AI disappoints, Microsoft's cloud revenue unexpectedly slows in the second quarter, plunging 8% after hours, "bleeding" 250 billion｜Financial Report Insights

Although overall sales revenue and profits both maintained double-digit growth, the slowdown in growth of Microsoft's Azure cloud business revenue in the second quarter exceeded Wall Street's expectations, disappointing investors eager to see Microsoft's significant investment in artificial intelligence (AI) pay off.

After the U.S. stock market closed on Tuesday, July 30, Microsoft announced the financial data for the fourth quarter of its fiscal year 2024 ending on June 30, 2024. The following are all referred to as second quarter data.

1) Key Financial Data

Revenue: Revenue for the second quarter was $64.73 billion, a year-on-year increase of 15%, analysts expected $64.52 billion, and a 17% year-on-year increase in the first quarter.

EPS: Diluted earnings per share (EPS) for the second quarter was $2.95, a 10% year-on-year increase, analysts expected $2.93, and a 20% year-on-year increase in the first quarter.

Operating Profit: Operating profit for the second quarter was $27.93 billion, a 15% year-on-year increase, analysts expected $27.63 billion.

Net Profit: Net profit for the second quarter was $22 billion, a 10% year-on-year increase, and a 20% increase in the first quarter.

Capital Expenditure: Capital expenditure for the second quarter was $13.87 billion, analysts expected $13.27 billion.

2) Segment Revenue

Intelligent Cloud: Revenue for the Intelligent Cloud business segment in the second quarter, including Azure public cloud, Windows Server, speech recognition software Nuance, and GitHub, was $28.52 billion, a 19% year-on-year increase, analysts expected $28.72 billion, and a 21% year-on-year increase in the first quarter.

Productivity and Business Processes: Revenue for the Productivity and Business Processes segment in the second quarter, including Microsoft 365 Copilot AI tools and Office software, was $20.32 billion, an 11% year-on-year increase, analysts expected $20.21 billion, and a 12% year-on-year increase in the first quarter.

More Personal Computing: Revenue for the More Personal Computing business segment in the second quarter, including Windows operating system, Surface hardware, Xbox game consoles, and video game company Activision Blizzard, was $15.9 billion, a 14% year-on-year increase, analysts expected $15.54 billion, and a 17% year-on-year increase in the first quarter.

After the financial report was released, Microsoft's stock price fell by about 0.9% on Tuesday and plunged after hours, with a post-market drop of up to 8%. Due to the sharp decline in stock price, Microsoft's market value "bled" by approximately $250 billion after hours.

Slowing Growth Rate of Intelligent Cloud Revenue to Less Than 20%, Azure Revenue Below 30% for Nearly Three Quarters

The financial report shows that Microsoft's total revenue and profit growth in the second quarter generally slowed compared to the first quarter, but still exceeded Wall Street expectations. However, the revenue growth of the cloud business not only failed to continue to accelerate compared to the previous quarter but also slowed down more than expected by Wall Street. The revenue growth of the intelligent cloud business fell below 20% for the first time in the past three quarters.

In the intelligent cloud business, in the second quarter, the revenue of Azure and other cloud services increased by 29% year-on-year, also slowing down from the 31% growth in the first quarter, marking the first time since the third quarter of last year that the growth rate fell below 30%. Excluding the impact of exchange rate fluctuations, the revenue growth of Azure and other cloud services was 30%, slightly lower than analysts' expected growth of 30.3%.

After two consecutive quarters of accelerating year-on-year growth, the slowdown in the revenue of Azure and other cloud services has raised concerns among investors about the diminishing impact of AI on cloud revenue growth.

Microsoft stated that AI services contributed an 8 percentage point growth to the revenue of Azure and other cloud services in the second quarter. This contribution growth rate was slightly higher than the 7 percentage points in the first quarter of this year and 6 percentage points in the fourth quarter of last year.

Despite Microsoft outperforming expectations in most financial indicators, the stock price plummeted after hours, once again reflecting investors' concerns about the return prospects of AI investments by tech giants. According to Wall Street, the perception is that AI technology has not yet reached the expected practical level, and investing too much not only may not recoup costs but also could easily lead to a bubble.

Last week, Alphabet, Google's parent company, announced second-quarter revenue and profit that exceeded expectations, but Wall Street remains skeptical. Investors are now focusing on capital expenditures, fearing that Google's high spending on technical infrastructure could impact profitability. It is well known that the main driving factor for the continuous significant increase in capital expenditures by tech giants like Google is AI.

Wall Street News previously mentioned that last week, Meta's CEO Zuckerberg and Alphabet's CEO Pichai both hinted in their speeches that their companies and other tech companies may be investing excessively in AI infrastructure, "possibly overinvesting in AI." However, they both acknowledged that the business risks are too high if they do not do so. Pichai emphasized that for Alphabet, the risk of underinvestment in the AI field is far greater than the risk of overinvestment