Revenue and Profit Growth Not Enough for Investors

On Wednesday, a software giant Microsoft announced its financial results, which, at first glance, appear impressive but are overshadowed by several factors. The company concluded Q4 and the entire fiscal year 2024 (from July 1, 2023, to June 30, 2024). For the last quarter, total revenue increased by 15 % year-over-year to $64.7 billion, with a net profit of $22 billion, a 10 % increase. Azure, the intelligent cloud service, saw revenue growth of 29 % compared to last year, but this is down from 31 % in the previous quarter and lower than analysts' expectations. All eyes are on this segment, where Microsoft is pumping billions of dollars into AI integration. For comparison, these investments from April to June 2024 amounted to $19 billion, while in Q3 it was $14 billion. Azure's financial performance is also seen as a key indicator of overall demand for AI services.

Where Microsoft Excelled

A significant source of revenue for Microsoft comes from business-focused applications and services. In the Productivity and Business Processes segment, Q4 revenues were $20.3 billion, an 11 % year-over-year increase. Commercial products dominated, and cloud storage for Office grew by 12 %. Revenue from Office 365 Commercial were particularly helpful, rose by 13 %. Another important factor is the increase in Microsoft 365 Consumer subscribers, which reached 82.5 million. This indicates continued consumer interest in integrated solutions offering access to Office apps, cloud storage, and other services. Additionally, revenues from Search and News Advertising also increased significantly. They grew by 19 % year-over-year, up from 12 % growth in the previous quarter.

Large Tech Stock Sell-Offs

The day after the financial results were announced, Microsoft's stock dropped by about 1.6 %, although it slightly stabilized on Thursday. The tech sector has been experiencing a significant decline recently, mainly due to massive sell-offs of stocks like NVIDIA, Apple, Meta, and Intel. Increasing uncertainty related to AI investments has started to affect the market. Weak financial results from some airlines listed on Nasdaq due to lower-than-expected demand in early summer holiday season, have also contributed to the sector’s decline. Investor bets on the now almost certain September interest rate cut in the U.S. [1] have led to a rotation of capital into smaller companies, boosting the Russell 2000 index while causing a decline in the Nasdaq Composite.

Source: Investing.com*

The Biggest IT System Outage in History

Microsoft has also faced serious issues related to the recent historically largest global IT system outage. This was caused by a faulty software update from CrowdStrike, a cybersecurity company which numerous clients from which the biggest one is Microsoft. Since the Windows operating system is used by millions of businesses worldwide, the outage among others, impacted airlines in particular. According to Microsoft, the main problem is that CrowdStrike has access to the core of their system, and a similar fatal error can cause a total outage. Microsoft had to grant this open access to external firms back in 2009, in compliance with European regulations dealing with antitrust practices by tech giants. However, the case is still fresh and under investigation.

Conclusion

Microsoft's latest quarterly results reveal an interesting dynamic in the tech sector. Although the company saw year-over-year revenue and profit growth, key areas like Azure, into which Microsoft is investing heavily, did not meet analysts' expectations. This development, coupled with ongoing market fluctuations, creates an atmosphere of uncertainty. In the short term, it is crucial to monitor how AI investments will evolve and how the market will react to potential issues with their returns.

* Data relating to the past are not a guarantee of future returns.

[1] Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. Forward-looking statements inherently involve risk and uncertainty because they relate to future events and circumstances that cannot be predicted and actual developments and results may differ materially from those expressed or implied in any forward-looking statements.

Warning! This marketing material is not and must not be understood as investment advice. Data relating to the past are not a guarantee of future returns. Investing in a foreign currency can affect returns due to fluctuations. All securities transactions can lead to both profits and losses. Forward-looking statements represent assumptions and current expectations that may not be accurate or are based on the current economic environment, which may change. These statements are not guarantees of future performance. InvestingFox is a trademark of CAPITAL MARKETS, o.c.p., a.s. regulated by the National Bank of Slovakia.

Sources:

https://www.investing.com/news/stock-market-news/microsoft-cloud-growth-misses-estimates-in-q4-despite-jump-in-investment-spending-3544426

https://www.microsoft.com/en-us/Investor/earnings/FY-2024-Q3/press-release-webcast

https://www.microsoft.com/en-us/investor/earnings/FY-2024-Q4/press-release-webcast

https://www.investopedia.com/dow-jones-today-07112024-8676382

https://www.theverge.com/2024/7/26/24206719/microsoft-windows-changes-crowdstrike-kernel-driver

https://sherwood.news/tech/microsoft-eu-regulation-crowdstrike-cybersecurity-mishap/