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Microsoft and Meta reported September quarter earnings that beat market expectations but failed to impress investors with their guidance, sending both shares down more than 3% in after-hours trading. Microsoft’s shares were up 16% year-to-date, and Meta stocks rose 68% this year as markets closed on Wednesday.

Some similarities in their earnings reports are that both artificial intelligence (AI)–focused businesses have been heavily investing in AI infrastructure, sparking concerns about whether their pace of growth could justify the billions of dollars of spending. Meanwhile, the two Wall Street darlings faced different specific challenges – Microsoft’s capacity constraints and Meta’s overspending. It seems that they did not satisfy investors with their conservative outlook on the ongoing challenges they are facing.

The selloff reaction of the markets may also be due to Alphabet’s blow-out earnings results a day ago, as investors had set a high bar of expectations.

Microsoft’s Azure growth slows

Microsoft’s earnings for its first quarter of fiscal year 2025 show that the growth of its Azure cloud decelerated to 34% year-on-year at constant currency from 35% in the previous quarter. In August, the company revised the June quarter report, transferring some revenue from mobility and security services to Office software. This approach led to a higher revision of Azure’s growth rate to 34% from 29% previously.

Despite steady growth in its most competitive segment, rivalling Amazon’s AWS and Alphabet’s Google Cloud, Microsoft provided disappointing guidance, expecting 33% to 32% growth at constant currency for the current quarter, suggesting a further slowdown. CFO Amy Hood said during the earnings call that some data centre capacity Microsoft has been focusing on in its push into AI has not borne fruit as expected due to a shortage in supply, likely constraining revenue growth in the Azure cloud during the December quarter.

The risks analysts are concerned about regarding Microsoft are the increasing spending on its AI infrastructure to build their own supercomputing applications. Its quarterly capital expenditures, including assets acquired under capital leases, jumped 79% year-on-year to $20 billion (€18.4 billion), reaching a record high. However, Josh Gilbert, market analyst at Oanda Australia, is optimistic about Microsoft’s prospects, stating: “With enterprise spending on cloud services rising, Microsoft seems to be just beginning its AI expansion, and the good times look set to continue.”

Other key metrics are rather stunning, as the company comfortably topped analysts’ expectations. Revenue rose 16% year-on-year to $65.59 billion (€60.45 billion), and earnings per share were $3.30 (€3.04), surpassing the estimated $64.51 billion (€59.45 billion) and $3.10 (€2.9), respectively. “AI-driven transformation is changing work, work artefacts, and workflow across every role, function, and business process,” CEO Satya Nadella commented. “We are expanding our opportunity and winning new customers as we help them apply our AI platforms and tools to drive new growth and operating leverage.”

Meta’s spending sparks growth concerns

Meta’s third-quarter earnings topped market expectations in key metrics, reporting earnings per share of $6.03 (€5.59) on revenue of $40.59 billion (€37.41 billion), up 37% and 19% from a year ago, compared to analysts’ estimates of $5.25 (€4.84) and $40.29 billion (€37.13 billion), respectively. However, its revenue beat was not significant, and the annual net income growth sharply declined to 35% from 70% on average over the past year.

This signals that Meta’s massive investment in its ambitious AI and metaverse projects has negatively impacted its growth in its core business digital advertising. Now, the social platform expects that fourth-quarter revenue will be in the range of $45 billion (€41.5 billion) to $48 billion (€44.24 billion), with its midpoint slightly beating analysts’ expectations.

In its outlook statement, Meta expects “the full-year 2024 total expenses to be in the range of $96-98 billion, updated from our prior range of $96-99 billion. For Reality Labs, we continue to expect 2024 operating losses to increase meaningfully year-over-year due to our ongoing product development efforts and investments to further scale our ecosystem.”

CEO Mark Zuckerberg also warned during the earnings call that Meta will continue to spend significantly on AI infrastructure for its Reality Labs and AI glasses. He believes artificial intelligence will accelerate its core business – advertising revenue growth – in the long term. “There are lots of opportunities to use new AI advances to accelerate our core business,” Zuckerberg said.

Despite both companies comfortably beating earnings expectations, concerns over rising costs and cautious growth outlooks have left investors uncertain about their future performance.