Microsoft gave Wall Street hope, but then the cloud forecast turned dark

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Microsoft Corp. sparked a relief rally for the cloud Tuesday, then rained on that parade after less than two hours of joy.

Microsoft reported slightly disappointing holiday-quarter results, but the Azure cloud-computing business topped Wall Street’s expectations and initially sent shares higher in after-hours trading. Other cloud businesses — including the only rival believed to have a bigger market share than Microsoft, Inc. — joined in the fun with after-hours gains.

On a conference call later Tuesday afternoon, though, Microsoft Chief Financial Officer Amy Hood quickly tamped down the euphoria. She admitted that Microsoft saw a slowdown late in the year, and expects that to continue into the new year, with Azure expected to decelerate by four to five percentage points from the slower growth experienced in December.

“Basically, Microsoft admitted that the cloud slowdown we’d all feared has finally arrived,” said Maribel Lopez, principal analyst at Lopez Research.

Microsoft’s shares dropped from a 4% gain to a 1% decline in the extended session, and Amazon’s shares fell to a 1.5% as investors worried about its AWS cloud business. Lopez suggested that Microsoft could be taking share from Amazon to avoid an even steeper decline than executives projected Tuesday.

Investors have already seen signs of a slowdown in the cloud business for the past couple quarters from both Microsoft and Amazon, as well as at cloud-software companies like Inc. which is now under attack by activist investors. But now investors want to know if the cloud will ever return to those higher rates of growth, or if they need to prepare for slower growth going forward indefinitely.

Microsoft Chief Executive Satya Nadella tried to provide optimism on the company’s call, saying customers are “making sure that they’re getting the most value out of” the cloud and are “being a bit more cautious given the macroeconomic headwinds out there in the market.” He estimated the current “optimization,” or getting the most of out current workloads, will last about a year or so.

“I don’t think we’re going to take two years to optimize. But we’re going to take this year to optimize,” Nadella said. “And then as we optimize, the new projects start. The new project starts don’t start instantly at their peak usage.”

Nadella also expressed enthusiasm for Microsoft’s investment in OpenAI and how more artificial intelligence will help transform the Azure infrastructure. In an announcement Monday, Microsoft detailed how it will attempt to weave OpenAI technology into Azure and other projects.

As MarketWatch wrote Monday, however, it could take a long time for AI advances to make any substantial change to Microsoft’s finances, and other businesses, especially Windows, could also struggle in the near term. Executives will need patience — and that is exactly what investors will need if they’re hoping for a big rebound in Microsoft’s stock price.

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