What Happened?
Shares of tech giant Microsoft (NASDAQ:MSFT) fell 6.3% in the morning session after the company reported fourth quarter results with investor sentiment having soured a bit heading into the print around capex, the GenAI impact on the top line, and the OpenAI relationship.
It was encouraging to see Microsoft narrowly top analysts' revenue expectations this quarter, as Personal Computing and Business Services beat while Intelligent Cloud was in line. Commercial bookings growth of 75% year-on-year in constant-currency accelerated and beat handily, buoyed by OpenAI Azure commitments and deals across Azure and M365.
On the other hand, within Intelligent Cloud, the all-important Azure constant-currency revenue growth came in at 31%, missing investor expectations of 32-33%. The company then guided to 31-32% year-on-year constant-currency Azure growth next quarter, which missed expectations calling for a second-half acceleration. Overall, we think this was a decent quarter but not enough to appease some of the market's concerns.
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What The Market Is Telling Us
Microsoft’s shares are somewhat volatile and have had 13 moves greater than 2.5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 3 days ago when the stock dropped 7.1% on the news that stocks heavily tied to the AI market took a hit after Chinese artificial intelligence startup DeepSeek released a new large language model (DeepSeek-R1) that ranks competitively on key global benchmarks (coding competitions, math evaluations), uses less advanced semiconductor chips, costs significantly less to build (at $5.5 million - excluding non-compute costs), and has already achieved strong adoption after topping the iPhone App Store for AI apps. Notably, the company has also open-sourced this model, a move that may make it harder for rivals to justify huge upfront expenditures on hardware, software, and expertise to develop similar systems.
Speaking at the World Economic Forum in Davos, Switzerland, Microsoft CEO Satya Nadella praised DeepSeek's efforts, calling the new model "super impressive" for its open-source design, efficient inference-time computing, and high compute efficiency. "We should take the developments out of China very, very seriously," he added.
Nadella's comments suggest that upstarts like DeepSeek could reshape the competitive landscape of AI. DeepSeek's announcement disrupts long-held assumptions in key ways: 1) It undercuts the narrative that bigger budgets and access to top-tier chips are the only ways forward for AI development. 2) By using less advanced hardware, DeepSeek opens the door for innovators who face high chip costs or export restrictions, reaffirming they can still compete. 3.) The model's success questions the growth narrative of chipmakers like Nvidia—whose soaring valuations depend on the demand for cutting-edge, high-performance hardware.
Overall, DeepSeek's model demonstrates that AI innovation is no longer a race fueled solely by how much you spend, but rather by how resourceful you can be with what you have.
Microsoft is down 0.8% since the beginning of the year, and at $415.36 per share, it is trading 11.2% below its 52-week high of $467.56 from July 2024. Investors who bought $1,000 worth of Microsoft’s shares 5 years ago would now be looking at an investment worth $2,404.
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