Microsoft's stock performance has underperformed major tech peers, with investors questioning the company's Azure cloud growth trajectory. Despite being at the forefront of the AI boom, Microsoft faces challenges in maintaining its leading position in cloud computing.
Microsoft's stock performance has lagged behind the Nasdaq and its major tech competitors over the past year. The company's year-over-year Azure cloud growth has shown little change in recent quarters, while Alphabet and Amazon have demonstrated acceleration. Despite being at the heart of the artificial intelligence boom, investors have yet to see substantial returns. The software giant's stock price has risen by less than 8% in the past year, the weakest gain among the eight major U.S.
tech companies. Microsoft also trails significantly behind the tech-heavy Nasdaq, which has surged by 25% over the same period. This trend sets the stage for Microsoft's quarterly earnings report on Wednesday, marking the beginning of tech earnings season. The most pressing question for Microsoft shareholders revolves around the company's Azure cloud-computing business and its potential for accelerated growth. In a recent earnings call, CFO Amy Hood stated that Azure's growth rate is expected to increase in the first half of 2025, but for the December quarter, she projected a growth rate of 31% to 32% at constant currency, down from 34% in the previous period. This announcement led to a 6% drop in Microsoft's stock the following day.Azure's growth has increased by 2 percentage points since the last quarter of 2023, while top competitors Amazon and Alphabet have seen their cloud growth accelerate by 7 points and 13 points, respectively, during the same period. This disparity is particularly concerning for investors because Microsoft now commits tens of billions of dollars in quarterly capital expenditures to meet the cloud and AI needs of its customers. While Microsoft operates in various markets, investors focus heavily on cloud computing because it represents a significant and rapidly expanding sector. Companies are increasingly shifting away from owning and operating their own data centers, leading to a surge in demand for cloud services. Overall, Microsoft is projected to report revenue growth of 11% from a year ago to $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 increase to $3.11 from $2.93 a year ago. Microsoft's stock performed strongly in 2023, soaring by more than 50%, its best year since 2009. This surge was fueled by Microsoft's close relationship with ChatGPT creator OpenAI, which sparked the generative AI boom and resulted in a significant investment inflow into the AI startup. Through this partnership, Microsoft secures a substantial amount of cloud business while also investing heavily in infrastructure development. Recently, Microsoft made a significant announcement regarding its relationship with OpenAI. The company stated that OpenAI will no longer utilize Azure on an exclusive basis, except for handling incoming queries from developers. Going forward, OpenAI will need to consult with Microsoft when seeking additional computing capacity, and Microsoft will have the discretion to accept or reject the request. OpenAI has designated Microsoft as a technology partner but not a member of the group responsible for building and operating Stargate, which has the potential to attract up to $500 billion in investment. Microsoft has allocated $80 billion in AI-related capital expenditures for the fiscal year ending June 30th. A large portion of these investments is directed towards infrastructure development to support the growing demand for AI services. Analysts at Cowen suggest that last week's developments could help Microsoft reaccelerate Azure's growth rate to the mid-30s. They argue that Microsoft has been funding GPU capital expenditure investments for OpenAI model training without generating revenue, and by shifting some of this training elsewhere, the company can demonstrate improved capital expenditure efficiencies and stronger returns on capital spending while maintaining its access to OpenAI. Kevin Walkush, a portfolio manager at Jensen Investment Management, expects the AI investment to pay off in the long run. He believes that even if AI doesn't materialize, the cloud computing market still holds significant long-term growth potential. However, he recognizes the high probability of AI's success and considers Microsoft's strategic investments in this area as a calculated risk with substantial rewards
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