Microsoft (NASDAQ:MSFT) shares were down, albeit modestly, on Thursday following Wednesday’s post-close earnings release of the software giant’s fiscal second-quarter. Although per-share earnings topped expectations, revenue fell short of analyst estimates. As of this writing, Microsoft stock is off by roughly 2%.

At the heart of investors’ concern was an apparent slowdown in sales growth for its increasingly important cloud computing arm, its Azure platform in particular.

Analysts (and most investors for that matter) were largely split on whether the small setback was an omen or an opportunity. Largely lost in those discussions was the fact that growth — revenue as well as earnings — remains impressive. The only thing truly wrong with the company last quarter may have been unfair and unrealistic expectations.

MSFT Earnings Recap

For the quarter ending in December, Microsoft reported revenue of $32.47 billion, up 12% year-over-year, but just shy of the $32.51 billion analysts had been modeling.

Operating earnings of $1.10 per share of Microsoft stock were well up from the 96 cents per share reported in the second fiscal quarter of 2018, and just eclipsed the $1.09 pros had projected.

The company’s cloud computing infrastructure continues to drive the bulk of its growth, even if not the bulk of its sales or profits. The Intelligent Cloud drove $9.4 billion in revenue, up 20% year-over-year, led by the 76% improvement in Azure’s revenue. That, however, was the same year-over-year growth rate reported for Azure a quarter earlier, suggesting its penetration of the cloud market was slowing.

Productivity and Business Processes revenue was up 13%, to $10.1 billion, while the company’s Personal Computing division – where revenue from Windows and the Xbox are reported – saw sales grow 7% to $13.0 billion.

LinkedIn’s revenue, which is part of the Productivity and Business Processes division, drive revenue growth of 29%, further validating the 2016 acquisition of the professional networking website.

CFO Amy Hood commented “Our solid execution delivered another strong quarter, with commercial cloud revenue growing 48% year-over-year to $9.0 billion,” adding “We continue to make strategic investments to capture expanding market opportunities to drive growth across our businesses.”

Perspective

The concern that sent Microsoft stock slightly lower after Wednesday afternoon’s report is understandable, though may be rooted in misunderstanding.

While it is true that the year-over-year growth rates for Azure are falling, in many regards the company may be a victim of its own success on that front. The more revenue its cloud computing arm produces, the larger future baseline comparison numbers become, making the growth-rate calculation’s decline purely a mathematical phenomenon. On an absolute basis, Azure may be adding new revenue at around the same pace it has for the past several quarters.

That’s not to suggest there is no limit to the company’s cloud potential, absolutely or relatively. Amazon.com (NASDAQ:AMZN), as well as Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL), continue to carve out a share of the same market by offering differentiated options to institutional customers.

Even then though, Microsoft is picking up steam within the cloud arena. Hood explained if this division during the earnings call “Commercial bookings were strong, growing 18 percent and 22 percent in constant currency, driven by solid renewal execution and an increase in the number of larger longer-term Azure contracts.”

Some of Thursday’s weakness, however, may also be rooted in the unusually strong performance of MSFT stock that’s been unwinding since October.

It’s been one of the leading stocks of late, forging an uninterrupted 128% gain between July of 2016 and the peak near $114 made late last year. The price appreciation reflects the company’s revenue growth, but largely outpaced that revenue (and earnings) growth. Valued at a trailing P/E of around 27 at October’s highs, investors began to slowly dial back their expectations.

At a forward-looking P/E of 20.7, it’s closer to long-term norms, though such a valuation still leaves room for downside.

Looking Ahead for Microsoft Stock

As of the most recent look, analysts were looking for full-year earnings of $4.44 per share of Microsoft stock on revenue of $124.4 billion. Both figures would be solidly up from the prior year’s numbers. It’s not getting the year started on the most encouraging foot, however. The company offered Q3 revenue guidance of $29.75 billion, coming up short of the consensus of $29.9 billion.

Still, most analysts remain broadly bullish. UBS analyst Jennifer Swanson Lowe noted after the lackluster results and outlook were posted “We see cloud (computing) as the key driver for Microsoft’s (price/earnings) multiple, revenue, and increasingly, profits, providing a growth engine that should persist even in a slower IT (information technology) budget growth environment.”

Despite the revenue miss, the top and bottom lines continue to grow nicely.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities. You can follow him on Twitter, at @jbrumley.