Microsoft Stock Takes Hit Following Weak Fiscal Second Quarter Guidance

Shares of Microsoft (NASDAQ: MSFT) declined 7% in Tuesday’s extended trading after the company projected weak quarterly guidance. On its latest earnings call, the tech giant reported that its fiscal first quarter had cloud revenue coming in lower than expected. However, Microsoft beat analysts’ expectations on the top and bottom lines.

For instance, the tech giant reported a revenue haul of $50.12 billion compared to the $49.61 billion expected by analysts. In addition, Microsoft’s earnings per share for the fiscal first quarter stands at $2.35 versus the consensus estimate of $2.30 per share.

Microsoft also revealed plans to moderate its operating expense growth in the next few quarters. However, the company foresees fiscal second-quarter guidance of $52.35 billion to $53.35 billion in revenue. This implies a 2% growth at the middle of the range but still falls below Wall Street targets across the company’s business units. For example, analysts polled by Refinitiv had revenue for the same period at $56.05 billion. Microsoft’s implied operating margin for the fiscal second quarter, which stands at 40%, is also less than the 42% consensus among some analysts.

Microsoft Weak Guidance Spooks Investors, Undermines Stock Safe-haven Status

The weak Microsoft guidance for the next fiscal quarter spooked investors and stoked fears that macroeconomic constraints are impacting its operations. This is especially so regarding Microsoft’s softer cloud business and PC unit. Amid its lowest quarterly revenue growth in five years, Microsoft CEO Satya Nadella explained that cyclical trends are affecting the company’s consumer business.

Although Microsoft’s cloud business saw blazing growth in the past, the company said growth dropped to 35% in the last quarter. In addition, Microsoft also projects this cloud business, called Azure, to subsequently drop again in the second fiscal quarter of 2023. For instance, the company’s finance chief, Amy Hood, forecasts a 37% Azure growth drop in fiscal Q2. This estimate compares unfavorably with the 39.4% growth rate put forth by analysts for the same period. Speaking on how this unsavory development could impact Microsoft’s relatively “safe-haven” stock, Haris Anwar, senior analyst at Investing.com, noted:

“If this growth deceleration continues, it could harm an investment case in the company’s stock which is considered a safe haven amid the market turmoil.”

Bob O’Donnell, an analyst for TECHnalysis Research had a different take on the Microsoft cloud situation. In his opinion, the company’s fortunes fared reasonably well in the face of the pandemic when it was not expected to. However, that talismanic run has now tapered out. As O’Donnell put it:

“In a weird way, everyone expected there to be a disaster when the pandemic hit. And it was the exact opposite. But at some point that impact was going to hit and it’s hitting now.”

Microsoft shares have now fallen about 26% this year, while the S&P 500 is trading 19% lower over the same period.