Microsoft Shares Sink as AI Spending Hits Record High
Synopsis
Microsoft said capital spending rose to a record $37.5 billion in the latest quarter, an increase of 66 per cent from last year, but Azure cloud revenue growth of 39 per cent just edged past analyst estimates, and its shares fell by 6.5 per cent after hours. The big AI bets left some investors worried about the return on investment from the OpenAI deal. Revenue as a whole rose 17% to $81.3 billion, and the company said it expects continuing Azure growth of 37-38 percent in the next quarter. Over-dependence on OpenAI to drive cloud backlog growth increases risk, especially as Gemini competition from Google is increasing.
Microsoft’s capital spending rose to a record $37.5 billion in the latest quarter, up 66% from last year, but growth in revenue at its Azure cloud service barely exceeded Wall Street estimates, causing shares to fall 6.5% in after-hours trading. The AI spending spree frustrated investors who were expecting greater dividends from huge investments in artificial intelligence such as the OpenAI partnership with Tesla. Azure expanded 39 per cent at constant currency, barely edging out a 38.8 per cent projection
The tech giant, which is based in Redmond, Wash., said that revenue at its Azure cloud division increased 39% from a year ago in the October-December period, its fiscal second quarter. That narrowly beat a consensus estimate of 38.86%, a slim margin that was enough to disappoint investors betting on more flashy results from the company’s heavy AI investments. In the second quarter, total revenue increased 17% to $81.3 billion; analysts had forecast sales of $80.27 billion.
The Windows creator has had a first-mover advantage for years in Big Tech’s AI race, due to its early bet on OpenAI. Microsoft owns a 27 per cent interest in the maker of ChatGPT, and recapitalisation by the company last year lifted Microsoft’s overall earnings after an adjustment in how to report its stake.
Heavy Reliance on OpenAI Partnership
About 45% of Microsoft’s remaining performance obligation came from OpenAI alone, highlighting how dependent it is on the start-up, which has committed to spending $1.4 trillion on AI and has offered little information about how it plans to finance that spending. Microsoft added that without OpenAI, its cloud backlog increased by 28 per cent even as it counted a $30 billion deal with
Growing Competition Threatens AI Leadership
The strong acceptance of Google’s recent Gemini model, and the emergence of independent agents like Anthropic’s Claude Cowork have threatened not just Microsoft’s AI business but also its traditional software products that have been at its core. Competition has also weighed on Microsoft’s stock as investors have doubted whether Big Tech will ever deliver enough returns to justify the enormous AI spending.
For the current fiscal third quarter, Microsoft projected total sales within a range that had a midpoint of $81.2 billion, which matched the projections among analysts for $81.19 billion. Although the forecasts technically exceeded expectations, the relatively incremental increases were not enough to thrill investors who have been fueling interest in the stock as part of a broader gold rush into anything associated with AI.
Capital Expenditure Concerns Mount
Microsoft's capital spending in the most recent quarter totaled $37.5 billion, an increase of almost 66 per cent from a year ago and with about two-thirds spent on computer chips. That number topped market expectations of $34.31 billion, and reignited concerns about whether the company is receiving sufficient returns from such colossal spending on infrastructure and equipment.
“Capital expenditures will be “a little bit lower” than the just-completed quarter though higher over time since memory chips are becoming more expensive,” said Amy Hood, the chief financial officer at Microsoft. That caution signals that profit margins may come under pressure despite the ongoing growth in sales, further darkening investors’ questions about whether existing tax and spending levels are likely sustainable.
Big Tech AI Spending Spree
The big four are likely to spend over $500 billion on AI this year, collectively. The sum underscores an industrywide belief that artificial intelligence will be the next big thing, and not just for chip makers like Intel or Qualcomm. But investors are getting restless, tired of waiting for those investments to translate into comparably more revenue and profit growth.
Microsoft said that the contracted backlog in its cloud business more than doubled to $625 billion. In another sign that the company is winning big contracts, the figure was above what cloud rival Oracle announced in December: $523 billion. But the heavy skew in that backlog toward OpenAI introduces risk if that partnership cools or if the startup runs into financial problems or operational struggles.
Market Reaction and Valuation Concerns
The 6.5% plunge in the price of Microsoft shares in after-hours trading suggests that investors were disappointed that such aggressive capital spending hasn’t yet translated into markedly better revenue growth. And with AI hype at a fever pitch, investors wanted Microsoft to provide even clearer signs that its early bet on OpenAI and investments in building out the necessary infrastructure were paying off in spades.
The lacklustre response to what were, technically, better-than-expected results indicates the market’s priced in ardent growth expectations that even good business performances can’t live up to. With rivals including Google, Anthropic and others pressing for an advantage, Microsoft is under pressure to show that the massive spending spree on AI can yield returns.
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