Microsoft Earnings: Azure Growth Misses Expectations, AI Investments Raise Concerns

Q4/24 Results

Microsoft's recent earnings report disappointed Wall Street with Azure cloud computing service growth of 29%, falling short of the expected 30.6%. This fueled concerns about delayed returns on high AI investments, leading to a post-market share drop.

Investors have been anxious about the returns and timing of AI investments. Microsoft's quarterly results failed to dispel these doubts. CFO Amy Hood forecasted accelerated Azure growth but also higher capital expenditures in the new fiscal year (Microsoft's total capital expenditures for the fourth quarter rose by 77.6% to $19 billion).

Total revenue for the quarter ending in June rose by 15% to $64.7 billion, slightly exceeding the analyst expectation of $64.39 billion. Earnings per share were $2.95, just above the $2.94 expected. CEO Satya Nadella highlighted the need for both knowledge and capital-intensive investments in the AI transition, paralleling the shift to cloud services. Microsoft's stock has risen nearly 25% over the past year due to optimism about its AI leadership, thanks to investments in OpenAI, the creator of ChatGPT.

The Intelligent Cloud division, which includes Azure, reported revenue of $28.5 billion, below the expected $28.68 billion. Azure revenue increased by 29%, missing the 30-31% growth Microsoft forecasted in April. For the current quarter, Microsoft expects Azure growth of 28-29%, below analyst expectations. Hood noted a European weakness in non-AI sectors but assured that capital investments would boost AI capacity, anticipating faster Azure growth.

AI contributed 8 percentage points to Azure's growth, up from 7 points the previous quarter. Microsoft is investing billions in data centers to meet potential AI service demand, with capital expenditures rising 77.6% to $19 billion in the fourth quarter.

CEO Nadella emphasized integrating AI into nearly every product, from Bing to Word. Copilot, the AI assistant launched at $30 per month, enhances Microsoft software efficiency. Business software and services, including Office, LinkedIn, and 365 Copilot, saw an 11% revenue increase, slightly above expectations.

The personal computing segment, covering Windows, Xbox, and Surface, grew by 14% to $15.9 billion, benefiting from stabilizing PC sales. The PC market grew for the second consecutive quarter in April-June, according to IDC.

Despite a strong report, investors' high growth expectations led to penalties for any imperfection. Similar to Alphabet, the realization that significant ongoing investments affect profits is becoming evident.

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