Microsoft said on Wednesday it posted record spending on artificial intelligence in the past quarter, while cloud growth slowed, unsettling investors who had expected a stronger payoff from the heavy investment and its partnership with OpenAI.
Shares of the company fell 6.5% in after-hours trading following the release of its fiscal second-quarter results. Microsoft’s close alliance with OpenAI — once viewed as its biggest competitive edge in the AI race — is increasingly being seen as a potential risk as rivals such as Google gain traction with products like Gemini and attract major customers including Apple.
On a call with analysts, executives urged investors to evaluate Microsoft’s AI progress not only through cloud revenue but also through rising sales of its own AI tools. The company also disclosed, for the first time, key usage metrics for its Copilot assistant. However, despite CEO Satya Nadella’s view that AI adoption is still in its early stages, Microsoft has spent more than $200 billion on AI since the start of fiscal 2024, testing investor patience.
Revenue rose 17% in the quarter, while costs increased 19%, raising concerns about margin pressure, said Eric Clark, portfolio manager of the LOGO ETF. Azure revenue grew 39% in the October–December period, narrowly beating expectations, according to Visible Alpha.
Microsoft has benefited from an early lead in AI through its investment in OpenAI, whose technology underpins products such as M365 Copilot. The company owns a 27% stake in the ChatGPT developer, which previously boosted earnings following changes in accounting treatment. But increasing competition from Google’s Gemini and new autonomous AI agents has raised risks to both Microsoft’s AI ambitions and its core software business.
For the current quarter, Microsoft forecast Azure growth of 37% to 38%, slightly ahead of analyst estimates, while overall revenue guidance was broadly in line with expectations. Chief Financial Officer Amy Hood said capital spending would ease modestly next quarter but warned that rising memory chip costs could pressure cloud margins over time.
Nadella also revealed that M365 Copilot now has 15 million annual users, excluding free or limited chat usage. He said much of the company’s capital investment supports its own long-term profitable products and that capacity is being allocated carefully amid supply constraints.
Microsoft’s heavy AI spending continues to weigh on investor sentiment as questions persist over whether Big Tech can generate sufficient returns. Microsoft, Alphabet, Meta and Amazon are collectively expected to invest more than $500 billion in AI this year.
During the quarter, Microsoft’s capital expenditure surged nearly 66% year-on-year to $37.5 billion, well above market expectations, with about two-thirds directed toward computing chips. Total revenue climbed to $81.3 billion, beating estimates.
The company said its contracted cloud backlog more than doubled to $625 billion, surpassing rival Oracle’s figure. However, about 45% of the remaining performance obligation is tied to OpenAI, highlighting Microsoft’s reliance on the startup. Excluding OpenAI, cloud backlog growth stood at 28%, even after including a major deal with Anthropic.
A recent restructuring at OpenAI granted Microsoft its stake and included a commitment by the startup to purchase $250 billion in Azure services. However, the changes also allow OpenAI to pursue cloud agreements with other providers, potentially reducing its dependence on Microsoft.
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