Microsoft and Meta reported earnings for the September quarter that beat market expectations but failed to impress investors with their forecasts, sending both companies’ shares down more than 3% in after-hours trading. Since the beginning of the year, Microsoft shares are up 16%, and Meta shares are up 68% this year as markets closed on Wednesday.
Some commonalities in their earnings reports are that both artificial intelligence (AI)-focused companies have invested heavily in AI infrastructure, raising concerns about whether their growth rates justify the billions in spending. Meanwhile, the two Wall Street darlings faced different specific problems – Microsoft’s capacity constraints and Meta’s cost overruns. It seems that they have not satisfied investors with their conservative view of the current problems they face.
The markets’ reaction to the sell-off may also be due to Alphabet’s impressive earnings results a day ago, as investors have set the bar for expectations high.
Microsoft Azure growth is slowing down
Microsoft’s earnings for the first quarter of fiscal year 2025 show that Azure cloud growth slowed to 34% year-over-year in constant currency from 35% in the previous quarter. In August, the company revised its June quarter report, shifting some of the revenue from mobility and security services to Office software. This approach led to a revision of Azure’s growth rate to 34% from 29% previously.
Despite the steady growth in its most competitive segment, competing with Amazon’s AWS and Alphabet’s Google Cloud, Microsoft provided disappointing forecasts, expecting growth of 33% to 32% in constant currency in the current quarter, indicating a further slowdown in growth. CFO Amy Hood said during the call that some of the data center capacity that Microsoft has focused on in its AI push has not delivered as expected due to supply shortages, which is likely to hold back Azure cloud revenue growth in the December quarter.
Risks that analysts are concerned about Microsoft are the increasing costs of artificial intelligence infrastructure to create its own supercomputing applications. Its quarterly capital expenditures, including assets acquired through finance leases, jumped 79% year-on-year to $20 billion (€18.4 billion), hitting a record high. However, Josh Gilbert, market analyst at Oanda Australia, is optimistic about Microsoft’s prospects, noting: “With enterprise spending on cloud services on the rise, this is a record high: “With enterprise spending on cloud services on the rise, Microsoft appears to be just beginning its expansion into artificial intelligence, and the good times look set to continue.”
The other key figures are quite stunning, as the company confidently surpassed analysts’ expectations. Revenue grew by 16% year-on-year to $65.59 billion (€60.45 billion), and earnings per share amounted to $3.30 (€3.04), exceeding the expected $64.51 billion (€59.45 billion) and $3.10 (€2.9), respectively. “AI-driven transformation is changing work, work artifacts, and workflow in every role, function, and business process,” said CEO Satya Nadella. “We are expanding our capabilities and attracting new customers by helping them apply our AI platforms and tools to drive new growth and operational leverage.”
Meta’s expenses raise concerns about growth
Meta’s third-quarter earnings beat market expectations on key metrics, reporting earnings per share of $6.03 (€5.59) on revenue of $40.59 billion (€37.41 billion), up 37% and 19% year-over-year, compared to analysts’ estimates of $5.25 (€4.84) and $40.29 billion (€37.13 billion), respectively. However, revenue growth was not significant, and the annual net profit growth rate fell sharply to 35% from 70% on average over the past year.
This suggests that Meta’s large-scale investments in ambitious projects to create artificial intelligence and meta-space have negatively impacted the growth of its core business, digital advertising. The social platform now expects its fourth-quarter revenue to be between $45 billion (€41.5 billion) and $48 billion (€44.24 billion), with its average figure slightly higher than analysts’ expectations.
In its forecast, Meta expects that “total spending for the full year 2024 will be in the range of $96-98 billion, compared to our previous forecast of $96-99 billion. For Reality Labs, we continue to expect operating losses in 2024 to increase significantly from the prior year due to our ongoing product development efforts and investments to further scale our ecosystem.”
CEO Mark Zuckerberg also warned during the call that Meta will continue to spend heavily on artificial intelligence infrastructure for its Reality Labs and AI glasses. He believes that artificial intelligence will accelerate the development of its core business – advertising revenue growth – in the long run. “There are many opportunities to leverage new advances in artificial intelligence to accelerate our core business,” Zuckerberg said.
Despite the fact that both companies have confidently beaten earnings expectations, concerns about rising costs and cautious growth forecasts have left investors uncertain about their future performance.
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