What Happened?

Shares of tech giant Microsoft (NASDAQ:MSFT) fell 6% in the morning session after the company reported weak third-quarter earnings. While growth in Microsoft Azure (cloud segment) grew 34%, the company anticipated a slight deceleration in the next quarter (Q2'25) due to supply chain issues, including delays in third-party infrastructure for AI capabilities. However, management reassured that there will be normalization in the second half of the fiscal year. 

Also, margins came under pressure during the quarter. This could be attributed to the ongoing investments to stay ahead in the AI race. The margin pressure is also partly due to weaknesses in areas like gaming and cloud, and the timing of revenue recognition and integration costs from the acquisition of Activision. 

Lastly, we note that changes in how the company reports segments led to large segment beats and misses that investors should largely ignore. Consolidated numbers matter much more this quarter given the segment noise, and on that note, revenue and EPS beat expectations this quarter. This was an uninspiring quarter, with mixed guidance weighing on shares.

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What The Market Is Telling Us

Microsoft’s shares are not very volatile and have only had 7 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful, although it might not be something that would fundamentally change its perception of the business.

Microsoft is up 10.2% since the beginning of the year, but at $408.50 per share, it is still trading 12.6% below its 52-week high of $467.56 from July 2024. Investors who bought $1,000 worth of Microsoft’s shares 5 years ago would now be looking at an investment worth $2,849.

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