Even as growth in its cloud business slowed, Microsoft (MSFT.O), opened a new tab and said it would spend more money this fiscal year to expand its AI infrastructure—another indication that the reward from significant investments in the technology may take longer than Wall Street had anticipated.
Following Microsoft’s announcement on a post-earnings call that Azure cloud growth would increase in the second half of fiscal 2025, shares of the company plummeted 7% on the spending prediction, although they recovered some of those losses to trade down 4% after the bell on Tuesday.
To take advantage of the rise in generative AI, large technology corporations have been investing billions of dollars in data centers. Last Monday, Alphabet, the parent company of Google (GOOGL.O), opened a new tab and stated that its capital spending will remain high for the remainder of the year.
In its fiscal fourth quarter, which ends on June 30, Microsoft said that its capital investment increased by 77.6% to $19 billion, with almost all of the expenditures being connected to cloud and artificial intelligence. In fiscal year 2024, capital expenditures amounted to $55.7 billion.
The investment, according to Group CFO Amy Hood, is required to meet the demand for AI services, and it is going toward assets that “will be monetized over 15 years and beyond.
“Nevertheless, the Azure growth disappointed investors who had driven up Microsoft shares by over a quarter over the previous 12 months on the back of AI expectations.
Compared to forecasts of 29.7%, Microsoft estimated that the company will increase by 28% to 29% on a constant currency basis in the July-September quarter, as reported by Visible Alpha.
That came after a 29% increase in the quarter that concluded on June 30. This was slower than expected, coming in at 30.6%.”There’s not much patience on the street.
“They want to see a pickup in revenue of that amount because they see you spending billions of dollars,” stated Daniel Morgan, senior portfolio manager at Synovus Trust, a company that owns Microsoft shares.”If these companies do not hit it out of the ballpark and are far better than the estimates then they are going to be knocked back,” he said.
The June quarter saw a slowdown in Azure growth overall, but AI services contributed more to the revenue gain (8 percentage points) than they did the prior quarter (7 percentage points).
The portion of the business that is most positioned to benefit from the growing interest in artificial intelligence, Azure, does not disclose its exact revenue amount.
According to CEO Satya Nadella, the average spend per client is still rising, and Azure AI is currently utilized by over 60,000 customers—a roughly 60% increase from the previous year.
Nadella has encouraged the business to fully embrace the technology, integrating AI into practically every product, including word processing programs like Word and the search engine Bing.
The 365 Copilot assistant for businesses and other technologies from OpenAI, in which Microsoft has spent roughly $13 billion, has powered a significant portion of those initiatives.
The productivity division, which is home to 365 Copilot, LinkedIn, and the Office app suite, reported growth of 11% versus forecasts of 10%.
According to LSEG statistics, revenue from its Intelligent Cloud division, which houses the Azure cloud computing platform, increased 19% to $28.5 billion in the fourth quarter, falling short of analysts’ projections of $28.68 billion.
Because of its extensive operations, Microsoft is regarded as a bellwether for the tech industry. The company said that its overall sales increased by 15% to $64.7 billion in the fourth quarter. Per LSEG statistics, analysts had projected $64.39 billion.
Microsoft profited from stable personal computer sales, which led to a 14% increase in revenue from its computing business, which includes Windows and products like the Xbox and Surface PCs. According to research firm IDC, the PC market expanded in the April–June period for the second consecutive quarter.
