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Microsoft reported a record fiscal first quarter, but its stock fell about 6% on October 31, 2024—the company’s worst one-day performance since October 2022. The decline was not caused by a quarterly earnings miss. Microsoft exceeded the cited expectations for revenue, net income and diluted earnings per share. Investors instead focused on the company’s slower near-term Azure growth forecast, the cost of building AI capacity and the question of how quickly Microsoft’s enormous artificial-intelligence investment will translate into accelerating sales and profits.
This article is date-locked to Microsoft’s October 30, 2024 earnings release and the October 31 trading session. It does not describe Microsoft’s current share price or valuation.
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The numbers behind Microsoft’s earnings beat
For the quarter ended September 30, 2024, Microsoft reported:
| Measure | Fiscal Q1 result | Year-over-year change |
|---|---|---|
| Revenue | $65.585 billion | Up 16% |
| Operating income | $30.552 billion | Up 14% |
| Net income | $24.667 billion | Up 11% |
| Diluted EPS | $3.30 | Up 10% |
| Microsoft Cloud revenue | $38.9 billion | Up 22% |
| Azure and other cloud services | — | Up 33% reported, or 34% in constant currency |
Microsoft’s official earnings release also showed growth across Microsoft 365 commercial cloud, LinkedIn, Dynamics 365, search advertising and gaming. Intelligent Cloud revenue rose 20% on a reported basis and 21% in constant currency.
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Microsoft’s commercial remaining performance obligation—contracted revenue that has not yet been recognized—rose 22% on a reported basis to $259 billion. That figure suggested substantial future demand, although it does not mean all of that revenue would be recognized immediately or produce the same margins.
The constant-currency figures are supplemental, non-GAAP measures intended to remove the effect of foreign-exchange movements. They should not be confused with Microsoft’s reported growth rates.
Why did Microsoft stock fall after the earnings beat?
The market was looking ahead rather than simply rewarding the quarter that had just ended. Microsoft’s results were strong, but investors had set an unusually high bar for a company viewed as one of the major beneficiaries of generative AI.
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The immediate concern was Microsoft’s forecast for Azure and other cloud services in fiscal second quarter. Management guided to growth of approximately 31% to 32% in constant currency, compared with 34% constant-currency growth in the fiscal first quarter. Reuters cited an average analyst expectation of approximately 32.25%, putting the midpoint of Microsoft’s forecast below that estimate.
A 31% to 32% growth forecast does not mean Azure sales were expected to decline. It means the rate of year-over-year growth was expected to moderate. For investors paying close attention to the pace of AI adoption, however, even a small change in the growth rate mattered.
That distinction explains the apparently contradictory headline: Microsoft delivered excellent historical results, yet the stock fell because the forward outlook did not clearly show the acceleration investors wanted.
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Azure demand was strong—but Microsoft lacked enough capacity
Microsoft management said demand for Azure remained higher than the company’s available capacity. That is an important detail because it makes the situation different from a conventional slowdown caused by weak customer demand.
Microsoft needed more data centers, servers and specialized graphics-processing units to serve AI workloads. If those resources were not available, customers could be ready to spend while Microsoft was still unable to recognize all of the potential revenue. Management also said that some capacity had shifted out of the quarter.
On the earnings call, Microsoft indicated that AI-service contribution would be similar to the prior quarter because of those capacity constraints. At the same time, executives expected Azure growth to accelerate in the second half of the fiscal year as new capital investments brought additional AI capacity online. The company’s explanation therefore contained both a near-term limitation and a longer-term promise: demand was present, but the infrastructure needed to monetize it was arriving in stages.
AI infrastructure was weighing on margins and cash flow
Building AI infrastructure is expensive before it becomes productive. Microsoft Cloud’s gross margin fell two percentage points from a year earlier to 71%. Intelligent Cloud’s gross margin fell three points. Management attributed the pressure primarily to scaling AI infrastructure.
Microsoft also reported:
- $20 billion of capital expenditures, including finance leases, during the quarter;
- $14.9 billion of cash paid for property and equipment; and
- $19.3 billion of free cash flow, down 7% year over year.
Microsoft said roughly half of its cloud- and AI-related spending was directed toward long-lived assets. The remainder was primarily spending on servers, including CPUs and GPUs. This distinction matters for understanding the economics: some investment builds data-center capacity that can serve customers for years, while server purchases and related equipment must be deployed and refreshed as demand expands.
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Investors were consequently weighing two competing possibilities. If Microsoft could add capacity quickly, the spending could support faster Azure growth and strengthen the company’s AI position. If the spending continued to rise faster than monetization, it could keep pressuring margins and free cash flow.
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The OpenAI item added another layer of uncertainty
Microsoft’s fiscal second-quarter outlook included approximately $1.5 billion of negative other income and expense, primarily reflecting the company’s expected share of losses from OpenAI under the equity method of accounting.
This was not described as an operating loss in Azure or Microsoft Cloud, and it was not the same as a $1.5 billion cash payment. Rather, it was an accounting recognition of Microsoft’s share of expected losses from an equity-method investment. Microsoft’s contemporaneous earnings-call materials and Form 10-Q identified recognized losses on equity-method investments, including OpenAI, as the primary reason for the expected other expense.
The disclosure nevertheless reminded investors that Microsoft’s AI exposure extended beyond its own data centers and cloud operations. The company was also financially exposed to the performance and investment needs of a major AI partner.
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AI was central to the market’s interpretation of the quarter, but it was not responsible for every part of Microsoft’s reported growth. Microsoft also cited progress in Microsoft 365 commercial cloud, LinkedIn, Dynamics 365, advertising and gaming.
The gaming comparison requires particular care. Microsoft’s acquisition of Activision Blizzard King contributed substantially to gaming and total-company comparisons. That acquisition-related effect means headline growth in some areas should not automatically be treated as entirely organic growth from Microsoft’s pre-existing operations.
Likewise, Microsoft Cloud is a broad category rather than a pure AI segment. It includes Azure, Microsoft 365 commercial cloud and other cloud services. Strong Microsoft Cloud revenue therefore demonstrates the scale of the company’s cloud business, but it does not provide a single, clean measure of AI revenue or AI profitability.
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How large was the market reaction?
Microsoft shares dropped approximately 6% on October 31, 2024, according to contemporaneous coverage from Forbes. That was the stock’s worst one-day performance since October 2022.
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The selling also affected the broader market. Forbes reported declines of approximately 1.9% for the S&P 500 and 2.8% for the Nasdaq on the session. The Associated Press described the S&P 500’s move as its worst day in eight weeks. Microsoft and other major technology companies, including Meta, contributed to investor concerns about whether the enormous cost of AI infrastructure would produce sufficiently rapid financial returns.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.What the selloff meant for investors
The October 31 reaction illustrated a recurring feature of highly valued technology stocks: a company can beat estimates and still fall if its guidance, margins or growth trajectory disappoints relative to market expectations.
Microsoft’s quarter answered some questions positively:
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- Net income and diluted EPS both increased.
- Azure continued to grow at a high rate.
- Commercial contracted revenue remained substantial.
- Management said AI demand exceeded available capacity.
But it also raised questions that the market considered more important for the next phase of the story:
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- How quickly can Microsoft add data-center and GPU capacity?
- When will that capacity produce an acceleration in Azure growth?
- How long will AI infrastructure weigh on cloud gross margins?
- Will free cash flow recover as capital investment begins generating returns?
- How much additional financial exposure will Microsoft have to AI partners such as OpenAI?
In that context, the selloff was best understood as an expectations reset rather than a judgment that Microsoft’s business had suddenly deteriorated. The reported quarter was profitable and expanding. The market simply wanted clearer evidence that AI spending would produce faster growth and improving economics soon enough to justify the expectations embedded in the stock.
Frequently Asked Questions
Did Microsoft miss earnings on October 30, 2024?
No. Microsoft reported $65.585 billion in revenue, $24.667 billion in net income and $3.30 in diluted EPS. Contemporaneous coverage said those results exceeded the cited analyst expectations. The main disappointment was the forward Azure growth outlook.
Did Azure revenue decline?
No. Azure and other cloud services grew 33% on a reported basis and 34% in constant currency in fiscal Q1. Microsoft guided to 31%–32% constant-currency growth for fiscal Q2, which represented slower year-over-year growth—not a decline in Azure sales.
Why did Microsoft’s cloud margins fall?
Microsoft Cloud gross margin declined two percentage points year over year to 71%, while Intelligent Cloud gross margin fell three points. Management attributed the pressure primarily to the cost of scaling AI infrastructure.
Was the expected $1.5 billion OpenAI expense a cash loss in Azure?
No. The approximately $1.5 billion of expected negative other income and expense primarily reflected Microsoft’s share of expected OpenAI losses recognized under the equity method of accounting. It was not an operating loss in Azure and should not be described as a direct cash payment.
How much market value did Microsoft lose?
Forbes estimated that the approximately 6% share-price decline erased about $175 billion in market value on October 31, 2024. That is an approximate historical estimate, not a current Microsoft market-cap figure.
The Bottom Line
Bottom line: Microsoft’s October 2024 selloff was driven by the gap between strong reported earnings and an even higher forward-growth expectation. Azure was growing rapidly and AI demand exceeded available capacity, but the near-term growth forecast, falling cloud margins and rising infrastructure spending made investors question how quickly Microsoft could turn AI demand into accelerating revenue, cash flow and profits.
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