Microsoft earnings are already moving the market

Jhe stock market had another difficult day on Tuesday. Despite the huge reversal that led to positive closes on Monday for the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P500 (SNP INDEX: ^GSPC), and Nasdaq Compound (NASDAQ INDEX: ^IXIC), downward pressure reasserted itself at the open on Tuesday morning. Despite a similar rebound that briefly sent the Dow Jones into positive territory mid-afternoon, Wall Street was unable to pull a rabbit out of its hat for a second straight day.


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Data source: Yahoo! Finance.

Additionally, there are signs pointing to potential further weakness on Wednesday. It’s because Microsoft (NASDAQ: MSFT) released its latest financial results, and while they were pretty strong, they weren’t enough to avoid a bearish trend for its stock price after hours of trading on Tuesday afternoon. Let’s take a closer look at what Microsoft said and why investors seem disappointed.

Image source: Getty Images.

Everything is still fine with Microsoft – except its stock

From Microsoft’s nearly 5% drop in after-hours trading, you might think its second-quarter fiscal results were horrendous. Still, a close look at everything the software giant said showed continued fundamental strength in its business and strong long-term prospects for the future.

Microsoft’s headlines looked good. Revenue grew 20% year over year to $51.7 billion. Net income climbed 21% to $18.8 billion, equating to earnings of $2.48 per share, up 22% from year-ago levels.

Additionally, the company has seen strength at almost every level. The intelligent cloud segment was the best performer from a revenue growth perspective, with an overall increase of 26%. Azure drove a 29% increase in server products and cloud services revenue, with other cloud services showing 46% revenue growth.

Meanwhile, the productivity and business process segment saw a 19% increase in revenue, with Office 365 Commercial seeing 19% growth and the LinkedIn business increasing sales by 37%. Dynamics 365 increased sales by 45%, providing another example of a successful cloud-related business in today’s environment. More personal computing revenue grew 15% year-over-year, with Windows OEM sales up 25% and search and news advertising revenue up 32%.

Microsoft also continued to do good for shareholders. The software giant spent $10.9 billion on stock buybacks and dividend payouts in the quarter, up 9% from the amount of capital it returned to investors during the period of the previous year.

Beaten by the law of large numbers?

Analysts examining both the results and the subsequent fall in stock prices offered a few possible explanations, the most common of which involved slowing growth rates. Yet when measured in percentage terms, reduced growth as a business grows is almost inevitable.

It’s also clear that the COVID-19 pandemic helped accelerate some of the trends that were driving cloud computing adoption among enterprise customers, and that had the effect of driving some of Microsoft’s growth forward. The claim among analysts that investors are disappointed that these increased growth rates have turned out to be unsustainable doesn’t sound very realistic, but that doesn’t stop some analysts from making the claim anyway.

In any event, Microsoft’s news is hurting the entire market. An ETF that tracks the Nasdaq-100 index is already down another 1.6% in after-hours trading. An S&P 500 ETF is down more than 1%, almost matching its decline in the regular trading session.

Microsoft is a major tech player, and the idea that the US stock market behemoths are vulnerable is bad news for investors. Rational or not, declines in major stocks could end up prolonging the entire downturn.

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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a board member of The Motley Fool. Dan Caplinger owns Microsoft. The Motley Fool owns and recommends Microsoft. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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