Microsoft's downbeat cloud growth signals AI payoff will take longer By Reuters

By Aditya Soni,ifx foreign exchange official website Yuvraj Malik and Anna Tong

(Reuters) -Microsoft's weaker-than-expected revenue growth in its Azure cloud-computing business dragged its shares down 6.5% in after-hours trading on Tuesday, in another sign the payoff in hefty AI investments may take longer than first thought.

The company - widely seen as the frontrunner in the race to make money from generative artificial intelligence thanks to its tie-up with OpenAI - said Azure revenue rose 29% in the fiscal fourth quarter ended June 30, below estimates of 30.6%, according to research firm Visible Alpha.

The disappointing growth also knocked shares of other large tech stocks. Shares of Amazon.com (NASDAQ:) were down 3.4% and Meta Platforms (NASDAQ:) was down 3% in extended trading as investors feared that the billions of dollars Big Tech was spending on AI infrastructure would provide little return in the short term.

"The street doesn't have a lot of patience. They see you spending billions of dollars and they want to see a pickup in revenue of that amount," said Daniel Morgan, senior portfolio manager at Synovus (NYSE:) Trust, which holds shares in Microsoft (NASDAQ:).

"If these companies do not hit it out of the ballpark and are far better than the estimates then they are going to be knocked back," he added.

Microsoft's shares have climbed nearly a quarter in the past 12 months. But they have lost 10% since a record high on July 5 amid a broader market selloff driven largely by megacap stocks, after disappointing results from EV maker Tesla (NASDAQ:) and Alphabet (NASDAQ:)'s forecast for higher expenditures.

Spending by the Windows maker surged in the fourth quarter, with capital expenditure including finance leases rising 77.6% to $19 billion, a big step up from the $14 billion it recorded in the previous three months.

Brett Iversen, Microsoft's vice president of investor relations, told Reuters that the company continued to ramp up spending in order to meet "strong customer demand."

AI services accounted for 8 percentage points of Azure's growth in the quarter, up from 7 percentage points in the first three months of the year. Microsoft does not break out the absolute revenue figure for Azure, the part of its business best situated to capitalize on booming interest in AI.

"The AI contribution continues to grow each quarter despite having some capacity constraints on the AI side that we called out in April," Iversen said, adding that "AI interest and demand continues to be a big driver."

Overall, revenue from its Intelligent Cloud unit - home to the Azure cloud-computing platform - rose 19% to $28.5 billion in the fourth quarter, missing analysts' estimates of $28.68 billion, LSEG data showed.

Microsoft has said the spending was needed to expand its global network of data centers and overcome the capacity constraints that were hampering its efforts to meet AI demand.

CEO Satya Nadella has pushed the company to go all-in on the technology, weaving AI into almost every product from search engine Bing to productivity software such as Word.

Large parts of those efforts have been fueled by technology from OpenAI, in which Microsoft has invested about $13 billion, including the 365 Copilot assistant for enterprises that costs $30 a month and became widely available last year.

The productivity business - home to the Office suite of apps, LinkedIn and 365 Copilot - posted growth of 11%, compared with expectations of 10%.

Microsoft - seen as a bellwether for the tech industry thanks to its wide-spanning business - said total revenue rose 15% to $64.7 billion in the fourth quarter. Analysts had expected $64.39 billion, according to LSEG data.

Revenue from its personal computing business, which includes Windows and devices such as the Xbox and Surface computers, grew 14% to $15.9 billion, as it benefited from stabilizing personal computer sales. The PC market grew for the second straight quarter in the April-June period, according to research firm IDC.

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