- Microsoft shares fall 4.6% in pre-market trading as results disappoint
- Investors showed concern with pace of growth in Microsoft’s cloud computing arm
- Xbox hardware revenue slumped 29%
- Tesla shares initially fell on its results but have since reversed, now trading 4.2% higher in pre-market trading after Elon Musk predicted ‘an epic 2026 and a ridiculous 2027 and 2028’ on the analyst conference call
- Fourth quarter earnings and revenue below market expectations
- Growing pressure on Elon Musk to decide where his focus lies: cars, space or politics
Dan Coatsworth, investment analyst at AJ Bell, comments:
MICROSOFT
“It’s no longer enough to beat expectations; investors want the world from Microsoft and failure to deliver means the share price risks going down. Pockets of negative points in its latest results knocked the share price for six, even though the company beat market estimates for sales and earnings for the third quarter in a row.
“Investors were spooked by Microsoft’s slower growth with its Azure cloud computing arm. The AI revolution was meant to have driven companies around the world to upgrade their infrastructure and processing capabilities, theoretically making cloud computing services a hot spot for significant growth. That Microsoft ‘only’ delivered 21% revenue growth would suggest that large parts of the business world have been hesitant in committing to technology upgrades.
“Microsoft is doing everything it can to help people adopt AI as fast as possible, be it through storage or software, but even revolutions don’t play out smoothly. There will always be bumps in the road.
“Microsoft won’t be worried. This is only one set of quarterly results and it’s so engrained into people’s lives that it continues to be one of the biggest beneficiaries of the AI trend.
“Even the emergence of DeepSeek plays to its advantages, though that might not immediately seem to be the case. Competition always emerges when a certain area gets hot and bringing down the cost of running AI will broaden its appeal and reach to both consumers and businesses, making more people realise what’s possible. Microsoft’s army of software services are well positioned to help users embrace AI and it’s in the front pack of contenders to win the race.
“While the attention remains on cloud computing and AI-related software and services, it’s worth noting that other parts of Microsoft are going through a transitory period. Gaming revenue declined by 7% in the period and Xbox hardware revenue fell by a dramatic 29%.
“The gaming industry has been going through a hard time since getting a temporary boost during the Covid-19 pandemic. Microsoft seems to now be focusing more on games rather than pushing hardware.
“Whereas 10 or 20 years ago, people yearned for new consoles on a regular basis, nowadays there is so much more choice in how to play games. From using a mobile phone, laptop or no doubt one of the existing consoles that already work perfectly fine in someone’s house, it’s no surprise that games console launches or upgrades are much slower these days.”
TESLA
“Elon Musk might want to stop spending all his time at the White House looking to elevate his status on the political stage, judging by the disappointing results from Tesla. There’s urgent work needed in his day job to put Tesla back into the fast lane.
“Tesla has now missed earnings expectations in five out of the past six quarters. Under normal circumstances, the chair of a company in this situation would be banging their fists on the table and asking why the chief executive seems to be spending all their time doing something else apart from leading the business. Quite whether Musk has been granted special treatment remains to be seen, but it’s somewhat ironic when the person tasked with helping the government become more efficient has an empire beneath him showing considerable cracks.
“The electric vehicle industry has spluttered over the past year or so as take-up has been slower than expected. At the same time, companies like Tesla, which had enjoyed a first-mover advantage, have seen the emergence of serious competition. This cocktail of events has made life very hard and put pressure on Tesla to fight it out through price cuts, new models and more favourable financing deals.
“Musk’s vision seems to be centred on innovation and some of his ideas have backfired. He might be better off focusing on build quality to win the public’s trust and convince them a Tesla vehicle is something that will keep them on a road without problems.
“Having fallen on the results, the shares have subsequently moved higher in pre-market trading. One explanation is that Musk raised hopes on the analyst conference call, saying the company’s work was setting the scene for ‘an epic 2026 and a ridiculous 2027 and 2028’. Investors have a habit of buying into his every word, but whether that remains the case is unknown.
“The narrative for investors changed when Musk got more involved in politics. Running a company is one thing, having influence or opinions over policies that affect how people live their lives is another. That introduces a new risk for anyone considering Tesla as an investment.
“His political interests and motivations are a mystery and that introduces a degree of uncertainty. Certain Tesla investors might like him as a business leader but disagree with his political opinions which can cause a moral dilemma.
“The fact politics appears to be taking the front seat for Musk complicates Tesla’s investment case. Bulls might argue that his elevated political status in the US could be advantageous to Tesla if Musk is with the ‘in-crowd’ of people deciding the rules of the country. Bears might argue that political involvement means Musk is spreading himself more thinly than before, with too many interests, and that his political interests aren’t limited to the US which means even more uncertainty.
“Running a multi-billion- or trillion-dollar company is hard work and requires a laser focus. Investors thinking about buying shares in any business, not just Tesla, need to think hard about this point. The person at the top’s role is to be a leader, motivator and a role model. They’re no doubt being paid handsomely, but is their attention elsewhere? If so, investors either need to be comfortable with the situation and consider such external involvement of any kind to be beneficial, or they might decide the opportunity is not worth pursuing.”
