Microsoft Stock Drops After Disappointing Cloud Growth

Microsoft’s stock was down 2.8% in after-hours trading, a sign of how sensitive traders are to the slightest sign of weakness in the company’s all-important cloud business, which is at the heart of Chief Executive Satya Nadella’s artificial-intelligence strategy.

“There’s a segment of the investing community that is hyperfocused on very small changes to the Azure business,” said Brad Reback, an analyst at Stifel Financial SF 0.97%increase; green up pointing triangle.

On a call with analysts, Microsoft Chief Financial Officer Amy Hood said Azure growth came in at the low end of the company’s guidance because of soft demand in a few European markets for non-AI services, as well as limits in its AI-related hardware.

“We are constrained on AI capacity, and because of that, we’ve…signed up with third parties to help us,” Hood said, describing partnerships Microsoft has made with other AI providers. “You do see us investing a lot in build so we can get back to a more balanced place.”

Microsoft said its overall revenue in the quarter increased 15% from a year earlier to $64.7 billion. Net income was $22 billion, up 10%.

For the current first quarter that ends in September, the company expects total revenue of between $63.8 billion and $64.8 billion.

Excitement about the potential for generative AI that can create computer code and summarize complex information has helped fuel a huge run-up in the shares of Microsoft and other tech companies since last year.

More recently, though, investors have started to worry that the companies’ shares have become overvalued, helping trigger a reversal in tech stocks. The tech-heavy Nasdaq Composite Index has fallen about 8% over the past few weeks.

Google parent Alphabet’s shares fell 5% last Wednesday after it reported advertising sales growth had slowed while capital expenditures nearly doubled.

Microsoft’s stock is trading up more than 12% since the beginning of the year, but is down around 6% this month.

Nadella has bet Microsoft’s future on AI. The company has a multibillion-dollar partnership with ChatGPT maker OpenAI and is pouring cash into data centers and chips to power AI services.

The company used $13.9 billion of cash on capital expenditures last quarter, largely for AI, a 55% jump from the same quarter a year ago. Including finance leases, its total capital expenditures were $19 billion, up from $10.7 billion.

Microsoft executives have said they intended to keep capital expenditures at these elevated levels to meet soaring customer demand for AI. The company has aggressively cut costs in other areas such as hardware to mitigate the impact on its margins.

Eight percentage points of Azure’s growth came from AI last quarter, compared with 7 percentage points in the previous quarter.

Microsoft’s total cloud revenue, which also includes Office and Windows online offerings, increased 21% to $36.8 billion.

So far, most of Microsoft’s AI revenue has come through its cloud services. The company has also infused the technology into its core offerings, such as AI assistants called Copilot for products such as Microsoft 365 and its Bing search engine. The company hasn’t broken out revenue from Copilot.

Recently, Microsoft faced a security blowup, though not one of its making. Windows-based computers around the world began crashing following a security update pushed by software company CrowdStrike earlier this month.

Microsoft said 8.5 million Windows computers were hit, or less than 1% of the total footprint. But the global outage was enough to bring down hospitals, airlines and media operations. The incident underscored the ubiquity of Microsoft in the workplace and the security vulnerabilities that exist on the software giant’s platform.

Microsoft shares closed down 0.9% at $422.92 on Tuesday before the financial results were released.

Tom Dotan contributed to this article.

Write to Aaron Tilley at aaron.tilley@wsj.com

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