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Microsoft has become the latest Silicon Valley giant to be punished by investors amid a surge in artificial intelligence spending, as its shares moved lower after its quarterly earnings failed to meet Wall Street’s lofty expectations.
The disappointment in the face of double-digit sales and earnings growth highlighted the intense scrutiny being placed on the fast-developing technology and its perceived importance for bolstering Big Tech’s fortunes.
Despite continued strong sales at Microsoft’s closely watched cloud division, the Seattle-based company said on Tuesday that Azure growth had slowed slightly during the three months to June 30 to 29 per cent year on year, down from 31 per cent in the previous quarter. Microsoft said this was due in part to demand for AI outstripping its capacity.
Those “capacity constraints” were expected to persist into the first half of 2025, chief financial officer Amy Hood said. Azure growth is expected to keep slowing, to between 28-29 per cent in the current quarter.
Sales in the broader cloud business — Microsoft’s biggest revenue driver, which includes its Azure cloud computing platform — rose 19 per cent from a year ago to $28.5bn, just missing Wall Street forecasts of $28.7bn. The company estimated that revenue in the division for the present quarter would be between $28.6bn-$28.9bn, below analyst forecasts of $29.1bn, according to Refinitiv.
Investors have been closely tracking Microsoft’s fortunes as they look to see whether Big Tech can convert bubbling excitement about new cloud-hosted AI software into sales and profits. Its $13bn partnership with OpenAI, the start-up behind ChatGPT, has propelled it into an early lead in the race to win customers for new generative AI services.
Analysts are also clamouring for signs that the eye-watering investments being channelled into AI infrastructure, including data centres and chips, will pay off.
Microsoft’s capital expenditures ballooned by almost 80 per cent year on year to $19bn in the past quarter. For the full 2024 fiscal year the total reached $55.7bn, and Microsoft warned that spending would continue to rise next year.
But chief executive Satya Nadella defended the heavy spending, saying it was crucial to “capture the opportunity” presented by AI.
Microsoft shares sank as much as 8 per cent in after-hours trading, before clawing back some of those losses. It dragged down other tech stocks including Amazon and Meta, both of which are due to report earnings later this week.
The correction comes after a blistering rally over the past month that lifted Microsoft’s market value to more than $3tn.
The after-hours fall echoed the negative reaction last week to a doubling in Google’s capex spending, which weighed on tech stocks across the sector.
“Expectations had gotten so high that its becoming impossible to beat them,” said Steve Sosnick, chief investment strategist at Interactive Brokers. “This is what happens when you become very dependent on large companies with a huge footprint — and a technology that is going to take time to translate to the bottom line.”
AI’s contribution to Azure cloud growth continued to tick up in the latest quarter, accounting for 8 percentage points compared with 7 in the last quarter and 6 in the quarter before that, the company said. Ahead of Tuesday’s results, analysts at Deutsche Bank estimated AI would contribute about 8-9 percentage points.
Microsoft has so far not disclosed sales or customer numbers for its flagship Copilot AI assistant, which integrates with its suite of productivity apps and is priced at $30 per user a month for businesses.
Nadella said on Tuesday that the number of Copilot customers with more than 10,000 “seats”, or individual users, had “more than doubled quarter over quarter”.
Microsoft has struggled recently with some high-profile problems that have affected its core software products. An Azure outage earlier on Tuesday came just days after a faulty update to cyber security group CrowdStrike’s software caused millions of Windows devices globally to become unresponsive, which led to crippling problems for airlines, healthcare systems and others.
Overall revenue rose 15 per cent from the previous year to $64.7bn, beating expectations for $64.4bn. Net income was up 10 per cent to $22bn, ahead of analysts’ forecasts for $21.8bn.
Additional reporting by Jennifer Hughes
