Investors reacted sharply after Microsoft revealed record artificial intelligence spending alongside slower cloud growth, raising doubts about when returns will materialise. The company said it invested heavily in AI during its fiscal second quarter, but the results failed to fully meet market expectations tied to its long standing partnership with OpenAI.
Microsoft shares fell 6.5% in after market trading after the results were released. Total revenue rose 17% to $81.3 billion, above estimates of $80.27 billion. Azure cloud revenue grew 39% during the October to December quarter, narrowly beating expectations of 38.8%. For the current quarter, Microsoft forecast Azure growth of 37% to 38% and total sales around $81.2 billion, broadly in line with estimates. However, investors remained uneasy as costs rose faster than revenue. As one fund manager said, “One big obvious issue is that revenues are up 17% and the cost of revenues are up 19%. So if that is a new long-term trend, that is one of my concerns.”
The company disclosed that capital spending reached $37.5 billion in the quarter, up nearly 66% from last year, with around 66% directed toward computing chips. Microsoft has now spent more than $200 billion on AI since the start of fiscal 2024. Chief Financial Officer Amy Hood said spending will ease slightly next quarter but warned that higher memory chip costs could pressure cloud margins over time. Microsoft also reported that its cloud contracted backlog more than doubled to $625 billion, exceeding a major rival’s $523 billion figure. Excluding OpenAI, cloud backlog grew 28%, even after including a $30 billion deal with another AI partner.
CEO Satya Nadella said AI remains in the “early innings” and revealed for the first time that Microsoft has 15 million annual users of its $30 per month M365 Copilot assistant. He said much of the AI investment supports Microsoft’s own profitable products, adding, “We want to be able to allocate capacity while we’re supply constrained in a way that allow us to essentially build the best (lifetime value) portfolio.” Still, reliance on OpenAI remains high, with about 45% of remaining performance obligations tied to the startup, which has pledged roughly $1.4 trillion in AI spending while also gaining freedom to pursue other cloud partners.
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