Microsoft shares sink more than 8% on weak guidance but analysts bullish on rebound

Microsoft shares sink more than 8% on weak guidance but analysts bullish on rebound

Microsoft CEO Satya Nadella speaks at the company’s annual shareholder meeting on Nov. 30, 2016, in Bellevue, Washington.

Stephen Brashear | Getty Images News | Getty Images

Shares of Microsoft dropped as much as 8% early Wednesday, a day after the company released its fiscal first-quarter earnings.

Microsoft surpassed expectations on the top and bottom lines, but the stock was pressured by weak guidance and cloud revenue that missed expectations.

Microsoft’s Intelligent Cloud business segment, which includes the Azure public cloud, as well as Windows Server, SQL Server, Nuance and Enterprise Services, generated $20.33 billion in quarterly revenue, according to a company statement. That’s up 20% but slightly less than the $20.36 billion consensus among analysts polled by StreetAccount.

In terms of guidance, Microsoft expects to see $52.35 billion to $53.35 billion in revenue for the fiscal second quarter, which implies 2% growth at the middle of the range. Analysts polled by Refinitiv had been looking for revenue of $56.05 billion.

CEO Satya Nadella said cyclical trends are affecting Microsoft’s consumer business on a conference call with analysts. CFO Amy Hood also said weak demand for PCs in September will continue to hit Microsoft’s consumer segment, and said to a percentage decline in the high 30s for Windows revenue from devices makers in the fiscal second quarter.

Goldman Sachs analysts were not discouraged by the weaker, cyclical segments, and reiterated their buy rating on the stock. They said there’s potential for those segments to rebound, and that companies are more likely to offer conservative guidance when faced with a challenging macroeconomic environment.

They believe there is potential for revenue re-acceleration next year.

“Looking beyond near-term dynamics, we remain constructive as we see the company well positioned to continue to win deals and expand its wallet share within its existing customer-base, even in a slower growth environment,” they wrote in a Tuesday note.

Analysts at Morgan Stanley also remain confident in Microsoft’s growth potential despite its weak cyclical areas and guidance.

The strength of the company’s positioning for core secular growth trends “remains evident,” they said.

“Bottom line, while heavier cyclical weights brings down our FY23 EPS estimates, we remain firmly convicted in the longer-term secular growth story at Microsoft,” they said in a note Wednesday.

Barclays analysts said Microsoft’s quarterly outlook was a “negative surprise” for investors, and that macroeconomic challenges are slowing migration to the cloud.

However, they said in a Wednesday note that while “shares will likely react negatively in the short term,” the company’s management is still guiding for revenue and profit that “should ensure relative outperformance.”

Microsoft shares have fallen about 25% so far this year, while the S&P 500 stock index is down 19% over the same period.

— CNBC’s Jordan Novet and Michael Bloom contributed to this report.

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