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Rising AI costs and slower Azure growth raise investor concerns over Microsoft’s margins, returns, and long-term payoff from AI investments.
The investors are concerned about Microsoft Corp.'s aggressive AI effort after the company disclosed record capital expenditures and slow cloud growth, highlighting growing investor concerns about AI return on investment and short-term impact on margins. In the fiscal second quarter, capital investment increased 66% year over year to $37.5 billion, exceeding expert estimates of $36.2 billion. Growth at Microsoft's Azure cloud division is slowing. Azure’s revenue increased by 38%, which was slower than the previous quarter but still met the expectations. Microsoft predicted that Azure will increase by 37% to 38% in the current quarter.
After closing at $481.63 in New York, Microsoft shares dropped around 7% in after-hours trade, indicating a strong response to the company's earnings. The growing gap between increasing capital expenditures and short-term revenue growth was highlighted by analysts. Investor concerns about the returns on AI spending were reflected in Morgan Stanley analyst Keith Weiss' statement, "Cap expenditure is growing faster than expected, while Azure is growing a bit slower." A significant amount of the extra cloud capacity is being used internally to support the growth of M365 Copilot enterprise adoption, according to Chief Financial Officer Amy Hood. She pointed out that claimed cloud growth would have been larger if the capacity had been assigned only to Azure customers.
Microsoft continued to perform well overall despite all of these worries. With profits from its OpenAI investment, quarterly revenue increased 17% to $81.3 billion and earnings hit $5.16 per share. In addition, the business revealed a $625 billion backlog, of which almost half was related to OpenAI, supporting predictions for the enterprise AI software industry. Investors are balancing Big Tech AI spending against profits as Alphabet and Amazon get ready to release their earnings. Microsoft's approach is simple, in order to maintain its leadership in the future of cloud and AI integration and to shape the software market, it has to accept higher costs now.
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