Microsoft stock falls as $25B bond plan draws focus despite Azure growth

Microsoft shares MSFT fell on Thursday, reversing early gains and premarket strength, as investors assessed the company's latest earnings, capital spending plans, and intention to raise $25 billion through a US bond offering.

The stock declined despite Microsoft reporting stronger-than-expected fiscal first-quarter results, with revenue rising 19% year over year to $92.28 billion.

Adjusted earnings came in at $4.89 per share, above analysts' expectations of $4.71.

Azure, Microsoft's cloud computing business, was a key contributor to the results, recording revenue growth of 48%, well above the market forecast of 44.3%.

However, investors also weighed the company's capital expenditure, which came in below expectations because of delays in third-party capacity deliveries.

Azure growth exceeds expectations

Microsoft's Azure business remains a key indicator of demand for its artificial intelligence infrastructure and services.

The company provides computing power, storage and other cloud resources to customers, allowing it to monetise growing demand for AI.

Azure revenue growth of 48% exceeded expectations of 44.3%.

Chief Financial Officer Amy Hood also indicated that growth could accelerate to 49% in the fiscal second quarter, above analysts' forecast of 44.6%.

Bank of America Securities analyst Tal Liani raised his price target on Microsoft to $630 from $600 and maintained a Buy rating following the earnings report.

“MSFT’s positioning across infrastructure, models and software continues to provide multiple paths to monetize AI demand,” Liani wrote.

Bank of America also highlighted Azure's performance and outlook in its assessment of the results, noting that first-quarter growth was approximately 300 basis points above expectations.

Lower capital spending reflects delivery delays

Microsoft reported capital expenditure of $45.2 billion in the quarter, below the $51 billion analysts had expected. However, the figure was still higher than the $34.9 billion recorded a year earlier.

The company attributed the shortfall against expectations to delays in third-party capacity deliveries rather than a reduction in its AI investment plans.

“Capex is expected to exceed $50 billion in the second quarter and accelerate in the second half of fiscal 2027 as delayed capacity comes online and component inflation persists,” William Blair analyst Jason Ader wrote in a research note.

Hood similarly said capital expenditure should exceed $50 billion in the second quarter.

She added that spending was expected to accelerate in the second half of the fiscal year, primarily because of CPUs, GPUs, and higher memory and storage costs.

The spending outlook is important for AI infrastructure providers, including companies that supply computing capacity to major cloud operators.

Lower-than-expected spending initially raised concerns about demand for these businesses, although Microsoft's comments pointed to timing delays.

Bond offering and cash flow in focus

Bloomberg News reported that Microsoft was planning to raise at least $25 billion through a US bond offering.

The move drew attention as investors assessed how the company would finance its continued investment in AI infrastructure.

Heavy investment weighed on free cash flow, which fell to $18.6 billion from $25.7 billion a year earlier.

However, the figure exceeded Wall Street's expectation of $7.99 billion.

The company is also seeking to control costs. Earlier in the week, Microsoft said it was offering voluntary exit packages to 60,000 employees, although it expected only a fraction of eligible workers to accept.

Outside its cloud and AI operations, Microsoft's devices and consumer segment recorded a 3% decline, driven by weakness in Xbox, Windows and devices.

Higher prices amid rising memory costs have also weighed on consumer demand for PCs.