Microsoft's post-earnings stock reaction was the most severe in nearly 13 years, highlighting investor impatience with the company's artificial-intelligence spending relative to its ability to monetize AI.
The stock $(MSFT)$ lost 10% in Thursday's session, making for its steepest post-earnings drop since July 19, 2013, when it fell 11.4%, and its worst one-day decline for any sort of session since March 16, 2020, when it slid 14.7%, according to Dow Jones Market Data.
The plunge wiped out $357 billion in Microsoft's market capitalization. Only Nvidia (NVDA) has lost more market cap in a single day - the $593 billion that got erased on Jan. 27, 2025 in the wake of DeepSeek fears.
Analysts had different views of what investors should do from here. Mizuho trading-desk analyst Jordan Klein, previously bewildered by the level of negativity toward Microsoft's stock in recent months, now thinks it looks like "dead money" unless the company can get Azure growth above 40%. The company grew the Azure cloud-computing business at a 38% clip in the December quarter.
Microsoft's management suggested growth would be higher if the company put more of its limited resources toward Azure, in pursuit of heavy cloud demand from third parties. Instead, management is consciously choosing to allocate some of its graphics processing units to internal research and development teams.
Those efforts "come with way more long-term value and margin potential to the company and investors," Klein wrote. "But until they have enough GPUs to serve both internal and external AI demand, Azure growth probably stays right here, and investors will want more. Hence the stock suffers."
However, Bernstein's Mark Moerdler had a different interpretation of the lower-than-expected Azure growth, arguing that Microsoft is rightly prioritizing its own internal AI applications.
Investors need "to understand that management made a cognizant decision to focus on what is best for the company long term rather than driving the stock up this quarter," Moerdler wrote on Thursday. Demand for Microsoft's cloud services is clearly robust, as evidenced by the company's $625 billion in remaining performance obligations, a 110% increase year-over-year, he highlighted.
Deutsche Bank analyst Brad Zelnick wrote in a Thursday note that investors are focusing too much on "near-term bogeys" while "missing a story of exceptional share gains and execution." He pointed out that Microsoft is on track to grow operating income and adjusted earnings at mid-teens levels for the third consecutive year.
Microsoft maintains an incumbent advantage in the application layer of the AI stack, but the monetization will take longer to materialize, Zelnick added. While he believes Microsoft is making a prudent move in prioritizing internal AI projects, Zelnick noted that the strategy "puts the onus on Microsoft to deliver before it will get credit."
In order to disprove investor doubts, Microsoft will need to show increased monetization of its Copilot offering and AI models, according to UBS analyst Karl Keirstead. Thus far, "many checks on Copilot don't suggest a strong usage ramp," Keirstead wrote. "The model market appears crowded and capital-intensive."
In the near-term, Keirstead believes 39% Azure growth next quarter "looks doable" if Microsoft continues adding capacity, as the cloud deal with OpenAI looks to convert into revenue faster than originally expected.
