Microsoft has forecast an uptick in spending on artificial intelligence (AI) for the current quarter, paired with a slowdown in growth for its cloud platform, Azure. This development suggests that substantial AI investments alone cannot offset the capacity challenges faced by its data centers.
Following this announcement, shares of the Redmond, Washington-based tech giant fell 3.6% in after-hours trading, reversing earlier gains. Nevertheless, Microsoft exceeded Wall Street expectations for revenue and profit in its first-quarter results.
Meta, the parent company of Facebook, also reported earnings that surpassed analysts’ projections but cautioned about a notable rise in infrastructure costs related to AI. This warning led to a decline of 3.1% in its share price during after-market trading.
Brett Iversen, Microsoft’s vice president for investor relations, confirmed that the company might not resolve its AI capacity limitations until the latter half of its fiscal year.
For the upcoming second quarter, Microsoft predicts Azure revenue growth of 31% to 32%, which falls short of the 32.25% anticipated by analysts surveyed by Visible Alpha. Azure revenue increased by 33% in the fiscal first quarter that concluded on September 30, slightly outpacing projections.
AI accounted for 12 percentage points of Azure’s growth in the first quarter, compared to 11 percentage points in the previous quarter.
The tech giant has been investing heavily in its AI infrastructure and expanding its data center operations. In the latest quarter, Microsoft reported capital expenditures climbing by 5.3% to reach $20 billion, up from $19 billion in the previous quarter, exceeding the estimated $19.23 billion from Visible Alpha.
This significant investment has raised concerns among some investors regarding its sustainability.
This fiscal year, which commenced in July, Microsoft is projected to spend over $80 billion based on analyst estimates from Visible Alpha, an increase of more than $30 billion compared to the previous year.
“Microsoft is escalating a CapEx war that it may not be able to win. That level of investment is very high; it has created a substantial burden on free cash flow and will significantly affect margins going forward,” stated Gil Luria, head of technology research at D.A. Davidson.
Meanwhile, Microsoft’s competitor Google appears to be thriving from AI advancements. Alphabet announced on Tuesday that AI contributed to a 35% surge in its cloud business. Shares in Alphabet rose over 2.8% on Wednesday before finishing down 0.4% after hours.
OpenAI Partnership
The quarterly results mark the first for Microsoft since it restructured its reporting framework to better reflect its business management strategies. However, this change has complicated the assessment of quarterly performance.
Earnings per share were reported at $3.30, surpassing analysts’ average expectations of $3.10, according to LSEG data.
Revenue witnessed a 16% increase to $65.6 billion in the fiscal first quarter ending in September, compared to the anticipated $64.5 billion from analysts, as per LSEG.
Microsoft is recognized as a frontrunner in the AI sector among major tech companies, bolstered by its exclusive collaboration with OpenAI, the organization behind ChatGPT. Customers utilizing Azure have access to OpenAI’s latest models capable of tackling complex math, science, and coding queries.
Moreover, Microsoft benefits from early access to integrate OpenAI’s technologies into its various product offerings, including Bing and enterprise applications like Excel and PowerPoint, though this integration has not met initial expectations.
In its productivity division, Microsoft reported revenues of $28.3 billion, which includes its Office suite, 365 Copilot, and AI-driven services.
The personal-computing segment, which encompasses Windows, Surface devices, and gaming products like Xbox, experienced a revenue boost of 17%, reaching $13.2 billion.
© Thomson Reuters 2024
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
