Microsoft stock's slide post-earnings reflects 'fickle' market

Microsoft (MSFT) stock slips in Wednesday's after-hours trading after reporting fiscal first quarter results that beat on the top and bottom lines.

RBC Capital Markets managing director of software, Rishi Jaluria, dives deeper into the earnings print and discusses the latest on Microsoft's relationship with OpenAI (OPAI.PVT).

To watch more expert insights and analysis on the latest market action, check out more Asking for a Trend.

Video Transcript

00:00 Speaker A

Great to see you as always. So let's talk about this Microsoft print. You know, the stock was up about 30% year to date heading into the print. We're we're slipping a bit here at least initially. Importantly, of course, Rishi, we don't have guidance. We would expect that on the call from CFO Amy Hood. Um I am interested in your take in the print and why you think we could be slipping a bit here. I do see um spending on data centers being flagged, Rishi. Looks like first quarter capital expenditures, including leases, Rishi, 34.9 billion. That was up from 24 billion in the preceding quarter. But but give me your take. What what do you what what's your read on the report?

01:01 Speaker B

Yeah, absolutely. And Josh always, always a pleasure to be with you. Really appreciate you having me. Look, I think this is just a very fickle market that we're in. Uh as you correctly pointed out, Microsoft's had a good run year to date. It's had a good multi-year run uh since the AI narrative has started to kind of take foot. And this is everything we could have asked for from uh Microsoft this quarter, obviously, uh guidance dependent. Uh but you know, 39% constant currency azure growth, you know, very broad-based beat and kind of every single metric and continued cost discipline where you're seeing upside on gross margins, upside on operating margins. So there's really not much for me to poke holes in this, but you know, just given the nature of the market and valuations here, it may be a situation of just, hey, the uh Azure constant currency number was 39% and some investors wanted 40%, right? And you know, candidly at at scale like this when we're talking about these sort of raw dollar figures, 39% constant currency is an outstanding number. Uh so if the stock is down tomorrow morning, I would probably be a buyer of it to be completely honest.

02:20 Speaker A

Uh on that Azure cloud computing unit, um as you noted, 39% revenue gain when adjusting for currency fluctuations. That that beats what your colleagues on the street were looking for, Rishi. They were at 37%. I I am curious, you know, what do you try to model out what what growth looks like for that Azure business ahead? And and what do we think the the AI contribution is?

02:51 Speaker B

Yeah, look, the AI contribution, they they stopped disclosing it and I think they're having a little bit of trouble because, you know, you're in a situation where everything's getting bundled together and you know, separating what's AI and what's not is getting harder and harder, right? And so they they stopped giving that disclosure, but by my math, it's it's roughly, you know, probably in the in the low to mid teens as a percentage of the uh total azure business, which is a really strong number, right? And bear in mind, they're using a very conservative definition of what is AI. They're not including any training of Open AI models in there, which I do believe uh a lot of their peers on the uh you know, in in in the software and technology sector probably do. And so I think this is a situation where a lot of the growth is being led by AI, but the non-AI piece is also benefiting from, you know, what we've termed this this azure AI Halo effect, where because of their leadership in AI, we're seeing them actually gain non-AI workloads. Um whether that's happening through the open AI API or, you know, some of these up-the-stack products like Microsoft Fabric and and Synapse and Cosmos DB. That's what I think is really going on. So as we think about modeling that going forward, you know, number one, we think AI is going to be a bigger contributor because more of the workloads for Microsoft from Open AI are shifting from training, which was never on the P&L into inferencing and reasoning, adding the fact that you have this new open AI deal, which we think is going to, you know, be a new additional contributor to numbers, and you maybe even have some esoteric factors like Sora 2, uh which has obviously taken off like wildfire and I think that's going to show up in in the following quarters uh Azure number. So there's a lot that I think can boost continued super healthy Azure growth here.

04:47 Speaker A

Very quickly, Rishi, I have a minute left, but on that Microsoft OpenAI relationship, we got the new details there. Microsoft's going to own about 27% worth around 135 billion. Um, any more questions you have about that, Rishi, perhaps that could be brought up on the call, more insight you'd liked about that?

05:13 Speaker B

Yeah, look, I I think it was a great deal for Microsoft and a great deal for OpenAI. I think both companies need each other. The one question I want to maybe better understand is there's a clause in there around Microsoft having rights to AGI, even post AGI until 2032 and research rights until 2030 or AGI, whichever comes first. And what we don't know is, you know, who who is on this council that's deciding what is AGI and what's not? What is the demarcating line? You know, I think that's something that we'd all like to know a little bit more about because obviously Microsoft, I think does need open AI and it would be great to see them still have all these rights uh you know, maybe even after post AGI. For now, I think that's something we just don't have a little bit too much clarity on and I'm hopeful we'll get a little bit more today.

06:04 Speaker A

Rishi, always a pleasure to have you. Thank you, my friend.

06:08 Speaker B

Thank you.

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