Microsoft’s underperformance has investors looking to cloud for growth
Satya Nadella, CEO of Microsoft, speaking on CNBC’s Squawk Box outside the World Economic Forum in Davos, Switzerland on Jan. 22nd, 2025.
Gerry Miller | CNBC
Microsoft is in the middle of the artificial intelligence boom, but it’s been a while since investors have seen the rewards.
The software giant’s stock price is up less than 8% in the past year. That’s by far the weakest gain among the eight U.S. tech megacap companies. Apple has the next slimmest increase at 19%, followed by Alphabet at 26%. All the others are up at least 48%, and Tesla is the top performer in the group, up 117%.
Microsoft is also badly trailing the tech-heavy Nasdaq, which has gained 25% in the past year.
That’s the backdrop heading into Microsoft’s quarterly earnings report Wednesday. The company is kicking off tech earnings season, along with Meta and Tesla. Apple follows on Thursday, and Alphabet and Amazon report next week.
The biggest question for Microsoft shareholders surrounds the company’s Azure cloud-computing business and whether it will show accelerating growth.
In October, Microsoft told investors that demand for Azure services outstripped supply because of a delay from a third-party provider. Finance chief Amy Hood said she still foresees an increase in Azure’s growth rate in the first half of 2025, but for the December quarter, she called for 31% to 32% growth at constant currency, which would be down from 34% in the prior period. Microsoft’s stock slipped 6% the next day.
Since the last quarter of 2023, Azure growth has increased by 2 percentage points. Meanwhile, top rivals Amazon and Alphabet have seen cloud growth over that stretch accelerate by 7 points and 13 points, respectively. It’s a matter of particular importance to investors, because Microsoft now has tens of billions of dollars in quarterly capital expenditures to meet cloud and AI needs of customers.
A Microsoft spokesperson didn’t provide a comment.
Microsoft operates in many other markets. But investors gravitate to cloud first, because it’s a sizable category that’s still rapidly expanding as companies continue to move away from owning and operating their own data centers and as they add heftier workloads.
Overall, Microsoft is expected to report revenue growth of 11% from a year earlier to $68.8 billion, according to LSEG. That would mark the slowest year-over-year growth for any quarter since mid-2023. Analysts expect earnings per share to increase to $3.11 from $2.93 a year ago.
Investors were more bullish on Microsoft in 2023, sending the stock up more than 50%, its best year since 2009. The driving force was Microsoft’s intimate relationship with ChatGPT creator OpenAI, which sparked the generative AI boom and led to a historic increase in investments.
Microsoft is OpenAI’s leading backer, having poured nearly $14 billion into the AI startup. Through the partnership, Microsoft gets a lot of cloud business but also spends heavily on building out infrastructure.
The relationship changed in an important way last week, when Microsoft said OpenAI will no longer use Azure on an exclusive basis, except when it comes to handling incoming queries from developers. Going forward, OpenAI will have to check with Microsoft when it seeks more computing capacity, and Microsoft will be able to accept or turn away the request.
The announcement came at the same time as President Donald Trump’s introduction of Stargate, an AI infrastructure initiative involving SoftBank, OpenAI and Oracle.
In its own blog post, OpenAI named Microsoft as a technology partner but not a member of the group that will build and operate Stargate, which has the potential to draw up to $500 billion in investment. Microsoft has committed to $80 billion in AI-related capital expenditures in the year that ends June 30. Much of that is being directed toward Nvidia’s graphics processing units, or GPUs.
Analysts at Cowen wrote in a report that last week’s developments could help Microsoft reaccelerate the Azure growth rate into the mid-30s. They said Microsoft has been “funding GPU capex investments for OpenAI model training but not collecting revenue,” and that by pushing some of that training elsewhere, the company can “show improved capex efficiencies and stronger returns on capital spend” while keeping its access to OpenAI.
Kevin Walkush, a portfolio manager at Jensen Investment Management, said he expects the AI investment will pay off in the long run.
“If AI doesn’t show up, there’s still a long runway for cloud,” said Walkush, whose firm held about $913 million in Microsoft shares at the end of September. “But I think the chance of AI showing up is really high, so that’s the bet I’m willing to let them make to take advantage of this opportunity.”
(L-R) Priscilla Chan, CEO of Meta and Facebook Mark Zuckerberg, and Lauren Sanchez attend the inauguration ceremony before Donald Trump is sworn in as the 47th US President in the US Capitol Rotunda in Washington, DC, on January 20, 2025.
Saul Loeb | Afp | Getty Images
Meta CEO Mark Zuckerberg praised the Trump administration for backing Silicon Valley on a call with investors, adding that 2025 will be big for “redefining” the company’s relationships with governments.
“We now have a U.S. administration that is proud of our leading companies, prioritizes American technology winning and that will defend our values and interests abroad,” Zuckerberg said Wednesday. “I am optimistic about the progress and innovation that this can unlock, so this is going to be a big year.”
Meta on Wednesday also agreed to pay $25 million to settle a lawsuit with President Donald Trump, according to NBC News. Trump sued Meta after the company suspended his Facebook and Instagram accounts following the insurrection at the U.S. Capitol on Jan. 6, 2021.
Zuckerberg and Meta have made several public efforts to smooth over relations with President Donald Trump since his victory in November. The company donated $1 million to Trump’s inaugural fund late last year, weeks after Zuckerberg dined with him privately at his Mar-a-Lago resort.
Earlier this month, Zuckerberg announced that Meta would eliminate third-party fact-checking to “restore free expression” to the company’s platforms. He said the fact-checkers had been “too politically biased” and “destroyed more trust than they’ve created, especially in the U.S.”
The move was widely recognized as a nod to Trump, as he and other Republicans have long claimed that Meta’s platforms like Facebook and Instagram censor conservative views. Zuckerberg and Trump have had an especially rocky relationship in the past, as Trump has previously threatened the tech executive with life in prison.
The company also elevated Joel Kaplan, former White House deputy chief of staff under President George W. Bush with longstanding ties to the Republican Party, to its chief policy role earlier this month.
Zuckerberg’s public concessions appear to be earning him some good will, as he attended Trump’s inauguration alongside other tech moguls like Tesla CEO Elon Musk, Google CEO Sundar Pichai and Amazon founder Jeff Bezos this month.
Shares of Meta were up slightly in extended trading Wednesday after the company reported fourth-quarter earnings that beat Wall Street’s expectations on top and bottom lines.
–CNBC’s Jonathan Vanian contributed to this report
WATCH: Meta beats on top and bottom lines, stock slips on Q1 revenue guidance
Mark Zuckerberg, CEO of Meta Platforms, demonstrates the Meta Quest Pro during the virtual Meta Connect event in New York on Oct. 11, 2022.
Michael Nagle | Bloomberg | Getty Images
Meta continues to lose billions of dollars developing the virtual reality and augmented reality technologies needed to underpin the nascent metaverse.
The social media giant reported fourth-quarter earnings Wednesday and said its Reality Labs unit recorded an operating loss of $4.97 billion while generating $1.1 billion in sales. Analysts were projecting that unit to log a fourth-quarter operating loss of $5.4 billion on $1.1 billion in sales.
Reality Labs is Meta’s unit that makes the Quest family of virtual-reality headsets and Ray-Ban Meta Smart Glasses.
Meta CEO Mark Zuckerberg kick-started his company’s VR endeavors in 2014 when it acquired the startup Oculus for $2 billion. Since then, Zuckerberg has characterized VR and AR as central to his plans to develop the futuristic digital world known as the metaverse, which he has said represent the next major computing platform.
Wall Street has questioned Zuckerberg’s metaverse investment. Reality Labs has tallied an operating loss of more than $60 billion since 2020, as of Meta’s fourth-quarter earnings report.
Meta last week said it would invest between $60 billion and $65 billion in 2025 capital expenditures to expand its computing infrastructure related to artificial intelligence. Zuckerberg has previously said AI is core to the company’s metaverse efforts, including its Ray-Ban Meta smart glasses. Meta develops that device with France-based EssilorLuxottica.
The social media company last year also unveiled its Orion prototype AR headset that is capable of overlaying digital objects on top of a person’s real field of view.
Meta released its latest VR headset, the $299 Quest 3S, during its September Connect event and pitched the device as a way for people to watch movies, play games and workout in VR.
Other tech companies are also investing in VR and AR.
Apple’s Vision Pro headset went on sale in the U.S. in February 2024 with a starting price of $3,499, and in December, Google and Samsung said they were working on a VR and AR device dubbed Project Moohan that will be available to buy in 2025 for an undisclosed price.
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