Key Takeaways
Despite beating analysts’ expectations to report 15% year-over-year revenue growth, Microsoft stock has taken a hit after reporting earnings on Tuesday as markets reacted to a slowdown in its cloud business.
The company said the issue was due to the demand for AI resources outpacing its capacity. For the world’s major chipmakers, however, AI demand is the golden goose that keeps on giving.
From 31% in the previous quarter, annual growth for Microsoft’s cloud division declined to 29% in the three months to July 30.
Blaming “capacity constraints” for the slowdown, Microsoft CFO Amy Hood told investors the company expects Azure growth to fall further before the tide turns, forecasting 28%–29% growth in Q3. AI capacity challenges are expected to persist into the first half of 2025, she added.
Of course, Microsoft has been investing heavily in AI infrastructure, building new data centers and upgrading existing ones with additional GPUs for machine learning workloads.
Microsoft’s capital expenditure for the quarter totaled $19 billion, up 80% since the same period last year. In the 12 months to Tuesday, the firm spent a staggering $55.7 billion, with Azure AI “[driving] the bulk” of spending, CEO Satya Nadella said during the earnings presentation.
Yet despite the ballooning costs of AI infrastructure, Nadella sought to reassure investors that the costs are worth it, “to capture the opportunity with the right product portfolio that’s driving value.”
Even so, Microsoft’s share price fell by around 7% on the earnings news, compounding a wider slide in tech stocks that has seen the Silicon Valley giant’s market valuation decline by over 17% in the past week.
However, although Amazon, Apple and Meta are all down this earnings week, semiconductor manufacturers including AMD and Nvidia rebounded on Tuesday.
From $136 earlier in the day, AMD reached highs of $150 as Microsoft made it clear that AI spending is set to continue. ASML, Nvidia, Qualcomm and the Taian Semiconductor Manufacturing Company all experienced similar spikes, partially erasing earlier losses.
Meanwhile, Samsung’s better-than-expected earnings boosted the company’s share price to its highest level in nearly two weeks.
Chipmaker stocks were further buoyed after Reuters reported details of the Biden administration’s plans for additional Chinese export restrictions.
While US semiconductor sanctions are designed to prevent companies from selling specialist manufacturing equipment to China, there were concerns about how the new rules would impact shipments from third countries. But according to Reuters, those restrictions have been watered down in the latest draft, providing exemptions for Japan, the Netherlands and South Korea, providing a lift for Samsung and Netherlands-based ASML.
Nonetheless, the semiconductor standoff between the US and China continues to threaten chipmakers’ revenues and remains a significant headwind for the industry.