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MSFT Stock: Microsoft Cloud Services Fuel Earnings Beat

Microsoft ( MSFT ) stock sank Wednesday after the company reported mixed results for the December quarter and provided disappointing guidance. MSFT stock retreated more than 3% on the news.




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The Redmond, Washington-based company late Tuesday beat expectations for earnings in its fiscal second quarter, but sales were weak. Also, its revenue forecast for the March quarter came in well below Wall Street estimates.

Microsoft earned an adjusted $2.32 per share. share on sales of $52.7 billion in the December quarter. Analysts polled by FactSet had forecast Microsoft earnings of $2.29 per share on sales of $53 billion. On a year-over-year basis, Microsoft’s earnings fell 6%, while sales rose 2%.

It was the first decline in earnings for Microsoft in five years since the December 2017 quarter.

MSFT stock falls on Outlook

In morning trading on the stock market today, MSFT shares fell 3.5% to 233.66. During the regular session on Tuesday, MSFT stock fell 0.2% to close at 242.04.

In the December quarter, Microsoft’s Azure infrastructure and other cloud computing services had greater growth than expected in the period. However, Azure’s growth is slowing.

“Microsoft Cloud revenue was $27.1 billion, up 22% (up 29% in constant currency) year over year as our commercial offerings continue to drive value for our customers,” Chief Financial Officer Amy Hood said in a Press release.

Of Microsoft’s three business segments, Intelligent Cloud was the best performer in the December quarter. Revenue in the segment increased 18% year over year to $21.5 billion. The unit includes server products and cloud services such as Azure.

Azure and other cloud services had revenue growth of 31% or 38% in constant currency. It topped impressions for 37% growth in constant currency. Growth was 42% in the previous quarter.

Meanwhile, Microsoft’s productivity and business process unit saw sales rise 7% to $17 billion. The division includes Office productivity software as well as the Dynamics and LinkedIn businesses.

Windows PC, poor sales of devices

And finally, Microsoft’s More Personal Computing unit saw sales fall 19% to $14.2 billion. The device includes Windows PC software, Xbox video games, Surface computers, Internet search and advertising.

Windows licensing revenue fell 39% in the holiday sales quarter due to declining PC sales. Unit revenue also fell by 39%. And revenue from Xbox content and services fell 12% in the period.

Jefferies analyst Brent Thill said Microsoft’s results were “better than feared.” He rates MSFT shares as buy with a price target of 280.

On a conference call with analysts, Microsoft executives forecast sales below Wall Street estimates for its fiscal third quarter.

Microsoft forecast sales of $50.5 billion to $51.5 billion for the current quarter. The $51 billion midpoint was well below Wall Street’s target of $52.4 billion for the March quarter. In the same quarter last year, Microsoft had sales of $49.4 billion.

The company also predicted a continued slowdown in Azure sales growth to around 30% or 31% in constant currency.

Microsoft News: Layoffs, AI Investments

The earnings report came after Microsoft announced major layoffs and a cost-cutting plan last week. The company is cutting 10,000 jobs, or about 4.5% of its workforce. Microsoft took a $1.2 billion charge in the quarter just ended related to severance costs and other restructuring costs. It lowered the company’s earnings by 12 cents per share.

Microsoft also warned that customers were reducing their spending in a difficult macroeconomic climate.

At the same time, Microsoft said it will continue to add staff and invest in growth areas such as cloud computing and artificial intelligence.

On Monday, Microsoft announced a new investment, reportedly worth $10 billion, in artificial intelligence startup OpenAI. OpenAI is the organization behind the text generator ChatGPT and the image generator Dall-E. Microsoft previously invested in OpenAI in 2019 and 2021.

Microsoft provides its Azure cloud computing infrastructure for OpenAI. It also adds OpenAI models to its consumer and enterprise software products.

MSFT shares have a medium composite rating

MSFT stock ranks second out of six stocks in IBD’s Computer Software-Desktop industry group, according to IBD Stock Checkup. It has an average IBD Composite Rating of 58 out of 99.

IBD’s Composite Rating combines five separate proprietary ratings into one easy-to-use rating. The best growth stocks have a Composite Rating of 90 or better.

Follow Patrick Seitz on Twitter at @IBD_PSeitz for more stories on consumer technology, software and semiconductor stocks.

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