Microsoft is being dropped by impatient investors
Microsoft's Cloud Business Keeps Growing, But Not as Fast as Analysts Expected After Recent Billion-Dollar Investments. Post-market, the stock plunges.
Billion-dollar investments in data centers for Artificial Intelligence (AI) have yet to translate into accelerated growth for Microsoft's cloud business. The software giant reported a surprisingly low revenue increase for its "Azure" division, which was also below the previous quarter's level. Microsoft's stock dropped as much as seven percent in after-hours trading on the Wall Street, with other tech stocks like Amazon and Nvidia losing up to ten percent in its wake.
"Azure" grew by 29 percent in the fourth quarter of the 2023/2024 fiscal year, with eight percentage points attributed to AI applications, according to Microsoft's Investor Relations chief Brett Iversen. In the previous quarter, it was only seven percentage points. "AI demand remains a key growth driver," Iversen said. However, analysts had hoped for a total "Azure" growth of 31 percent.
The company's total revenue increased by 15 percent, slightly above market expectations, to $64.7 billion. This was also driven by the recovery of the PC division, which includes the "Windows" operating system and the "Xbox" gaming console, with revenues up 14 percent to $15.9 billion.
Growth at a High Cost
Meanwhile, costs for building and expanding data centers soared by nearly 78 percent to $19 billion, far exceeding the 53 percent increase that analysts had predicted. Microsoft justified the high investments by citing capacity constraints in computing power for AI applications and sustained high demand.
Similarly, Microsoft's competitor Alphabet argued that the risk of not investing enough in AI infrastructure is much greater than investing too much. Despite this, investors ignored Alphabet's revenue and profit growth and sold off its stock.
Analyst Igor Tishin from asset manager Harding Loevner cautioned against overly pessimistic assessments of Microsoft's business prospects. "Although the focus is on consumer-facing applications like ChatGPT, generative AI in the enterprise sector potentially offers even greater opportunities. Microsoft is incredibly well-positioned to capitalize on this."
The surprising revenue increase for Microsoft's "Azure" division in the fourth quarter was only 29%, with eight percentage points attributed to AI applications, which was lower than the analysts' expected total growth of 31%. In the upcoming quarterly figures, investors will be closely monitoring if Microsoft's heavy investments in data centers for AI applications will lead to the accelerated growth they anticipate.
