Microsoft on Tuesday said it expects lower-than-expected quarterly growth for its Azure cloud platform and that capital spending will rise this fiscal year, another sign that the payback on its big AI investments may take longer than initially thought.
Shares fell 7% after the company gave its spending outlook on a conference call with analysts, but quickly pared losses and traded down 3% after it said Azure growth would accelerate in the second half of fiscal 2025.
Microsoft is widely seen as a leader in the race to profit from generative artificial intelligence, thanks to its partnership with OpenAI, and is investing heavily in expanding its network of data centers.
Visible Alpha said it now expects Azure’s growth rate to be 28% to 29% in the July-September quarter excluding the impact of currency fluctuations, beating its forecast of 29.7%.
Azure revenue grew 29% in the fourth quarter ended June 30, below expectations of a 30.6% increase.
The disappointing growth dragged other big tech stocks down. Amazon shares fell 3.4% and Meta Platforms shares fell 3% in extended trading as investors worried that the billions of dollars big tech companies are pouring into AI infrastructure will provide little benefit in the near term.
“The market isn’t very patient. They see billions of dollars being spent and they want to see revenue growth on that amount,” said Daniel Morgan, senior portfolio manager at Synovus Trust, which holds Microsoft shares.
“If these companies don’t perform as well as expected and they far exceed expectations, they’re going to be hit hard,” he added.
Microsoft shares have risen nearly 25% over the past 12 months, but are down 10% from their all-time high hit on July 5 amid market-wide selling pressure, mainly from large-cap stocks, following disappointing results from electric-car maker Tesla Inc. and Alphabet Inc.’s forecast for higher spending.
The Windows maker’s spending surged in the fourth quarter, with capital expenditures, including finance leases, rising 77.6 percent to $19 billion from $14 billion in the previous quarter.
Brett Iversen, Microsoft’s vice president of investor relations, told Reuters the company continues 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 doesn’t disclose absolute revenue figures for Azure, the part of the business best positioned to take advantage of growing interest in AI.
“Despite the capacity constraints on the AI side that we noted in April, AI contributions continue to grow quarter over quarter,” Iversen said, adding that “interest in and demand for AI continues to be a major driver.”
Overall, revenue at its Intelligent Cloud division, home to the Azure cloud computing platform, rose 19% to $28.5 billion in the fourth quarter, below analysts’ expectations of $28.68 billion, according to LSEG data.
Microsoft said the spending was needed 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 go all-in on the technology, building AI into nearly every product, from the Bing search engine to productivity software like Word.
Much of this work is driven by technology from OpenAI, in which Microsoft has invested roughly $13 billion, including 365 Copilot, a business assistant that became widely available last year for $30 a month.
The productivity business, which includes the Office suite of apps, LinkedIn and 365 Copilot, grew 11% versus the expected 10%.
Microsoft, considered a tech industry bellwether for its breadth of business, said its total fourth-quarter sales rose 15 percent to $64.7 billion. Analysts were expecting $64.39 billion, according to LSEG data.
Revenue from the company’s personal computing business, which includes Windows, Xbox, Surface and other devices, rose 14% to $15.9 billion, benefiting from stabilizing PC sales, which grew for the second straight quarter in the April-June period, according to research firm IDC.
