Following a $750 Million Deal with Perplexity, Is Microsoft Stock a Buy, Sell, or Hold?

Core Viewpoint - Microsoft has secured a significant $750 million cloud deal with AI search startup Perplexity, which is seen as a potential boost for its Azure cloud business, despite a negative market reaction following its latest earnings report [1][2]. Financial Performance - Microsoft reported revenue of $81.27 billion, surpassing the consensus estimate of $80.27 billion, and adjusted earnings per share of $4.14, exceeding expectations of $3.97 [7]. - Azure cloud revenue growth was 39%, which fell short of the 39.4% consensus forecast, raising concerns among investors [7]. - Guidance for the More Personal Computing segment, which includes Windows, was approximately $12.6 billion, significantly below the expected $13.7 billion [7]. Market Reaction - Following the earnings report, Microsoft's stock dropped 10%, marking its worst single-day performance since March 2020, and erasing $357 billion from its market capitalization, which now stands at $3.22 trillion [6]. Strategic Moves - The deal with Perplexity diversifies its cloud infrastructure beyond its primary partner, Amazon Web Services [2]. - CFO Amy Hood indicated that Azure's performance could have been better if more data center capacity had been allocated to external customers instead of internal projects like Microsoft 365 Copilot and GitHub Copilot [8]. Infrastructure Investment - Microsoft invested $37.5 billion in data centers and equipment during the quarter, a 66% increase from the previous year, exceeding analyst expectations of $34.31 billion [9]. - The company added nearly 1 gigawatt of total capacity in the quarter, but customer demand continues to outpace supply, creating challenges for capacity management [9].