Microsoft shares fell 2-3% after a strong Q2 earnings report, despite Bank of America reinstating a Buy rating with a $500 price target. The company’s revenue grew 1.2% year-over-year and Azure increased by 39%. However, Microsoft’s capital expenditures nearly doubled to $29.9 billion, and investment losses in OpenAI reached $3.1 billion in Q1.
The decline is concerning investors, who are worried about the company’s dependency on OpenAI for financing and computing resources. Microsoft holds a 27% stake in OpenAI and has contracted to purchase an incremental $250 billion of Azure services. The high level of spending raises concerns about near-term free cash flow and execution quality.
Analysts remain bullish on Microsoft, citing solid results from Q2 and a backlog of committed revenue. However, the market is pricing in near-certainty that Microsoft stock will close down today, with crowdsourced probability sitting at 99%. The key question is whether the OpenAI dependency and capex trajectory will weigh on Microsoft’s earnings quality in the coming quarters.
Microsoft’s CEO Satya Nadella confidently stated that the company is only “at the beginning phases of AI diffusion” and has built an AI business larger than some of its biggest franchises. However, investors are still debating how long it will take for this vision to materialize.
Source: https://www.aol.com/articles/microsoft-slips-openai-bet-starts-184310443.html