Why is Microsoft stock falling despite AI business growing 175%?

Microsoft shares are under pressure after lower Azure cloud computing service growth and a disappointing quarterly revenue forecast, despite higher revenues and increased operating income for the previous quarter.

Microsoft stock is falling despite reporting higher revenues and an increased operating income for the previous quarter. Microsoft shares fell 5% after the company reported lower Azure cloud computing service growth and a disappointing quarterly revenue forecast.

On January 29, 2205, Microsoft announced the results for the quarter ended December 31, 2024, as compared to the corresponding period of last fiscal year.

Revenue for the company was $69.6 billion and showed an increase of 12%, while the operating income was $31.7 billion, an increase of 17%. The net income was $24.1 billion showing an increase of 10%. The diluted earnings per share was $3.23, an increase of 10%.

Microsoft reported $3.23 earnings per share (EPS) for the quarter, based on $69.6 billion in revenue. Based on Bloomberg consensus figures, analysts were expecting an EPS of $3.13 on revenue of $68.8 billion.

Revenues from LinkedIn increased by 9%. Also, Search and news advertising revenue excluding traffic acquisition costs increased by 21%.

Microsoft’s Commercial Cloud division revenue, which includes cloud services sales, was $40.9 billion, a 21% increase year on year but less than Wall Street projections of $41.1 billion. Microsoft’s intelligent cloud business, which includes its Azure platform, had a revenue of $25.5 billion. Wall Street analysts expected $25.8 billion.

Microsoft’s stock closed 1.09% lower on Wednesday and is 3.5% lower in the pre-market trading, despite strong results.

Shares fell after Microsoft stated during the company’s results call that its Intelligent Cloud revenue for the upcoming quarter will be between $25.9 billion and $26.2 billion. Although Microsoft’s fiscal second-quarter results matched or were above Wall Street expectations, the company’s current quarter revenue projection fell short of expectations.

Also, Wall Street continues to process the aftermath of DeepSeek’s influence on the AI sector and Silicon Valley’s tech titans. China’s DeepSeek disrupted the tech sector by training its AI model on less power-consuming systems at a lower cost than leading AI chips from American rivals like OpenAI and Google.

Microsoft is heavily investing in artificial intelligence (AI), with plans to spend $80 billion on AI data centers in 2025. Investors are questioning whether Microsoft and other tech giants like Google and OpenAI are spending their AI budgets wisely.

According to Nivama Research, “Microsoft’s growth has been consistently accelerating in its Azure business for six consecutive quarters, after decelerating for over six consecutive quarters. AI contribution continues to increase, reaching 13% of Azure growth; the pickup in overall cloud services is encouraging and bodes well for Indian IT services companies. We estimate a pickup in cloud spending in FY26, after a recovery in FY25, which would revive discretionary spending for IT Services in FY26 and beyond.

Microsoft’s AI business is the one that investors will focus on. “We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead. Already, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year,” said Satya Nadella, chairman and chief executive officer of Microsoft.

Even while Microsoft has benefited greatly from the AI explosion, its stock price has not kept up with the competition. As of Monday, Microsoft’s stock had increased just 10% over the previous 12 months, compared to 50% and 40% increases for Amazon and Google, respectively.