Microsoft's AI Investments Under Scrutiny as Cloud Growth Slows and Competition Intensifies

Microsoft shares slide 5% as cloud forecast, AI spending disappoint

Chinese rivals have recently claimed to produce competing AI technologies at lower costs than US rivals, sparking fears of a price war. For more than a year, Microsoft and its Big Tech peers have tested Wall Street's patience by plunking down huge amounts of cash in pursuit of profits from AI that have yet to satisfy investors.Microsoft on Wednesday forecast disappointing growth in its cloud computing business, sending its shares down 4.5% in after-hours trading as investors worry about big spending, elusive artificial intelligence revenue and competition from cheaper AI models from China. Azure results for the fiscal second quarter also fell below Wall Street expectations. Despite beating quarterly overall sales estimates, investors want better results from the hundreds of billions of dollars that Wall Street heavyweights have been spending to build AI data centers and infuse their products with the emerging technology. Chinese rivals have recently claimed to produce competing AI technologies at lower costs than US rivals, sparking fears of a price war. For more than a year, Microsoft and its Big Tech peers have tested Wall Street's patience by plunking down huge amounts of cash in pursuit of profits from AI that have yet to satisfy investors. "It's OK if that is a few years out, three to five years into the future," said Brian Mulberry, portfolio manager at Zacks Investment Management. "But we really want to start to see a clear road map to what that monetization model looks like for all of the capital that's been invested." On a conference call with investors, Chief Executive Satya Nadella said costs were coming down, with models showing 10 times better performance for the price as Microsoft irons out the algorithms. "As AI becomes more efficient and accessible, we will see exponentially more demand," Nadella said. Microsoft Chief Financial Officer Amy Hood said Azure would grow between 31% and 32% in the current fiscal third quarter, below the 33% Wall Street expects, according to data from Visible Alpha. Microsoft's Azure unit reported revenue growth of 31% in the quarter, missing Visible Alpha estimates of 31.8%. Microsoft's capital expenditures hit $22.6 billion, above analysts' consensus estimate of $20.95 billion, according to data from Visible Alpha. DeepSeek's meteoric rise in the past three weeks has sparked worries of stiff competition that could force leading US AI providers to slash prices. Microsoft said earlier on Wednesday it had added DeepSeek, the breakout Chinese AI model, to its offerings on Azure. Microsoft said AI contributed 13 percentage points of Azure's growth in its fiscal second quarter, up from 12 percentage points the previous quarter. Responding to questions from analysts, Nadella said Microsoft was spending to build out data centers to develop AI models and offer them to customers. Microsoft is working to make those services more cost efficient, he added. "We are working super hard on all the software optimizations - not just the optimizations that have come because of what DeepSeek has done, but all the work we have done to reduce the prices of GPT models over the years in partnership with OpenAI," Nadella said. "In fact, we did a lot of the work on the inference optimizations on it, and that's been key to driving it." Overall, investors still appear to view Microsoft as a leading bet on AI. Its stock has gained about 8% over the past year, trailing a 29% rally in Alphabet and a 50% surge in Amazon. It is trading at about 32 times expected earnings, slightly above its five-year average of 30, according to LSEG. Microsoft also posted 67% growth in what it calls commercial bookings, a measure of new contracts signed with large customers. Brett Iversen, Microsoft's vice president of investor relations, said that figure was mostly driven by large new Azure contracts with OpenAI. While OpenAI announced a new data center deal with Oracle last week, Microsoft still retains the rights to most of the hosting of OpenAI's models for commercial purposes. At the company's Intelligent Cloud unit, which includes the Azure platform, revenue rose to $25.54 billion, missing expectations of $25.76 billion. Total revenue rose 12% to $69.6 billion in the fiscal second quarter ended December, compared with analysts' average estimate of $68.78 billion, according to data compiled by LSEG. Redmond, Washington-based Microsoft reported a profit of $3.23 per share, beating expectations of $3.11 per share.

Microsoft's cloud growth in focus as doubts grow over AI spending

The software company became a leader in Big Tech's AI race last year by making an early investment in OpenAI, but investor concerns have been mounting about its ability to generate profit from the technology, despite planning to invest around $80 billion in capital spending this fiscal year.Microsoft has spent months touting a rebound in its Azure cloud business and its quarterly revenue forecast on Wednesday will show whether billion-dollar bets on artificial intelligence are propelling increased growth in its main profit engine. The software company emerged as a front-runner in Big Tech's AI race last year thanks to its early bet on OpenAI, but investor doubts have been growing about its ability to make money from the technology that it plans to back with about $80 billion in capital spending this fiscal year. Azure growth has slowed for two straight quarters even as the contribution of AI has been increasing and Microsoft has said a rebound would only materialize in the third quarter. Its shares underperformed most Big Tech rivals last year. The stock also fell sharply on Monday in a tech-led global selloff after Chinese startup DeepSeek launched an AI model that it said was cost-effective and ran on less-advanced chips, stirring doubts about United States' lead in the technology. Like other US companies with a large global presence, Microsoft is expected to take a hit from a strong dollar, as the greenback firmed nearly 8% in the last three months of 2024. "Investor sentiment (for Microsoft) has shifted to negative as a 'wall of worry' around gross margins, capital expenditure, generative AI monetization and the OpenAI relationship builds," Morgan Stanley analysts said in a preview note. Azure, which some analysts say accounts for around a third of Microsoft's revenue, is expected to grow 31.8% in the second quarter, slower than the 33% growth it saw in the previous three months, according to Visible Alpha. Some of the growth will come from its business with OpenAI. Despite OpenAI's move to work with Oracle on building new data centers, Microsoft still has the rights to handle almost all the traffic for both OpenAI's consumer business and its business of selling to software developers, according to representatives from Microsoft and OpenAI. That means OpenAI will pay for Azure services as its business grows. Wall Street expects Microsoft to forecast nearly 33% growth in the Azure business during the third quarter. Overall, the intelligent cloud business that houses Azure is expected to report revenue growth of 19.7% for the second quarter. Copilot pricing Doubts have also been rising about the adoption of Microsoft 365 Copilot AI assistant. After reports including a Gartner survey last year flagged tepid demand beyond pilot projects, Microsoft has been experimenting with pricing to boost uptake. It has now bundled AI features into Microsoft 365 Personal and Family plans for an extra $3 per month. Previously, users paid $20 monthly to access Copilot in apps such as Word. Enterprises still have to pay $30 a month per user for Copilot. The company has also been betting heavily on AI agents and relaunched its free Copilot for businesses as 365 Copilot Chat this month, with the ability to use AI agents - programs that need little human intervention unlike chatbots. "While the product has had some bumps - we still think a 10% penetration rate for Microsoft 365 Copilot could add well over $10 billion in revenues within 5 years," Melius Research analyst Ben Reitzes said. Microsoft's productivity and business processes unit - home to Office products, LinkedIn and 365 Copilot - is expected to report a revenue growth of 11.8% in the second quarter. More personal computing, the unit that houses Windows and Xbox, is expected to see a 2.6% decline in revenue. The results are just the second since the company in August rejigged the way it reports its businesses to align them more closely with how they are managed. That move has, analysts said, made it harder to estimate the company's performance. Overall, revenue is expected to rise 10.9% in the second quarter, slower than the 16% growth in the first quarter, according to data compiled by LSEG. Net profit is expected to increase 6.3%, weaker than the 10.7% growth in the first quarter.

Microsoft's cloud growth in focus as doubts grow over AI spending

(Reuters) - Microsoft has spent months touting a rebound in its Azure cloud business and its quarterly revenue forecast on Wednesday will show whether billion-dollar bets on artificial intelligence are propelling increased growth in its main profit engine. The software company emerged as a front-runner in Big Tech's AI race last year thanks to its early bet on OpenAI, but investor doubts have been growing about its ability to make money from the technology that it plans to back with about $80 billion in capital spending this fiscal year. Azure growth has slowed for two straight quarters even as the contribution of AI has been increasing and Microsoft has said a rebound would only materialize in the third quarter. Its shares underperformed most Big Tech rivals last year. The stock also fell sharply on Monday in a tech-led global selloff after Chinese startup DeepSeek launched an AI model that it said was cost-effective and ran on less-advanced chips, stirring doubts about United States' lead in the technology. Like other U.S. companies with a large global presence, Microsoft is expected to take a hit from a strong dollar, as the greenback firmed nearly 8% in the last three months of 2024. "Investor sentiment (for Microsoft) has shifted to negative as a 'wall of worry' around gross margins, capital expenditure, generative AI monetization and the OpenAI relationship builds," Morgan Stanley analysts said in a preview note. Azure, which some analysts say accounts for around a third of Microsoft's revenue, is expected to grow 31.8% in the second quarter, slower than the 33% growth it saw in the previous three months, according to Visible Alpha. Some of the growth will come from its business with OpenAI. Despite OpenAI's move to work with Oracle on building new data centers, Microsoft still has the rights to handle almost all the traffic for both OpenAI's consumer business and its business of selling to software developers, according to representatives from Microsoft and OpenAI. That means OpenAI will pay for Azure services as its business grows. Wall Street expects Microsoft to forecast nearly 33% growth in the Azure business during the third quarter. Overall, the intelligent cloud business that houses Azure is expected to report revenue growth of 19.7% for the second quarter. COPILOT PRICING Doubts have also been rising about the adoption of Microsoft 365 Copilot AI assistant. After reports including a Gartner survey last year flagged tepid demand beyond pilot projects, Microsoft has been experimenting with pricing to boost uptake. It has now bundled AI features into Microsoft 365 Personal and Family plans for an extra $3 per month. Previously, users paid $20 monthly to access Copilot in apps such as Word. Enterprises still have to pay $30 a month per user for Copilot. The company has also been betting heavily on AI agents and relaunched its free Copilot for businesses as 365 Copilot Chat this month, with the ability to use AI agents - programs that need little human intervention unlike chatbots. "While the product has had some bumps - we still think a 10% penetration rate for Microsoft 365 Copilot could add well over $10 billion in revenues within 5 years," Melius Research analyst Ben Reitzes said. Microsoft's productivity and business processes unit - home to Office products, LinkedIn and 365 Copilot - is expected to report a revenue growth of 11.8% in the second quarter. More personal computing, the unit that houses Windows and Xbox, is expected to see a 2.6% decline in revenue. The results are just the second since the company in August rejigged the way it reports its businesses to align them more closely with how they are managed. That move has, analysts said, made it harder to estimate the company's performance. Overall, revenue is expected to rise 10.9% in the second quarter, slower than the 16% growth in the first quarter, according to data compiled by LSEG. Net profit is expected to increase 6.3%, weaker than the 10.7% growth in the first quarter. (Reporting by Aditya Soni in Bengaluru; Editing by Shounak Dasgupta)

Microsoft beats earnings expectations on demand for AI

Starbucks just cut its menu down to size. It's not what you think The company reported revenues of $69.6 billion for the second quarter of fiscal year 2025 -- a 12% increase year over year. Microsoft reported earnings per share of $3.23 and net income of $24.1 billion. Microsoft was expected to report revenues of $68.9 billion for the quarter ended in December, according to analysts' estimates compiled by FactSet. Net income was estimated to be $23.3 billion, while earnings per share was expected at $3.11. First quarter revenue guidance will be announced during the company's earnings call and is expected to be $69.8 billion, according to FactSet. The company's shares were down by around 3% in after-hours trading Wednesday, after closing down by about 1%. Microsoft's stock is up by almost 5% so far this year. "We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead," Microsoft chief executive Satya Nadella said in a statement. "Already, our AI business has surpassed an annual revenue run rate of $13 billion, up 175% year-over-year." Last week, Microsoft joined a slew of tech companies -- including its longstanding partner, OpenAI -- on a $500 billion artificial intelligence infrastructure project called Stargate. Microsoft is one of the project's "key technology partners," OpenAI said. The project builds upon Microsoft and OpenAI's relationship, the startup said, adding that it plans to continue increasing its use of Microsoft's Azure cloud computing service alongside "additional compute" from Stargate. However, a new agreement with OpenAI "includes changes to the exclusivity on new capacity," Microsoft said and will follow a model where the tech giant has the right of first refusal. "To further support OpenAI, Microsoft has approved OpenAI's ability to build additional capacity, primarily for research and training of models," the company said. Meanwhile, Microsoft and OpenAI are looking into whether a group associated with the Chinese AI startup DeepSeek obtained data output from OpenAI's AI models in violation of the startup's terms of service, Bloomberg reported, citing unnamed people familiar with the matter. Microsoft's security team reportedly noticed unusual activity of individuals accessing large amounts of data through OpenAI's application programming interface, or API, last fall. Earlier this week, Nasdaq, Dow Jones Industrial Average, and S&P 500 futures fell after the release of DeepSeek-R1 on Jan. 20. Investors were spooked by the launch of DeepSeek's reasoning AI models, which followed the December release of DeepSeek-V3, a model DeepSeek said cost just $5.6 million to develop and train on Nvidia's (NVDA-5.05%) reduced-capability H800 chips.

Microsoft hit as AI spending in sharp focus after DeepSeek market shock

Shares in Microsoft have fallen sharply after investment spending came in higher than expected in its latest results, released just days after the DeepSeek market shock for tech stocks. The company, which has received reprimands from shareholders previously over AI related bills, had let it be known that it expected to spend $80bn this year alone ahead of its earnings reports on Wednesday night. That AI spending forecast came before Monday's rout for AI-linked stocks that saw the leading AI chipmaker Nvidia suffer the worst one day loss in history, with almost $600m erased from its market value. Money latest: Ryanair boss launches blistering attack on chancellor While it has since clawed back some of those losses, it has left investors pondering whether the levels of investment planned by big US tech is completely necessary. It's all a consequence of the emergence of DeepSeek - the Chinese-owned and developed chatbot currently sitting atop Apple's app store free downloads. DeepSeek's claims to have created the assistant on a shoestring budget - when compared to the vast US investment - forced US tech investors to not only question the huge sums involved but also the lofty market values of exposed firms. Ahead of Monday's market reaction that saw constituents of the Nasdaq bleed a combined total above €1trn, there had been an 18 month stampede for AI-linked shares. Microsoft was among those to benefit in that time and among those to face pressure on Monday. The company, a major shareholder in privately-owned OpenAI, lost $7bn in market value. Read more from Sky News: Lloyds to cut 136 group branches Chancellor backs Heathrow third runway Post Office unveils new wave of cuts Analysts said that Microsoft's latest share price pain was related to slower-than-expected growth in its crucial Azure cloud business between October-December. But capital expenditure was also $1.6bn higher than consensus forecasts. Just hours earlier, the company announced that it had added DeepSeek's model to its offerings on Azure. Shares were up to 4% lower in after-hours trading despite both group revenue and profits beating estimates.