Microsoft forecast quarterly growth for its Azure cloud platform below estimates on Tuesday and said its capital spending would increase this fiscal year, in another sign that the payoff on big AI investments may take longer than first thought.
Shares fell 7% after the company gave the spending forecast on a call with analysts, but quickly pared losses to trade up 3% after it said Azure growth would accelerate in the second half of fiscal 2025.
Microsoft — widely seen as the front-runner in the race to monetize generative artificial intelligence thanks to its tie-up with OpenAI — has invested heavily to expand its network of data centers.
He expects Azure to grow 28% to 29% on a constant currency basis in the July-September quarter, compared with estimates of 29.7%, according to Visible Alpha.
Azure revenue rose 29% in the fiscal fourth quarter ended June 30, below estimates of 30.6%.
The disappointing growth sent shares of other big tech stocks down. Amazon shares fell 3.4% and Meta Platforms fell 3% in extended trading as investors feared the billions of dollars Big Tech was spending on AI infrastructure would provide little return in the short term.
“The road does not have much patience. They see you spending billions of dollars and they want to see that amount grow in revenue,” said Daniel Morgan, senior portfolio manager at Synovus Trust, which holds shares in Microsoft.
“If these companies don’t get out of the ballpark and are much better than the valuations, then they will go under,” he added.
Microsoft shares have risen by nearly a quarter in the past 12 months. But they have lost 10% since a record high on July 5, amid a broader market selloff driven mostly by megacap stocks, following disappointing results from EV maker Tesla and Alphabet’s forecast of higher spending.
Spending by the Windows maker rose in the fourth quarter, with capital spending, including finance leases, rising 77.6% to $19 billion, a big jump from the $14 billion it recorded in the previous three months.
Brett Iversen, Microsoft’s vice president of investor relations, told Reuters the company continued to increase spending to meet “strong customer demand.”
AI services accounted for 8 percentage points of Azure’s growth in the quarter, up from 7 percentage points in the first three months of the year. Microsoft does not disclose the absolute revenue figure for Azure, the part of its business best positioned to benefit from the growing interest in AI.
“AI’s contribution continues to grow every quarter, despite there being some capacity constraints on the AI side that we mentioned in April,” Iversen said, adding that “interest and demand for AI continues to be a big driver “.
Overall, revenue from its Intelligent Cloud unit — home of the Azure cloud computing platform — rose 19% to $28.5 billion in the fourth quarter, missing analysts’ estimates of $28.68 billion, LSEG data showed.
Microsoft has said the spending was necessary to expand its global network of data centers and overcome capacity constraints that were hampering its efforts to meet AI demand.
CEO Satya Nadella has pushed the company to embrace technology across the board, weaving artificial intelligence into nearly every product, from the Bing search engine to productivity software like Word.
Much of that effort has been fueled by technology from OpenAI, which Microsoft has invested about $13 billion in, including the $30-a-month 365 Copilot assistant for enterprises that became widely available last year.
The productivity business – home to the Office suite of applications, LinkedIn and 365 Copilot – posted 11% growth, compared with expectations of 10%.
Microsoft — seen as a center for the technology industry thanks to its sprawling business — said total revenue rose 15% to $64.7 billion in the fourth quarter. Analysts had expected $64.39 billion, according to LSEG data.
Revenue from its personal computing business, which includes Windows and devices such as Xbox and Surface PCs, rose 14% to $15.9 billion as it benefited from stabilizing PC sales. The PC market grew for the second straight quarter in the April-June period, according to research firm IDC.
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