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Microsoft (MSFT) reported its second quarter earnings after the bell on Wednesday, beating estimates on the top and bottom lines but falling short on estimates for its Intelligent Cloud business.
Microsoft stock fell almost 4% in premarket trading on Thursday on the news.
Microsoft’s Commercial Cloud segment revenue, which includes cloud services sales, saw revenue of $40 billion, a 21% year-over-year increase but shy of Wall Street expectations of $41.1 billion. Microsoft's intelligent cloud business, which includes its Azure platform, saw revenue of $25.5 billion. Wall Street was expecting $25.8 billion.
The company said it saw 13 percentage points of growth in Azure from AI services. Cloud gross margin, however, decreased to 70% on the company's artificial intelligence build-out.
“We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead," Microsoft CEO Satya Nadella said in a statement. “Already, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year.”
During the company's earnings call, Microsoft said its Intelligent Cloud revenue for the current quarter would land between $25.9 billion and $26.2 billion, sending shares lower.
The earnings announcement comes as Wall Street continues to digest the fallout surrounding DeepSeek’s impact on the AI industry and Silicon Valley’s tech titans.
Microsoft and its Big Tech cohort are investing tens of billions of dollars in AI data centers, with Microsoft saying it plans to spend $80 billion in fiscal 2025 alone. But China's DeepSeek sent a jolt through the tech sector, saying it trained its AI model on systems that use less power than leading AI chips and at a fraction of the price of those produced by American rivals like Microsoft-backed OpenAI, Google (GOOG, GOOGL), and Meta (META).
That has investors questioning whether Silicon Valley is making the right investments.
For the quarter, Microsoft reported earnings per share (EPS) of $3.23 on revenue of $69.6 billion. Analysts were anticipating EPS of $3.13 on revenue of $68.8 billion, according to Bloomberg consensus data. The company reported EPS of $2.93 on revenue of $62 billion in the same quarter last year.
While Microsoft is one of the main beneficiaries of the AI boom, its stock price has lagged behind the competition. Shares of Microsoft were up just 5% over the last 12 months as of Monday, while Amazon (AMZN) and Google shares were up 44% and 26%, respectively.
Microsoft is also seeking to jump-start PC sales via its Copilot+ PC lineup. The idea is that AI PCs will be able to run AI applications natively rather than via the cloud. But so far, there aren’t very many intriguing scenarios in which those applications make upgrading worthwhile. Hardware updates like improved performance and power are still the main reason consumers want new PCs.