Microsoft (NASDAQ:MSFT) posted second-quarter results that topped Wall Street forecasts, but the shares fell sharply in premarket U.S. trading as investors focused on a slowdown in its core cloud division and a surge in capital expenditure.
The software giant reported adjusted earnings per share of $4.14, ahead of analysts’ expectations of $3.93. Revenue rose 17% year on year to $81.3 billion, beating consensus estimates of $80.23 billion.
Growth at Azure, Microsoft’s flagship cloud-computing platform, came in at 39%. While this slightly exceeded market expectations of 38.8%, it marked a modest deceleration compared with the previous quarter, which appeared to weigh on sentiment.
Investor concerns were compounded by a sharp increase in spending. Capital expenditure climbed to $37.5 billion in Microsoft’s fiscal second quarter, up nearly 66% from a year earlier and well above forecasts of $34.31 billion.
That said, the broader cloud business continued to perform strongly. Microsoft Cloud revenue surpassed $50 billion for the quarter, while operating income rose 21% year on year to $38.3 billion.
“We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises,” said Satya Nadella, chairman and chief executive officer of Microsoft.
On a GAAP basis, net income jumped 60% to $38.5 billion, while non-GAAP net income increased 23% to $30.9 billion. The company noted that its non-GAAP figures exclude the impact of investments in OpenAI.
“While we believe the stock reaction is due to Azure growth & elevated Capex, we view the second quarter as fundamentally strong beneath the surface,” analysts at Truist said in a note to clients.