Microsoft shares have been rocked by cloud growth fears, taking Amazon with it

Shares of Microsoft Corp fell more than 6% in after-hours trading on Tuesday as the company’s cloud computing growth slowed sharply and executives guided that holiday season revenue came in more than $2 billion short of expectations.

Azure cloud computing business has become the largest and most important business for Microsoft MSFT.
and there are concerns about cloud growth as the US faces a potential recession for the first time since the ubiquity of the technology. Microsoft executives said Azure grew 35% in the fiscal first quarter, a marked slowdown from Azure’s 40% growth rate in the previous quarter, as well as the 50% growth seen in the same quarter last year; Analysts on average were expecting a 36.5% increase, according to FactSet.

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In the current quarter, Chief Financial Officer Amy Hood suggested that there would be a similar sequential decline for Azure, saying that the rate increase would be reduced by five points on a constant currency basis. Hood also suggested that more costs could be cut after Microsoft confirmed earlier this month that fewer than 1,000 jobs were being cut.

“While we will continue to help our customers do more with less, we will do the same internally,” he said. “And you should expect our operating expenses to increase significantly over the course of the year as we focus on increasing productivity from the significant investments we’ve made over the past year.”

Microsoft shares fell more than 6% in after-hours trading after Hood’s prediction in a conference call. Shares closed up 1.4% at $250.66.

Concerns about cloud growth immediately spread to Azure’s biggest competitor, Amazon Web Services, as Inc. shares AMZN,
fell more than 4% in after-hours trading.

Microsoft reported fiscal first-quarter profit of $17.56 billion, or $2.35 per share, down from $2.71 per share in the same quarter a year ago, when the tech giant announced a tax break of 44 cents per share. Revenue rose to $50.1 billion from $45.32 billion a year earlier. Analysts on average had expected earnings of $2.31 per share on sales of $49.66 billion, according to FactSet.

For the fiscal second quarter, Hood reported revenue of $52.35 billion to $53.35 billion, while analysts on average were expecting sales of $56.16 billion, according to FactSet. Hood said “Smart Cloud” revenue will reach $21.25 billion to $21.55 billion, while analysts on average forecast $21.82 billion in print; Microsoft’s other revenue segment forecasts were higher than analysts’ average expectations.

Microsoft also suffered from a stronger dollar as well as a sharp decline in PC sales, which rose during the pandemic but are now showing a record regression.

For more: Pandemic The PC boom is over, but its legacy will live on

Microsoft reported PC revenue of $13.3 billion in the quarter, roughly flat from $13.31 billion a year ago and beating analysts’ average estimate of $13.12 billion, according to FactSet. While PCs have long been what consumers most recognize Microsoft for, their importance to the company’s finances has waned in recent years as cloud computing has grown in importance.

“Historically, Windows has been a very large driver of Microsoft’s revenue and a disproportionate driver of earnings given its strong margins,” Bernstein analysts said in a preview of the report, while maintaining an “overweight” rating. “Over time, other businesses, notably Microsoft’s commercial cloud, have grown rapidly, while the Windows business has grown relatively slowly, reducing Windows’ relative influence.”

The Smart Cloud segment posted revenue of $20.3 billion in the first quarter, up from $16.96 billion a year ago, but slightly below the average analyst estimate of $20.46 billion tracked by FactSet. Azure’s 35% growth was Microsoft’s slowest growth in the previous two fiscal years; Microsoft, even its main competitors Inc. Like AMZN, only Azure reports a percentage increase for its cloud computing product.
and Alphabet Inc. GOOGLE,
revenue and profit margin reporting for cloud computing products.

Microsoft’s other revenue segment, Productivity and Business Processes, reported revenue of $16.5 billion, up from $15.04 billion a year earlier, and above the average analyst estimate of $16.13 billion, according to FactSet. This segment includes Microsoft’s core cloud software properties, such as the Office suite of products, officially called Microsoft 365, as well as LinkedIn and some other properties.

Microsoft shares have fallen 25.5% this year, as has the S&P 500 index SPX.
20.3% and the Dow Jones Industrial Average DJIA,
– which counts Microsoft as one of its 30 components – decreased by 13.3%.

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