Microsoft’s Cloud Growth Slows: AI Benefits to Take More Time
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Microsoft’s Cloud Growth Slows: AI Returns Expected to Take Longer
Quick Read
- Microsoft plans to enhance its investment in AI infrastructure despite the slower growth of its cloud services.
- Capital investments surged by 77.6%, reaching US$19 billion for the fiscal fourth quarter.
- Cloud growth in Azure is anticipated to gain momentum in the latter half of fiscal 2025.
- AI services added 8 percentage points to the revenue growth of Azure in the June quarter.
- CEO Satya Nadella noted a nearly 60% year-on-year rise in Azure AI usage.
- Overall revenue for Microsoft climbed 15% to US$64.7 billion in the fourth quarter.
Boosted AI Investments Despite Sluggish Cloud Growth
Microsoft has revealed its plans to substantially increase spending on AI infrastructure this fiscal year, even though growth in its cloud services shows signs of slowing. This decision implies that the rewards from its significant investments in AI technology may take longer to materialize than early projections by Wall Street investors suggested.
Market Response
After the announcement, Microsoft shares dipped by seven percent initially but rebounded slightly to close down by four percent. The company suggested that growth in Azure cloud services is set to pick up in the second part of fiscal 2025.
Major Tech Companies Investing Heavily in AI
Microsoft isn’t the only tech giant pouring resources into AI. Alphabet, Google’s parent company, has recently cautioned that its capital spending will remain high throughout the year. Microsoft reported a 77.6% increase in capital expenditures to US$19 billion for its fiscal fourth quarter concluding June 30, with cloud and AI-focused investments constituting a significant portion of this expense. For fiscal year 2024, total capital expenditure reached US$55.7 billion.
Investor Perspectives
Even with the increased outlay, investors who have driven Microsoft’s stock up nearly 25 percent over the past year on AI optimism were left dissatisfied with the slower growth reported for Azure. Microsoft forecasts that Azure’s growth will range between 28 percent and 29 percent for the July-September quarter, slightly falling short of the 29.7 percent growth expectation.
The Growing Role of Azure AI
Although overall Azure growth has slowed, AI services have contributed more significantly to revenue growth in the June quarter, contributing 8 percentage points compared to 7 percentage points in the prior quarter. CEO Satya Nadella stated that more than 60,000 customers are now utilizing Azure AI, reflecting an almost 60% year-on-year increase, with average spending per customer also on the rise.
AI Integration in Microsoft’s Offerings
Nadella has been advocating for the incorporation of AI into nearly all Microsoft products, from the Bing search engine to productivity applications like Word. A substantial portion of these efforts is powered by technology from OpenAI, in which Microsoft has invested around US$13 billion.
Financial Overview
Microsoft’s productivity segment, which encompasses the Office suite, LinkedIn, and 365 Copilot, experienced an 11 percent growth, exceeding the 10 percent expectations. Revenue from the Intelligent Cloud segment increased by 19 percent to US$28.5 billion, slightly missing analysts’ projections of US$28.68 billion. Overall, Microsoft’s total revenue grew by 15 percent to US$64.7 billion in the fourth quarter, surpassing analysts’ predictions.
Performance of Personal Computing Division
The personal computing division, covering Windows, Xbox, and Surface devices, recorded a 14 percent growth, benefiting from recovering PC sales. IDC indicated that the PC market witnessed growth for the second consecutive quarter during the April-June period.
Conclusion
Microsoft’s bold initiative to enhance its AI infrastructure, despite the deceleration in its cloud services, highlights the company’s long-term strategy and dedication to AI-centric solutions. While market reactions have been mixed, the potential for future growth remains robust, particularly as Azure AI gains increased traction among users.
Q: Why is Microsoft boosting its AI infrastructure investment?
A: Microsoft is increasing its AI investments to address the rising demand for AI solutions and to leverage the burgeoning interest in generative AI technologies.
Q: What was the market’s reaction to Microsoft’s announcement?
A: Initially, Microsoft’s shares dropped seven percent but later slightly recovered, settling down four percent after the company hinted at future Azure cloud growth.
Q: How did AI services impact Azure’s revenue growth?
A: AI services provided 8 percentage points to Azure’s revenue growth in the June quarter, an increase from 7 percentage points in the earlier quarter.
Q: How significant is Microsoft’s investment in OpenAI?
A: Microsoft has invested about US$13 billion in OpenAI, which has played a crucial role in enabling AI functionalities across Microsoft’s products.
Q: What are expectations for Azure’s upcoming growth?
A: Microsoft projects that Azure’s cloud growth will pick up in the latter half of fiscal 2025, predicting growth rates between 28 and 29 percent in the pending quarters.
Q: How did the productivity and personal computing sectors perform?
A: The productivity sector expanded by 11 percent, surpassing forecasts, while the personal computing sector grew by 14 percent, benefiting from stabilising PC sales.
Q: What does the overall financial outlook look like for Microsoft?
A: Microsoft’s total revenue increased by 15 percent to US$64.7 billion in the fourth quarter, exceeding analysts’ expectations, reflecting strong financial health.
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