Microsoft (MSFT +1.00%) stock was in free fall on Thursdaydropping more than 12% despite posting earnings Wednesday afternoon that appeared to be strong on the top and bottom lines.
The revenue and earnings numbers beat estimates in blowout fashion. The technology giant saw revenue climb 17% to $81.3 billionwhile net income jumped 60% to $38.5 billionor $5.16 per sharewhich blew away estimates of $3.92 per share.
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Microsoft's cash cowits cloud computing businesscrossed $50 billion in revenue for the first timeup 26% year over year. Its intelligent cloud businesswhich primarily encompasses its artificial intelligence (AI) cloud businessincluding Azurejumped 29% to $32.9 billion. Azurethe largest part of the intelligent cloud pie and the growth driversaw revenue increase 39% in the quarter.
Againthese look like good numbersbut Microsoft investors saw some perhaps troubling trends that sparked the sell-off.
Slowing cloud growthrising AI spending
Two trends stuck out for investors that caused the sell-off. OneAzure cloud growth declined slightlyfrom 40% the previous quarter to 39% this quarter. It's certainly a small dropbut when combined with anticipated growth for Azure of 37% to 38% in the third fiscal quarterit starts to form a trend.
At the same timeMicrosoft reported $37.5 billion in capital expenditures (capex) in the quarter -- a record for the company and 66% higher than the same quarter a year ago.
On the earnings callCFO Amy Hood said about two-thirds of the capex was spent primarily on GPUs and CPUs to keep up with AI demand. But that raised a red flag for many investors questioning the lack of bang for the AI buck with Azure growth slowing and capex spending rising.
So what does this mean for Microsoft stock?
What will Microsoft stock be worth in a year?
Coming into the yearWall Street analysts were more bullish on Microsoft than any other S&P 500 stockwith 97% rating Microsoft as a buy.
NASDAQ: MSFT
Key Data Points
While Microsoft stock got a slew of price target downgrades after the earnings reportall of the analysts maintained their buy ratings.
Prior to the earnings releaseMicrosoft had a median price target of $625 per sharewhich would suggest a 12-month return of 47%.
While the latest upgradeswhich ranged from about $650 per share from Morgan Stanley to around $550 per share from JPMorgan Chasemight bring that down a bitit would still likely be in the $600-per-share rangewhich would still be 41% growth in a year.
Why it matters
This matters for a couple of key reasons. Firstit means that despite the increase in AI spending and concerns about AI cloud growthWall Street analysts remain very bullish on Microsoftwith almost all who cover it rating the stock as a buy.
Secondthe 41% to 47% expected return for Microsoft stock over the next 12 months makes it the most promising of all the "Magnificent Seven" stocks.
No other Magnificent Seven stock has a higher expected return over the next yearbased on the median price target. The next closest is Nvidia with a projected 32% gain.
And today's dip might provide a good opportunity to scoop up some shares.
