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Microsoft shares fell as investors were spooked by a 66 percent rise in data center spending and slower than expected cloud growth, while profits jumped by nearly a quarter on strong demand for AI services.
The software giant’s stock slipped 6 percent in after-hours trading on Wednesday as another big jump in AI-related spending soured the market’s reaction to the record profit and revenue figures.
Adjusted net income rose 23 percent year-on-year to $30.9 billion in the three months to the end of December, beating analysts’ expectations of $28.9 billion. Revenue rose 17 percent to $81.3 billion, beating estimates of $80.3 billion.
But Microsoft’s capital spending, including finance leases, was $37.5 billion in the quarter, up from $34.9 billion in the previous three months and up 66 percent from a year earlier.
Previously, Microsoft had projected capital spending to reach $140 billion in its fiscal year ending in June.
The $3.6 trillion tech conglomerate is in a costly race with rival cloud operators including Google and Amazon to build the infrastructure needed to run advanced AI.
Meta, which also reports earnings on Wednesday, said its capital spending could rise to $135 billion this year, more than double what it spends on AI in 2025. By contrast, its stock rose as much as 10 percent after it said AI was improving ad efficacy.
“Meta talked about its plans for AI-targeted ad placement and was rewarded, while Microsoft reported good but not great Azure revenue and suffered a loss,” said Deck Mullarkey, managing director at $300 billion asset manager SLC Management.
“The path to AI revenue will remain difficult due to large-scale investment,” he said.
Microsoft Chief Executive Satya Nadella remains committed to its bet on AI, arguing that the historic spend will be justified as the technology is adopted by businesses, with demand for its Azure cloud computing services still exceeding supply.
The company is integrating AI into its Office enterprise software – hoping the productivity gains will allow it to charge more and improve margins. It is also trying to build a consumer Copilot AI app to challenge Google’s Gemini and OpenAI’s ChatGPT.
“As an investor, when you think about our capital expenditures, don’t just think about Azure, think about Copilot,” Nadella said on a call with analysts. “We don’t want to maximize just one of our businesses. We want to be able to allocate capacity while we have supply constraints in a way that allows us to build the best portfolio.”
Revenue at Microsoft’s cloud division rose 26 percent from a year earlier to $51.5 billion. But Barclays analysts said shareholders were disappointed by the slow pace, as Azure reported year-on-year growth of 38 percent, one percentage point less than the previous quarter’s rate.
“We are seeing a muted response (even though) the overall numbers look very good,” he wrote. “But a lot of the focus is on Azure growth…we fear buy-side investors may have expected more.”
Microsoft is also in danger of being overly dependent on one customer, as it revealed for the first time that 45 percent of its $625 billion future cloud contracts were from OpenAI.
Chief Financial Officer Amy Hood said investors should focus on the fact that $350 billion of those contracts were for other customers spanning multiple regions around the world.
“We are more diversified than most competitors and we have a lot of confidence in that,” Hood said on the earnings call. “We will continue to be a provider of scale (of OpenAI). We’re excited to do that.”
Microsoft previously had an exclusive partnership with OpenAI, but it is parting ways with Sam Altman’s company after renegotiating its relationship with the start-up.
Rival Anthropic recently committed to buying $30 billion of Azure compute capacity. Meanwhile, Microsoft said it would invest $5 billion in Anthropic, raising $20 billion at a valuation of $350 billion.
Microsoft also reported an accounting profit of $7.6 billion in the quarter from its investment in OpenAI, which increased net income 60 percent to $38.5 billion. This reflects the increased amount of cash on the start-up’s balance sheet after several large fundraises.
Microsoft owns a 27 percent stake in the AI model builder after it reorganized from a nonprofit to a more traditional for-profit venture in October. OpenAI is pursuing a massive new funding round at a valuation of more than $750bn, giving Microsoft a huge return on its $14bn investment.
