Microsoft Spending Soars on AI, But Cloud Growth Disappoints as Shares Slide

Microsoft reported record spending on artificial intelligence in its latest quarter, but slower-than-expected cloud growth rattled investors, sending shares sharply lower in after-hours trading.

The software giant said capital spending hit an all-time high as it ramps up AI infrastructure, while revenue growth in its cloud business failed to deliver the strong payoff markets were hoping for from Microsoft’s massive investment push and its landmark partnership with OpenAI.Microsoft stock fell 6.5% in after-market trading following the release of its fiscal second-quarter results.

Big AI Bets, Growing Investor Anxiety

Microsoft has positioned its early alliance with OpenAI as a major competitive edge in the AI race. That relationship, once seen as a clear advantage, is now drawing more scrutiny as rivals such as Google gain traction with their own AI models, including Gemini, which has attracted major customers like Apple.On its earnings call, Microsoft executives urged investors to judge its AI progress not only by cloud revenue but also by the growing adoption of its own AI products. For the first time, the company disclosed usage figures for its flagship business AI assistant, Copilot.CEO Satya Nadella stressed that AI is still in the “early innings,” but Microsoft has now spent more than $200 billion on AI since the start of fiscal 2024 — testing investor patience.

“One big obvious issue is that revenues are up 17%, while the cost of revenues are up 19%,” said Eric Clark, portfolio manager of the LOGO ETF. “If that becomes a long-term trend, that’s a concern.”

Azure Growth Just Beats Estimates

Revenue at Microsoft’s Azure cloud unit grew 39% in the October-December quarter, narrowly topping consensus estimates of 38.8%, according to Visible Alpha.Looking ahead, Microsoft forecast Azure growth of 37% to 38% for the current quarter, slightly above analyst expectations. Overall revenue guidance was largely in line with Wall Street forecasts.

Rising Costs and Margin Pressure

Chief Financial Officer Amy Hood said capital spending will ease slightly next quarter, but warned that rising memory chip costs could weigh on cloud margins over time. Microsoft spent $37.5 billion on capital expenditures during the quarter up nearly 66% from a year earlier — with about two-thirds going toward computing chips. That exceeded market estimates and highlighted how aggressively the company is building out AI capacity.

Copilot Adoption Revealed

Nadella also revealed that Microsoft now has 15 million annual users of M365 Copilot, its $30-per-month AI assistant for business customers. The figure excludes users of more limited AI chat features. He said much of Microsoft’s AI spending is tied to its own long-term, historically profitable products.

“We want to allocate capacity while we’re supply-constrained in a way that allows us to build the best lifetime value portfolio,” Nadella told analysts.

OpenAI Dependence Raises Questions

Microsoft’s cloud backlog more than doubled to $625 billion, topping rival Oracle’s figure. However, about 45% of Microsoft’s remaining performance obligations were tied to OpenAI, highlighting how dependent the company has become on the startup.While OpenAI has pledged massive future AI spending, recent restructuring also allows it to pursue cloud deals with other providers — potentially reducing its reliance on Microsoft.

Industry-Wide AI Spending Surge

Microsoft is not alone in its massive AI push. Along with Alphabet, Meta, and Amazon, the group is expected to spend more than $500 billion on AI this year.Despite solid revenue growth total sales rose 17% to $81.3 billion, beating expectations — investor concerns are mounting over whether Big Tech’s enormous AI investments will deliver returns fast enough to justify the spending.