Update 1:49 p.m.:
Microsoft’s stock recorded the largest decline in 18 months after the company lowered the bar for its financial year ahead.
Microsoft released a mixed set of quarterly financial results Monday. The company’s profit met Wall Street expectations, but the report brought some signs that Microsoft’s Office and Windows businesses were stumbling more than investors had expected.
On a rough day for stocks across the board, Microsoft was hit particularly hard. Shares fell $4.35, or 9.3 percent, to close at $42.66 a share. The decline wiped out about 40 percent of the gains made in the 11 months since Satya Nadella was appointed as Microsoft’s third chief executive.
Tuesday’s swoon came as investors reacted to Microsoft’s dour outlook for the rest of its fiscal year.
The company’s expectations for how much cash it will bring in during the current quarter were “shockingly low,” John DiFucci, an analyst with Jefferies, said in a note to clients.
How low? Microsoft’s estimates point to roughly $21 billion in sales in the three months through March, or 12 percent below the $23.8 billion analysts were anticipating, according to Gregg Moskowitz, an analyst with Cowen & Co.
Part of the expected weakness is the result of temporary factors. A stronger U.S. dollar is eating into the profit Microsoft earns abroad, and the virtuous cycle of computer users buying Windows and Office to upgrade from the no-longer-supported Windows XP has come to a halt.
But DiFucci says Microsoft’s outlook is so weak that it indicates ongoing struggles at the company’s core businesses. The personal computer market is lethargic. Microsoft itself highlighted the struggles of its units in Japan and China. And the transition of Microsoft’s money making toward cloud-computing units is squeezing profits as users opt for cheaper subscription-based services.
Companies with sophisticated investor relations departments like Microsoft’s make a habit of managing expectations. It’s common for companies to lean conservative in their sales estimates so that investors are pleasantly surprised should the company’s actual results hurdle that lowered bar.
Microsoft’s “forecasts appear very conservative,” DiFucci said. “Maybe they are…and maybe they aren’t.”
Tuesday’s decline was the biggest one-day slump for Microsoft shares since July 19, 2013. Then, shares tumbled 11.4 percent after a quarterly earnings report showed the hit from weak personal computer sales and a $900 million cut to the value of unsold inventory of the first generation Surface tablet.