Microsoft’s ambitious investments in artificial intelligence (AI) provided little relief for its stock performance, which dropped over 7% in after-hours trading following a disappointing earnings report. The primary concern? Slower-than-expected growth in its Azure cloud business.
Azure, a key driver of Microsoft’s AI and cloud strategy, grew by 29% this quarter—falling short of Wall Street’s 30.1% forecast. The company’s Intelligent Cloud division, including Azure, reported revenues of $28.5 billion, slightly below analysts’ expectations of $28.69 billion. Nevertheless, Microsoft’s total revenue climbed 15% year-over-year, surpassing projections.
Microsoft has positioned itself as a leader in the AI space, most notably through its $13 billion investment in OpenAI, the developer of ChatGPT. The company reported that AI added eight percentage points to Azure’s revenue growth. However, the initial excitement around AI’s potential appears to be waning as investors begin questioning the long-term returns from these hefty investments—a sentiment also reflected in Alphabet’s recent earnings report.
During its earnings call, Microsoft emphasized plans to increase capital expenditure (capex) on AI infrastructure significantly in the next financial year. Capex surged by 78% in the most recent quarter, reaching $19 billion, as Microsoft focused on building infrastructure to support long-term growth. “These assets are flexible and designed for the long haul,” said Amy Hood, Microsoft’s Chief Financial Officer, adding that their impact would unfold over the next 15 years or more.
While Microsoft’s stock struggled, Nvidia emerged as a winner from the tech giant’s earnings report. Nvidia, a major supplier of chips powering AI applications, saw its stock initially fall by 7% but rebounded during after-hours trading. The continued rise in capex from companies like Microsoft suggests a sustained demand for Nvidia’s products.
With Microsoft’s AI journey still in its early stages, the company’s ability to deliver meaningful returns on its investments will remain under close scrutiny.
