Microsoft yesterday cut its quarterly growth forecast for its cloud platform Azure and simultaneously reported a significant increase in capital expenditures, which analysts believe is another sign that the company’s massive AI investments may take much longer to pay off than previously thought. Microsoft’s shares fell 7% in response to the announcement, but then rebounded 4% after forecasting Azure growth in the second half of fiscal 2025.
Microsoft is a leader in generative AI thanks to its partnership with OpenAI and is investing heavily in expanding its data center network. Experts estimate that Azure growth will be in the range of 28% to 29% in the third quarter of 2024, down from the previous forecast of 29.7%. Azure revenue in the fourth fiscal quarter of 2023, which ended June 30, grew 29%, compared with the forecast of 30.6%.
Image source: Microsoft
The disappointing performance weighed on other major tech stocks, with Amazon falling 3.4% and Meta✴ — by 3%, as investors fear that billions of dollars spent on AI infrastructure will not yield the expected returns in the short term.
“Wall Street doesn’t have a lot of patience. They see you’re spending billions of dollars, and they want to see that amount of revenue grow,” said Daniel Morgan, a senior portfolio manager at Synovus Trust, which owns Microsoft shares. “If these companies don’t beat expectations and do much better than expected, they’re going to get pushed back.”
Microsoft shares have risen nearly 25% over the past 12 months but have quickly lost 10% from their July 5 record high amid worsening AI payback forecasts, disappointing results from electric car maker Tesla and Alphabet’s forecast of higher costs.
Microsoft’s capital expenditures rose 77.6% to $19 billion in the fourth fiscal quarter of 2023. Microsoft vice president of investor relations Brett Iversen said the company continued to ramp up spending to meet “strong customer demand.” The spending was needed to expand the company’s global data center network and overcome capacity constraints that had hampered its efforts to meet demand for AI.
AI services accounted for 8 percentage points of Azure’s growth in Q2 2024, up from 7 percentage points in Q1. Microsoft doesn’t disclose absolute revenue numbers for the Azure business, which is best positioned to capitalize on growing interest in AI. “AI continues to grow each quarter, despite some of the limitations in AI capabilities that we discussed in April,” Iversen said. “Interest and demand for AI continues to be a big driver.”
Total revenue from the Intelligent Cloud division, which includes the Azure cloud computing platform, rose 19% to $28.5 billion in the fiscal fourth quarter, below analysts’ estimates of $28.68 billion. Revenue from the PC business, which includes the Xbox gaming consoles and Surface devices, rose 14% to $15.9 billion.
Microsoft has embedded AI into nearly every product, from its Bing search engine to its Office software and AI assistant 365 Copilot. Much of that is based on technology from OpenAI, a company Microsoft has invested about $13 billion in. Sales growth in its productivity division, which includes Office, LinkedIn, and 365 Copilot, was 11%, down from the expected 10%.
Microsoft’s total revenue rose 15 percent to $64.7 billion in its fourth fiscal quarter, beating analysts’ expectations of $64.39 billion.
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