Microsoft Shares Tumble as Azure Growth Slows Despite AI Boom

Microsoft's stock price took a hit after the company reported slower-than-expected growth in its Azure cloud-computing business, despite strong demand for its AI products, as reported by Bloomberg.

Azure is projected to grow by as much as 32% in the current quarter, a marginal increase from the last three months of 2024. This news sent Microsoft shares down approximately 5% in extended trading.

Microsoft's AI products, driven by its partnership with OpenAI, the creator of ChatGPT, have seen significant success. The company has introduced a wave of Copilot-branded AI assistants, but monetizing these products is proving to be a challenge for investors.

While Microsoft reported a 157% increase in Azure AI services revenue, overall cloud sales are being hampered by insufficient data center capacity to meet customer demand, according to Chief Financial Officer Amy Hood. She told investors that the capacity constraints are expected to ease by the end of the fiscal year.

The company has a substantial backlog of commercial service contracts, representing almost $300 billion in future revenue, that it has yet to recognize. Despite this, demand for Microsoft's services remains robust, with commercial bookings—a measure of future revenue—surging by 67%, significantly exceeding the company's expectations. Hood attributed this partly to Azure commitments from OpenAI.

Microsoft, along with its cloud competitors Google and Amazon, is making unprecedented investments in the chips and data centers required to support the power-hungry AI services. The company has previously stated that it expects to spend $80 billion this fiscal year on AI data centers. However, these massive expenditures have raised concerns among Wall Street analysts, particularly after the emergence of DeepSeek, a Chinese company that has released an open-source AI model claiming to rival US technology at a fraction of the cost.

Microsoft's capital expenditures in the last quarter reached $22.6 billion, exceeding analyst expectations of around $21 billion. This significant infrastructure buildout resulted in narrower margins in the cloud business.

Despite the challenges, Microsoft's overall performance remains strong. Total revenue for the three months ending December 31st increased by 12% to $69.6 billion, exceeding analyst estimates of $68.9 billion. Profit for the quarter also surpassed expectations, reaching $3.23 per share compared to the projected $3.12.