Microsoft’s forecast for Azure’s quarterly growth fell below estimates, leading to a stock drop and raising concerns over AI investment returns, despite plans for accelerated growth in fiscal 2025. The company continues heavy spending to expand its data centers and integrate AI across its products.
31 July 2024 – Microsoft has forecasted quarterly growth for its Azure cloud platform below market expectations and announced increased capital spending for the fiscal year, signaling that returns on substantial AI investments may take longer than anticipated. Following the spending forecast shared during an analyst call, Microsoft’s shares dropped by 7%, later recovering to a 3% decline after it projected accelerated Azure growth in the second half of fiscal 2025.
Widely considered a leader in monetizing generative artificial intelligence due to its partnership with OpenAI, Microsoft has been heavily investing in expanding its data center network. The company predicted Azure growth of 28% to 29% for the July-September quarter, slightly below the 29.7% estimate from Visible Alpha. Azure’s revenue increased by 29% in the fiscal fourth quarter ending June 30, falling short of the 30.6% expectation. This shortfall affected other major tech stocks, with Amazon.com and Meta Platforms experiencing declines in extended trading as investor concerns over AI infrastructure investments grew.
“The street lacks patience. Investors see significant spending and expect proportional revenue increases,” stated Daniel Morgan, senior portfolio manager at Synovus Trust, a Microsoft shareholder. “Failure to significantly exceed estimates will result in setbacks,” he added.
Over the past 12 months, Microsoft’s shares have risen by nearly 25%, though they have dropped 10% since hitting a record high on July 5, amidst a broader market downturn influenced by disappointing results from Tesla and higher expenditure forecasts from Alphabet. Microsoft’s capital expenditures surged 77.6% to $19 billion in the fourth quarter, up from $14 billion in the previous quarter.
Brett Iversen, Microsoft’s vice president of investor relations, told Reuters that the company is ramping up spending to meet “strong customer demand.” AI services contributed 8 percentage points to Azure’s growth in the quarter, up from 7 points in the first quarter. Iversen noted, “AI interest and demand continue to drive growth despite capacity constraints.”
Revenue from Microsoft’s Intelligent Cloud unit, which includes Azure, rose 19% to $28.5 billion in the fourth quarter, slightly missing the $28.68 billion analyst estimate. Microsoft emphasized that increased spending was essential for expanding its global data center network and overcoming capacity issues.
CEO Satya Nadella has integrated AI into nearly every product, from Bing to productivity software like Word. Significant investments, including approximately $13 billion in OpenAI, have fueled these efforts. The 365 Copilot assistant for enterprises, costing $30 per month, became widely available last year, contributing to an 11% growth in the productivity business, surpassing the 10% expectation.
Overall, Microsoft reported a 15% increase in total revenue to $64.7 billion for the fourth quarter, slightly above the $64.39 billion analyst forecast. Revenue from its personal computing business, which includes Windows and devices like Xbox and Surface, grew 14% to $15.9 billion, benefiting from stabilizing personal computer sales, marking the second consecutive quarter of growth according to IDC.
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