Microsoft saw a sharp drop in its stock price, losing $200 billion in market value after its cloud division, Azure, posted slower-than-expected growth. The Financial Times reported that while the tech giant exceeded overall revenue and profit forecasts, its cloud business fell just short of expectations, raising concerns among investors.
Cloud Growth Slows Despite AI Demand
Azure’s artificial intelligence (AI) services grew by an impressive 157% year over year, but that wasn’t enough to reassure Wall Street. The company’s total cloud revenue increased 21% to $40.9 billion, slightly below the $41.1 billion expected. Investors reacted swiftly, causing Microsoft’s stock to drop more than 6% in a single day.
Chief Financial Officer Amy Hood acknowledged that the company is facing capacity constraints, meaning the company is struggling to keep up with demand for its AI-powered cloud services. She expects these challenges to continue into 2025 but believes the situation will improve by the end of the fiscal year.
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Heavy Investment in AI and Data Centers
Microsoft is making massive investments to support its AI ambitions. In the last quarter alone, it spent $22.6 billion on capital expenditures—double what it spent the previous year. For the full fiscal year ending in June, Microsoft plans to invest about $80 billion in expanding its data center infrastructure to train AI models and deploy applications.
This aggressive spending comes at a time when competition in AI is heating up. Chinese AI startup DeepSeek is claiming to match the performance of OpenAI’s models at a much lower cost. Microsoft CEO Satya Nadella acknowledged DeepSeek’s progress, noting that AI advancements will continue to be widely adopted, ultimately benefiting consumers.
OpenAI Partnership and Market Strategy
The company’s $13 billion partnership with OpenAI has been a major driver of its AI growth. OpenAI’s models power Microsoft’s Copilot chatbot and are available to customers through Azure. However, Microsoft recently adjusted its deal with OpenAI to allow the startup to use rival cloud providers, though it retained the right of first refusal.
This shift follows OpenAI’s decision to work with Oracle and SoftBank on a $100 billion AI infrastructure project called “Stargate.” While Microsoft is only a technical partner in the project, Nadella downplayed concerns, saying Microsoft would still benefit from OpenAI’s success due to existing commercial agreements.
Can Microsoft Sustain Its AI Momentum?
While Microsoft remains one of the biggest winners in the AI boom, this latest earnings report raises questions about its ability to maintain its lead. The company is betting heavily on AI-powered cloud services, but execution challenges and rising competition could slow its growth.
Investors are clearly worried, as seen in the sharp stock drop. However, the company’s deep pockets and strong market position give it a solid foundation to navigate these hurdles. The coming year will be crucial in determining whether Microsoft can fully capitalize on AI’s potential or if it will struggle with the challenges of scaling up.
