Microsoft (NASDAQ:MSFT | MSFT Price Prediction) shares are fresh off a historic decline following the release of some poorly-received quarterly earnings results. Undoubtedly, at its worst, shares shed more than 12% of their value in the session that followed the big reveal. The big headline was that $357 billion in value was wiped out. That’s the worst day for the enterprise software icon and AI innovator since the 2020 stock market crash.
It’s a steep drop, especially for such a well-established blue chip in tech, and perhaps too much for most retail investors to handle, especially since shares were flirting with a bear market earlier in January. With the stock now officially in a bear market, down close to 21% from its all-time high, the big question on investors’ minds is whether the drop is a buying opportunity or if it’s best to wait things out, given the magnitude of the single-day drop.
Microsoft stock takes a big hit. The name feels misunderstood
Of course, going by the three-day rule, which entails waiting three trading days after a substantial drop before stepping in, might make sense to those with woozy stomachs. But for the longer-term bulls who weren’t deterred by the slight miss in Azure growth metrics, I think there’s no shame in hitting the buy button at around $430 per share. Undoubtedly, there’s a good chance that the weakness could continue as other big tech players step up to the earnings plate.
In any case, I’m more inclined to view Microsoft as a misunderstood name as investors start severely punishing heavy AI CapEx while having zero tolerance for anything short of quarter-over-quarter strength. Undoubtedly, I think it’s just unrealistic not to grant a firm a bit of wiggle room when it comes to earnings.
While the AI trade may not be headed for a free-fall, perhaps thanks in part to Meta Platforms (NASDAQ:META), which rocketed over 10% on the same day that Microsoft stock took its nasty spill, I do think that long-term investors should brace for big bumps in the road.
At the end of the day, Meta is showing that it has what it takes to become an effective AI monetizer. And I believe Microsoft is more than capable of doing the same thing.
Microsoft is spending heavily. So, where’s the return?
Will investors be more forgiving of heavy AI spend ($37.5 billion in CapEx startled many in this latest quarter) if there’s growing evidence that such spend is working its way into growth? I guess it depends on how much growth and how soon it arrives. With Azure revenue rising 39% (still a pretty good metric relative to its public cloud rivals), falling a percent shy of last quarter, there’s certainly an impression that the CapEx is going to waste.
If Microsoft is spending that much on AI, investors are going to want to see a growth acceleration. Not flat growth, not 1% below last quarter, and perhaps not even 1% above. It feels like CapEx has risen so much that a meaningful quarter-over-quarter gain in Azure is needed to move the needle.
Undoubtedly, when expectations are high, and the stakes are even higher with spending that’s up a whopping 66% year over year, it’s no mystery as to why so many thought the quarter was a disaster. Add the hefty OpenAI exposure realization (45% of RPOs tied to OpenAI) into the equation, and perhaps there’s enough for many to hit the panic button.
Time to take the other side of the trade in Microsoft stock?
After such a big slap in the face, dip-buyers might have to dig deeper to find reasons to hit the buy button. Perhaps CFO Amy Hood’s comments are encouraging enough to justify getting in here. She noted that demand for AI services is outpacing supply in what appears to be a “resource allocation battle.”
“If I had assigned all the GPUs that just came online in Q1 and Q2 entirely to Azure, our KPI would have exceeded 40% already,” said Hood.
Investors have every reason to believe Hood.
Capacity looks to be the cap right now, not demand. And had Microsoft had more firepower, perhaps Azure would have delivered the meaningful gain investors wanted, perhaps even more. In any case, the headline figure fell short, and investors were too quick to dump the stock. Once Microsoft solves its capacity issue, I think there’s real potential for Azure to be the star of the show again.
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