Microsoft (MSFT) Stock: Earnings Beat Fails to Lift Shares as AI Spending Concerns Mount

TLDR

• Microsoft posted Q1 earnings of $3.72 per share on $77.7 billion revenue, surpassing Wall Street estimates of $3.68 per share and $75.5 billion.
• Azure cloud services grew 40% while commercial cloud revenue reached $49.1 billion, up 26% year over year.
• The company took a $3.1 billion accounting charge related to its OpenAI investment, reducing earnings per share by 41 cents.
• Capital expenditures jumped 74% to $34.9 billion, with half allocated to AI infrastructure including GPUs and CPUs.
• Microsoft secured a $250 billion Azure contract from OpenAI but gave up first refusal rights, while obtaining a 27% stake valued at $135 billion.

Microsoft delivered first quarter results that beat analyst expectations across the board. The tech giant reported earnings per share of $3.72 on revenue of $77.7 billion.

Wall Street had projected $3.68 per share and $75.5 billion in revenue. Last year’s comparable quarter saw earnings of $3.30 per share on $65.6 billion in revenue.

Despite the beat, shares dropped more than 2% in after-hours trading. Investors appeared concerned about rising costs and AI infrastructure spending.

Microsoft Corporation, MSFT

The commercial cloud business continued its strong performance. Revenue hit $49.1 billion, growing 26% from the prior year. Analysts expected $48.6 billion.

Azure led the charge with 40% revenue growth. The Intelligent Cloud segment, which houses Azure, generated $30.9 billion. That topped the $30.2 billion consensus estimate.

Heavy AI Infrastructure Investment

Capital expenditures told a different story. Spending surged 74% year over year to reach $34.9 billion in the quarter.

About half went toward purchasing GPUs and CPUs. These chips power Azure’s growing AI workloads and meet increasing customer demand.

The results arrived as Azure recovered from a Wednesday outage affecting businesses globally. Amazon’s AWS faced similar issues the week before.

OpenAI Partnership Costs and Benefits

Microsoft’s bottom line absorbed a $3.1 billion hit related to OpenAI. The charge stemmed from equity method accounting for the AI company investment.

This reduced earnings per share by 41 cents. Even with the charge, net income climbed to $27.7 billion from $24.67 billion last year.

Microsoft has committed $13 billion total to OpenAI. Through September’s end, $11.6 billion had been funded according to regulatory filings.

The timing aligned with OpenAI’s completed recapitalization. The ChatGPT maker restructured as a nonprofit controlling its for-profit operations.

Microsoft now holds 27% of OpenAI’s public benefit corporation. That stake carries a $135 billion valuation on an as-converted diluted basis.

The partnership terms changed under the new agreement. Microsoft surrendered its first right of refusal as OpenAI’s primary compute provider.

The two companies began working together in 2019, years before ChatGPT launched. Their relationship has evolved as both compete in overlapping AI markets.

Microsoft listed OpenAI as a competitor in last year’s annual report. The filing cited rivalry in AI offerings, search, and news advertising.

OpenAI previously relied exclusively on Microsoft for cloud infrastructure. The companies modified their deal to let OpenAI partner with other providers like Oracle for the Stargate Project.

Microsoft has tested its own AI model since August. The internal development could enhance its Copilot assistant without depending solely on OpenAI technology.

The OpenAI Foundation holds a 26% stake in the for-profit entity. Employees, former staff, and other investors control 47% of the company.

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