Microsoft's cloud miss overshadows better-than-expected revenue and earnings, causing shares to drop.

• Microsoft reported better-than-expected earnings and revenue for the fiscal fourth quarter.
• The stock dropped in extended trading as investors focused on disappointing Azure revenue.
• Total revenue increased 15% from a year earlier.

On Tuesday, shares dropped 7% in extended trading, despite better-than-expected earnings and revenue, as investors focused on cloud results.

Here's how the company did, compared with the LSEG consensus:

• Earnings per share: $2.95 vs. $2.93 expected
• Revenue: $64.73 billion vs. $64.39 billion expected

In the fiscal fourth quarter, which ended on June 30, Microsoft's revenue increased by 15% year over year. Additionally, the company's net income was $22.04 billion, up from $20.08 billion in the previous quarter, representing an increase of $2.69 per share.

The Intelligent Cloud segment of the company, which includes Azure public cloud, Windows Server, Nuance, and GitHub, generated $28.52 billion in revenue. Despite this, the total revenue was only about 19% above the $28.68 billion consensus among analysts surveyed by StreetAccount.

During the quarter, revenue from Azure and other cloud services grew 29%, falling short of the 31% growth analysts polled by CNBC and StreetAccount had expected. Microsoft doesn't disclose revenue from the category in dollars. Last week, Google parent Alphabet said revenue from its cloud business, including Workspace productivity software and Google Cloud Platform infrastructure, went up by about 29%.

Wall Street views Microsoft's cloud business as crucial, as the company competes with Web Services and Google for artificial intelligence workloads. All three companies are heavily investing to enhance their AI capabilities and attract startups and big companies as generative AI models rapidly progress.

The revenue generated by the Productivity and Business Processes unit, which includes Office software and LinkedIn, was $20.32 billion, representing an 11% increase and surpassing the $20.13 billion StreetAccount consensus.

The Windows operating system, gaming, devices, and search advertising contributed $15.90 billion in revenue to Microsoft's More Personal Computing unit, which is up 14% and higher than the StreetAccount consensus of $15.49 billion.

The PC market strengthened, leading to a 4% increase in Windows license sales to device manufacturers, according to Gartner's research. Additionally, PC shipments during the fiscal fourth quarter grew by 1.9%, compared to a 0.9% increase in the previous quarter.

In the fourth quarter of the fiscal year, Microsoft introduced Surface PCs with AI capabilities that can run specific models without requiring an internet connection. Dell, HP, and other device manufacturers also advertised their own Copilot+ PCs. During a May press conference, CEO Satya Nadella stated that "we're bringing back the joy and sense of wonder to creation on the PC through our new Surface PCs."

Microsoft stock has risen 12% in 2024, outpacing the S&P 500 index's 13% gain.

Analysts will receive guidance on the results from executives during a conference call starting at 5:30 p.m. ET.

Microsoft is the company that I am most optimistic about, according to Matt McIlwain of Madrona, after a challenging week for Big Tech.