Microsoft stock drops 23% this year! Surging capital expenditures and AI concerns become two major “problems,” with this month's earnings report set to be a key test

According to Zhihu Finance, some of the negative factors impacting Microsoft's (MSFT.US) stock price are unlikely to dissipate in the short term. Gabriela Borges, an analyst at Goldman Sachs, pointed out in a recent report released on Monday that Microsoft's 23% decline in stock price this year is mainly due to two factors. First, capital expenditure has continued to climb, but sales for the Azure cloud business have not been revised up accordingly. This has once again raised concerns in the market regarding the return on investment as well as Azure's competitive position relative to rivals such as Amazon Web Services. Second, there are ongoing concerns about Microsoft's enterprise office applications (such as Office 365) potentially being impacted by artificial intelligence competing products, such as Anthropic's Claude Cowork. These concerns are partly due to the market's perception that Microsoft's Copilot functionality lags behind other AI tools.

Microsoft plans to release its earnings report after the market closes on April 29. The analyst added: “We believe that risks and rewards are roughly balanced heading into the earnings report. The short-term outlook for fundamentals is mixed, but investor expectations have already come down.”

After Microsoft released a poorly received quarterly earnings report on January 28—which caused its stock price to plunge nearly 10% at the time—Microsoft now needs to rebuild investor confidence. The focus among investors is on the company's capital expenditures which have soared as high as $37.5 billion for building data centers to support its AI development. The market interprets this as putting pressure on Microsoft's profit margins over the next few quarters.

Wedbush technology analyst Dan Ives stated: “Wall Street originally hoped to see less capital expenditure and a faster monetization pace for cloud and AI, but the reality turned out to be quite the opposite. We have always viewed this as a multiyear development process, and Microsoft needs to continue focusing on building data centers as more and more customers take the AI path.”

However, the excessive focus on capital expenditures by Wall Street has overshadowed the fact that Microsoft is performing well in other areas. Microsoft reported robust results—revenue reached $81.3 billion, up 17% year-over-year. This performance was mainly driven by the company's intelligent cloud division, especially the Azure business, whose revenues grew by 39%, due to enterprises accelerating their shift toward AI-driven infrastructure.

Meanwhile, Wall Street's expectations for Microsoft's earnings per share (EPS) have remained stable—which may reflect strong performance in its core business areas. JPMorgan analyst Mark Murphy said: “In our view, the bigger picture is that both of Microsoft’s core business pillars have reached scales close to $100 billion—Azure, despite capacity constraints, is still maintaining a growth rate above 30%; Microsoft 365 commercial business maintains a solid double-digit growth rate. Moreover, the company has achieved over 20% growth in both operating income and EPS for three consecutive quarters.”