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Microsoft Slumps On Muted Cloud Outlook

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J.D. DURKIN: Microsoft  (MSFT) - Get Free Report reported a better than expected second quarter here, Martin, but did post a muted outlook for its cloud division specifically. What did we learn and why is it moving markets the way it is?

MARTIN BACCARDAX: Yeah, Microsoft is very much a cloud focused stock when it comes to earnings projections. Now, ultimately, they have scale of business across a host of sectors, particularly for business software, for consumers, for video games and all the rest of it. But the cloud division, the cloud computing division is by far the largest and most important engine of Microsoft, which is the second most valuable tech company in the world. So we do have to give it its proper dialogue. Essentially, what Microsoft said was that Azure, which is its flagship cloud product, is growing revenues at an annualized rate of about 31%, when you strip away the impact of currencies, it's about 38%. That was bang in line with what Wall Street was looking for this quarter.

However, that rate has been slowing, notably over the past two or three years. It was above 50% when we first started paying attention to it, and it's been declining ever since. The product is maturing, there's greater competition and we're seeing a pullback in business spending. All of those are factoring in to the slowdown in growth. Now, Microsoft said that the broader cloud division, they call it intelligent cloud, is going to see a growth rate that's probably under 30%, somewhere in the range of $22 billion USD for this year, I beg your pardon for the fiscal Microsoft year, which ends in the summertime. 

Now again, that number was not what analysts were looking for, it was a little bit shy. And as a result, the stock, whilst it had risen after the earnings, which were better than expected, it pulled back very quickly and it's in the red today as a result of that projection. So I think what analysts are looking at is the fact that this engine of growth is slowing and its margins are narrowing.

Now, what the rest of the market is looking at is the fact that Microsoft is very much a leading indicator with respect to economic performance, because the companies that it deals with are all over the world. They are at the tip of the spear, if you will, of business investment. And if they are pulling back, that suggests that they see economic headwinds along the way. And that, of course, results in the rest of us, assuming that there's going to be even more sort of headwinds from an economic growth perspective than we first anticipated. So Microsoft is a bit of a canary in the coal mine in that regard. And that's why it's being, you're seeing the big tech stocks pulled down as a result of these numbers and Microsoft trailing the market, I think last I saw was down about 3% or 4% in early trading.

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