Should Investors Buy Microsoft Stock on the Dip After Azure Revenue Disappoints? | The Motley Fool

Microsoft (MSFT -3.27%) has been helping lead the charge in artificial intelligence (AI), so when fiscal fourth-quarter revenue for its Azure cloud computing business came up short of analyst expectations, investors were a bit disappointed. After a strong run through early July, the stock dropped a bit and is now up only about 10% on the year.

Let’s take a closer look a Microsoft’s latest results and whether the stock is a buy after the 10% pullback from its recent July highs.

Azure revenue disappoints

For its fiscal fourth quarter, Microsoft reported a 15% year-over-year increase in revenue to $64.7 billion while its earnings per share (EPS) rose 10% to $2.95. That came in just ahead of analyst expectations for revenue of $64.5 billion and EPS of $2.94.

Azure once again helped lead the way with year-over-year revenue growth of 29% (30% in constant currency). However, that was at the low end of the 30% to 31% constant currency revenue growth that Microsoft forecast earlier. Overall Intelligent Cloud revenue, the segment where Azure resides, rose 19% to $28.5 billion.

Azure AI customers grew by 60% in the quarter, while its subscription and usage rates have seen a significant increase. It also introduced new AI accelerators and models.

Microsoft said capacity constraints impacted Azure’s growth and that these constraints will likely last into the first half of fiscal year 2025. In response, it has partnered with companies like Oracle and Cohere to expand Azure AI’s capacity. Microsoft will make infrastructure investments to meet demand, while also focusing on managing expenses to take a disciplined approach to growth.

The Productivity and Business Processes segment, home to Office and LinkedIn, saw its revenue increase 11% year over year to $20.3 billion. Dynamics 365 revenue led the way with 19% growth, while Office 365 Commercial revenue rose 13%. Revenue for More Personal Computing, home to Windows and Xbox, climbed 14% to $15.9 billion. The increase was powered by Microsoft’s recent acquisition of video game maker Activision.

Looking ahead, Microsoft forecasts double-digit revenue and operating income growth for fiscal year 2025. It also expects capital expenditures (capex) to be higher than in fiscal year 2024.

For the first quarter, Microsoft expects revenue to be between $63.8 billion and $64.8 billion. The company is looking for its Intelligent Cloud segment to grow between 18% and 20% to $28.6 billion and $28.9 billion, with Azure growth of between 28% and 29% in constant currency. The Productivity and Business Processes segment is expected to grow between 10% and 11% in constant currency, while More Personal Computing is forecast to grow between 9% and 12% in constant currency.

Is it time to buy the dip?

The slightly lower-than-expected revenue growth from Azure appears to be largely related to capacity constraints and some non-AI business in Europe as opposed to any AI demand issues. Ultimately, the Azure business is strong and still leading the way for the company.

Now Microsoft will have to invest in infrastructure to continue to build out the business, which is something investors have become a bit more sensitive about recently. However, this is something that all companies in the cloud computing space need to do in order to keep up with demand, and I think it would be worse if these companies weren’t planning to increase capex to take advantage of the AI opportunities in front of them.

Azure has been taking market share in the cloud computing space, so the company should get a good return on its capex investment. Meanwhile, Microsoft continues to see solid low-double-digit growth in its other two business segments, helped by Copilot and other AI features it has introduced. 

From a valuation standpoint, the stock now trades at a forward price-to-earnings (P/E) ratio of under 32 with a price/earnings-to-growth (PEG) of under 0.9. While that doesn’t put the stock in the bargain bin, it is still an attractive valuation considering its AI opportunities.

MSFT PE Ratio (Forward) data by YCharts

Given the growth opportunities still ahead of Microsoft, especially with Azure, I would be a buyer of the stock on this dip. However, I would consider taking a starter position and then dollar-cost averaging on any further price dips.

This can be a good investment strategy when buying a stock that has been seeing some near-term selling pressure. Over the long term, though, Microsoft still appears poised to be an AI winner.