The stock market was having a mixed day on Thursday, with the Dow Jones Industrial Average (^DJI 0.27%) slightly higher and the S&P 500 (^GSPC 0.21%) marginally lower. However, tech giant Microsoft (MSFT -6.12%) was a big exception, with shares down by more than 6% at 11 a.m. ET.
As you might expect, the primary reason for the decline was Microsoft’s latest earnings for the company’s second fiscal quarter of 2025, which it reported on Wednesday afternoon after the market closed. Despite beating analyst expectations for both revenue and earnings per share, investors don’t seem too thrilled with the megacap tech stock’s latest results.
As of this writing, Microsoft is now about 11% below its recent high, and a decline of 10% or more is typically considered to be a correction.
Why is Microsoft falling?
As most experienced stock investors can tell you, one of the most surefire ways to make a stock’s price drop is to issue weak guidance, and that’s exactly what happened here. Specifically, the company’s first-quarter revenue is forecast to come in at $68.2 billion at the midpoint of Microsoft’s guidance range — that’s about $1.5 billion less than analysts had expected. What’s more, although the Azure cloud services business grew by 31% year over year, that represents a slowdown of two percentage points compared with the previous quarter’s growth rate.
The weak guidance, combined with the recent artificial intelligence (AI) headwinds from China-based DeepSeek’s AI models, are causing many investors to question the tech giant’s massive AI spending strategy.
Is it a buying opportunity?
It’s worth noting that Microsoft isn’t a cheap stock. Even after this move, Microsoft trades for about 30.5 times forward earnings estimates. Given the company’s operating income growth of 17% year over year, this seems like a reasonable, but not dirt cheap, valuation.
However, if you believe the recent AI headwinds are overblown, there are some reasons you might want to take a closer look. For one thing, Microsoft’s AI business grew its annual revenue run rate by a staggering 175% over the past year, showing that its massive investments are paying off. And Microsoft’s cloud revenue, which makes up nearly 60% of the total, is growing significantly faster than the rest of the business.
Matt Frankel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
