Microsoft Drops Most Since 2020

Core Insights - Microsoft reported Azure growth of 38%, missing the expected 40%, attributed to significant GPU capacity being utilized for in-house applications rather than revenue-generating activities [1] - In contrast, Meta has seen a positive impact on ad convergence from AI applications, highlighting a gap in Microsoft's narrative regarding business uplift from their AI initiatives [1] Azure Performance - Azure's growth rate is a critical metric for Microsoft, and the recent performance indicates a need for more revenue-generating applications [3] - The company is bundling products like GitHub and Office Co-pilot, but growth rates in these areas have not improved significantly [3] Capital Expenditure (CapEx) - Microsoft reported a CapEx of $37.5 billion for the quarter, a 66% increase from the previous year, raising questions about market comfort with such spending [4] - Comparatively, Meta announced a 70% increase in CapEx for 2026, which was well-received by the market due to their revenue growth expectations [5] Competitive Landscape - Microsoft faces competition from companies like Google and Anthropic, which are releasing their own AI products that may outperform Microsoft's offerings [9][10] - The reliance on OpenAI for AI capabilities is seen as a weakness compared to competitors that have vertically integrated solutions [11] Market Sentiment - The software sector, including Microsoft, has experienced significant drawdowns of 40-50% over the past three months, driven by concerns over potential disruptions in the software market [8] - Despite the recent downturn, there is a belief that the market reaction may be an overreaction, as there are no fundamental issues with Microsoft's performance [14]