USA: Microsoft’s forecast for its cloud computing business came in below expectations on Wednesday (Jan 29), triggering an over 5 per cent drop in its stock price.
According to Reuters, the tech giant’s investors expressed concern over heavy spending, slow AI revenue growth, and growing competition from cheaper AI models, particularly from China.
For the fiscal second quarter, Microsoft’s Azure results fell short of Wall Street’s expectations. Though the company exceeded overall sales forecasts, investors want better returns on the vast sums being invested in AI data centres and technology.
Meanwhile, Chinese competitors have claimed to offer cheaper AI models, raising concerns about a potential price war. Microsoft and other tech giants have spent heavily on AI over the past year, but investors are still waiting for substantial profits from these investments.
Brian Mulberry, a portfolio manager at Zacks Investment Management, commented, “It’s OK if that is a few years out, three to five years into the future. But we really want to start to see a clear road map to what that monetisation model looks like for all of the capital that’s been invested.”
During a call with investors, Microsoft’s CEO Satya Nadella stated that costs are decreasing, with models now offering 10 times better performance for the price as Microsoft refines its algorithms. He added that as AI becomes more efficient and accessible, demand will increase “exponentially”.
According to data from Visible Alpha, Microsoft CFO Amy Hood projected 31 to 32 per cent growth for Azure in the current fiscal third quarter. That’s slightly less than the 33 per cent expected by Wall Street.
In the past quarter, Azure’s revenue grew by 31 per cent, which was a little short of the expected 31.8 per cent. The company also incurred US$22.6 billion (S$30.52 billion) in capital expenditure, surpassing the analysts’ US$20.95 billion (S$28.29 billion) estimate.
The rapid rise of DeepSeek, a Chinese AI model, has raised concerns about intense competition that could pressure US AI providers to lower their prices.
On Wednesday, Microsoft announced it had added DeepSeek to its Azure offerings. AI contributed 13 per cent of Azure’s growth in the fiscal second quarter, up from 12 per cent in the previous quarter, according to Microsoft.
In response to analysts’ questions, Mr Nadella said that Microsoft is investing in data centres to develop AI models and improve cost efficiency.
He also said that the company is “working super hard” on all software optimisations, “not just the optimisations that have come because of what DeepSeek has done” but in other areas, including reducing GPT model prices with OpenAI’s help.
Despite challenges, investors still see Microsoft as a strong AI player. Its stock rose by about 8 per cent over the past year, behind Alphabet’s 29 per cent and Amazon’s 50 per cent. It is also trading at 32 times expected earnings, just above its five-year average of 30, according to LSEG.
The company’s commercial bookings grew by 67 per cent, mainly driven by a new Azure contract with OpenAI.
However, its Intelligent Cloud unit, which includes Azure, earned less than expected. It posted US$25.54 billion (S$34.49 billion) in revenues, missing the US$25.76 billion (S$34.78 billion) expected.
Overall, total revenue increased by 12 per cent to US$69.6 billion (S$93.98 billion) for the fiscal second quarter ending in December, rising slightly above analysts’ expectations of US$68.78 billion (S$92.76 billion), according to LSEG. Profits also rose. Microsoft, based in Redmond, Washington, reported a profit of US$3.23 (S$4.36) per share, exceeding the expected US$3.11 (S$4.20). /TISG
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