's stock declining by 6% the following day. Since the last quarter of 2023, Azure growth has increased by 2 percentage points, while Amazon and Alphabet have seen their cloud growth accelerate by 7 points and 13 points respectively.This discrepancy is particularly concerning for investors as Microsoft is investing tens of billions of dollars quarterly to meet the cloud and AI needs of its customers. While Microsoft operates in various markets, investors primarily focus on cloud computing due to its considerable size and continued rapid expansion. Companies are increasingly migrating away from owning and operating their own data centers, opting instead for cloud-based solutions to handle more demanding workloads.Overall, Microsoft is projected to report revenue growth of 11% year-over-year, reaching $68.8 billion, according to LSEG. This would mark the slowest year-over-year growth for any quarter since mid-2023. Analysts anticipate earnings per share to climb to $3.11, up from $2.93 a year ago. In 2023, Microsoft enjoyed a significant boost, with its stock surging by more than 50%, its best performance since 2009. This surge was fueled by Microsoft's close relationship with OpenAI, the creator of ChatGPT, which sparked the generative AI boom and led to a historic influx of investments into the AI startup. Through this partnership, Microsoft benefits from a substantial amount of cloud business while also investing heavily in infrastructure development.Recently, Microsoft's relationship with OpenAI underwent a notable shift. Microsoft announced that OpenAI will no longer exclusively use Azure, except for handling incoming queries from developers. Going forward, OpenAI will require Microsoft's approval for any additional computing capacity requests. In a separate development, OpenAI designated Microsoft as a technology partner but excluded it from the group responsible for building and operating Stargate, a project with the potential to attract up to $500 billion in investment. Microsoft has allocated $80 billion for AI-related capital expenditures in the fiscal year ending June 30.Analysts at Cowen believe that these recent developments could help Microsoft accelerate Azure's growth rate back to the mid-30s. They argue that Microsoft has been funding GPU capital expenditure investments for OpenAI model training without generating revenue, and that by shifting some of this training elsewhere, the company can demonstrate improved capital expenditure efficiencies and stronger returns on capital spending while maintaining access to OpenAI. Kevin Walkush, a portfolio manager at Jensen Investment Management, anticipates that Microsoft's AI investments will yield long-term rewards. He acknowledges that even if AI fails to materialize, the cloud computing market still offers a substantial runway for growth. However, he believes the probability of AI success is high, making it a worthwhile bet for Microsoft to capitalize on this opportunity.
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