By Angela Palumbo

Microsoft stock was falling after earnings on Thursday, but some analysts see the drop as a buying opportunity, arguing the tech company's AI offerings could bring growth.

While Microsoft reported second-quarter earnings and revenue that beat Wall Street estimates on Wednesday evening, investors focused on a disappointing forecast for revenue. Also weighing on the stock was that growth in the Azure cloud-computing business slowed in the quarter.

Microsoft said that revenue in the quarter from Azure and other cloud services increased by 31%, compared with 33% one quarter earlier. Melius Research analyst Ben Reitzes wrote in a note on Thursday that the part of Azure that handles traditional computing tasks, rather than artificial intelligence, "is being impacted by what seems to be less focus -- and more attention given to AI by sales teams."

The software company told investors to expect third-quarter revenue of between $67.7 billion and $68.7 billion, while the consensus call among analysts tracked by FactSet was for $69.9 billion.

Microsoft shares were down 6.1% to $415.20, on pace for their largest percentage decrease since Oct. 26, 2022, according to Dow Jones Market Data. That decline also stemmed from concern about slowing growth in cloud spending following an earnings report.

Most analysts still remain bullish. Of the 60 surveyed by FactSet, 57 say the stock is a Buy, and three rate it at Hold.

The AI business is one reason for their optimism. One reason is that Microsoft said commercial bookings increased 75%, driven by commitments for Azure usage from OpenAI.

"We remain very happy with the partnership with OpenAI," Chief Executive Satya Nadella said on the earnings call. "And as you saw, they have committed in a big way to Azure, and even in the bookings, what we recognize is just the first tranche of it."

Reitzes wrote that the numbers show that faster growth is possible, though he said it isn't likely in the near term.

"Net-net we are buyers on weakness as MSFT should still grow faster than folks like Salesforce and Adobe at a much larger scale," Reitzes wrote. "Also, we still believe that Microsoft's position as a gateway for AI Agent creation and deployment is underappreciated."

He rates Microsoft at Buy with a $520 price target.

Microsoft stands to benefit from AI through Azure; its investment in OpenAI, the parent of ChatGPT; and commercial use of AI through its suite of apps.

"We continue to believe that Microsoft remains uniquely positioned to monetize the vast new AI opportunity across applications and infrastructure at scale," BofA Securities analyst Brad Sills wrote on Thursday. He rates the stock as a Buy with a $510 price target.

Still, the stock isn't cheap. Shares are trading at 31.1 times earnings expected over the next 12 months. The five-year average is 29.5 times.

Write to Angela Palumbo at angela.palumbo@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 30, 2025 15:30 ET (20:30 GMT)

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