Microsoft closes worst quarter on Wall Street since 2008 on AI concerns: 'Redmond is in a pickle'

Microsoft just closed out its worst quarter on Wall Street since the 2008 financial crisis, as investors soured on the software giant's prospects in artificial intelligence.
The stock plunged 23% in the first quarter, a steeper drop than any of its tech peers or the Nasdaq, which fell 7% in the period. Microsoft bounced back a bit on Tuesday, alongside a broader market rally, with the shares gaining 3.3%, the biggest jump since July.
While Microsoft remains dominant in workplace productivity software and through its Windows operating system, the company is facing twin pressures to grow efficiently in AI while also building out its cloud AI infrastructure to support soaring demand.
Oil prices are surging because of the war in Iran, potentially driving up costs for building and running data centers. And on the product side, Copilot, Microsoft's AI assistant, has yet to show a lot of traction as users flock to competitive services from Google, OpenAI and Anthropic.
"Redmond is in a pickle," wrote Ben Reitzes, an analyst at Melius Research, in a note on March 23, referring to Microsoft's headquarters. Reitzes, who has a hold rating on the stock, said the company has to use valuable capacity from its Azure cloud to fix Copilot, but has no choice "since Copilot is needed to maintain momentum in its most profitable and largest segment."
Microsoft declined to comment.
Meanwhile, software stocks are getting pummeled as part of an AI-inspired "SaaSpocalypse" that's pushed names like Adobe, Atlassian and ServiceNow down more than 30% this year.
"Much of traditional SaaS is dying/in likely terminal decay," Jason Lemkin, founder of SaaStr, wrote this week in a post on X, using the acronym for software as a service. In a blog post, he noted that earnings multiples for software trail the S&P 500.
Microsoft's multiple hasn't been this low since the fourth quarter of 2022, when OpenAI introduced ChatGPT, according to Capital IQ data.
Gil Luria, an analyst at DA Davidson, told CNBC that the selloff isn't justified, and he recommends buying shares. In the latest quarter, Microsoft reported revenue growth of almost 17%, accelerating from a year earlier.
"The dislocation in the fundamental performance of Microsoft and the stock performance of Microsoft, and the valuation of Microsoft, is the biggest it's been in decades," Luria said. He said he expects the company's earnings growth to outpace the broader market this year.
"There is no stickier product in all of enterprise software than Microsoft Windows and Office," he said.
Microsoft has been trying to build a larger revenue base from productivity software with the Microsoft 365 Copilot AI add-on, but so far just 3% of commercial Office customers have licenses for it. Luria said he has access to 365 Copilot, but that he's not a fan. More importantly, he said, Microsoft has pricing power with Office subscriptions. The company announced plans to raise prices in December.
Suleyman's 'demotion'
With Copilot struggling to win over users, Microsoft said two weeks ago that Mustafa Suleyman, the former co-founder of AI lab DeepMind who had been running Copilot development for consumers, would focus on building AI models. Microsoft has tasked former Snap executive Jacob Andreou with leading the Copilot experience for consumers and commercial clients.
"There is concern that the Microsoft 365 Copilot business has not lived up to quite their expectations, and that's an area that could see new competitors," said Kyle Levins, an analyst at Harding Loevner, which held $219 million in Microsoft shares at the end of December.
Levins took the shake-up involving Suleyman as good news. Others did not.
"Sure sounds like a demotion at best," former Jane Street trader Agustin Lebron wrote on X. The change followed departures of prominent executives, including gaming chief Phil Spencer and Rajesh Jha, Microsoft's highest-ranking productivity leader, who's retiring.
Microsoft is still getting healthy growth out of Azure, which is second to Amazon Web Services in cloud infrastructure. Revenue in the division jumped 39% in the December quarter. Finance chief Amy Hood said in January that growth could have been in the 40s if the company had allocated all of its AI chips to Azure, rather than giving some to teams operating services such as Microsoft 365 Copilot.
Azure is benefiting from a massive backlog of business from OpenAI and Anthropic. Microsoft's commercial remaining performance obligations at Azure more than doubled in the December quarter from a year earlier to $625 billion.
It's a reminder that, among tech's hyperscalers, Microsoft was viewed as an early mover in generative AI due to its 2019 investment in OpenAI and strategic partnership with the startup. But the companies no longer have an exclusive arrangement when it comes to cloud infrastructure, and are now competing in a number of areas.
In February, OpenAI announced a service called Frontier that the company said "helps enterprises build, deploy, and manage AI agents that can do real work."
Microsoft CEO Satya Nadella has been wearing a brave face, promoting the company's AI enhancements on social media.
"It's a lot of intense competition, but it's not so zero-sum, as some people make it out to be," he said in January.
Aaron Foresman, managing director of equity research at Crawford Investment Counsel, a Microsoft investor, said Nadella's continuing presence is crucial for the company that he's been leading since replacing Steve Ballmer in 2014.
"We've got a lot of trust and confidence in Satya," Foresman said.
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