:Microsoft on Wednesday posted disappointing Azure cloud business growth and large artificial intelligence expenses, hitting its shares as a recent surge in low-cost Chinese AI technology threatens to undermine the case for such big spending.
The stock fell 2 per cent even after quarterly revenue beat analysts’ estimates, showing investors want better results from the hundreds of billions of dollars that Wall Street heavyweights have been spending to build AI data centers and infuse their products with the emerging technology.
Chinese rivals have recently claimed to produce competing AI technologies at lower costs than U.S. rivals, sparking fears of a price war. For more than a year, Microsoft and its Big Tech peers have tested Wall Street’s patience by plunking down huge amounts of cash in pursuit of profits from AI that have yet to satisfy investors.
“It’s OK if that is a few years out, three to five years into the future,” said Brian Mulberry, portfolio manager at Zacks Investment Management. “But we really want to start to see a clear road map to what that monetization model looks like for all of the capital that’s been invested.”
On a conference call with investors, Chief Executive Satya Nadella said costs were coming down, with models showing 10 times better performance for the price as Microsoft irons out the algorithms.
“As AI becomes more efficient and accessible, we will see exponentially more demand,” Nadella said.Microsoft’s Azure unit reported revenue growth of 31 per cent in the quarter, missing Visible Alpha estimates of 31.8 per cent. Microsoft’s capital expenditures hit $22.6 billion, above analysts’ consensus estimate of $20.95 billion, according to data from Visible Alpha. DeepSeek’s meteoric rise in the past three weeks has sparked worries of stiff competition that could force leading U.S. AI providers to slash prices. Microsoft said earlier on Wednesday it had added DeepSeek, the breakout Chinese AI model, to its offerings on Azure. Microsoft said AI contributed 13 per centage points of Azure’s growth in its fiscal second quarter, up from 12 per centage points the previous quarter. However, investors still appear to view Microsoft as a leading bet on AI. Its stock has gained about 8 per cent over the past year, trailing a 29 per cent rally in Alphabet and a 50 per cent surge in Amazon. It is trading at about 32 times expected earnings, slightly above its five-year average of 30, according to LSEG. Microsoft also posted 67 per cent growth in what it calls commercial bookings, a measure of new contracts signed with large customers. Brett Iversen, Microsoft’s vice president of investor relations, said that figure was mostly driven by a large new Azure contract with OpenAI. While OpenAI announced a new data center deal with Oracle last week, Microsoft still retains the rights to most of the hosting of OpenAI’s models for commercial purposes. At the company’s Intelligent Cloud unit, which includes the Azure platform, revenue rose to $25.54 billion, missing expectations of $25.76 billion. Total revenue rose 12 per cent to $69.6 billion in the fiscal second quarter ended December, compared with analysts’ average estimate of $68.78 billion, according to data compiled by LSEG. Redmond, Washington-based Microsoft reported a profit of $3.23 per share, beating expectations of $3.11 per share.
