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Microsoft shares fell as investors were spooked by a 66 per cent surge in data centre spending and slower than expected cloud growth, despite strong demand for AI services boosting profits by almost a quarter.
The software giant’s stock slipped 6 per cent in after-hours trading on Wednesday as another big jump in AI-related spending soured the market reaction to record profit and revenue figures.
Adjusted net income rose 23 per cent year on year to $30.9bn in the three months to the end of December, beating analysts’ expectations for $28.9bn. Revenue increased 17 per cent to $81.3bn, exceeding estimates of $80.3bn.
But Microsoft’s capital expenditure, including finance leases, was $37.5bn in the quarter, an increase from $34.9bn in the prior three months and 66 per cent higher than the year before.
Previously, Microsoft had forecast reaching $140bn of capex in its fiscal year, which ends in June.
The $3.6tn tech group is in an expensive race with rival cloud operators including Google and Amazon to build out the infrastructure needed to run advanced AI.
Meta, which also reported earnings on Wednesday, said its capex could rise to $135bn this year, more than double what it spent on AI in 2025. By contrast, its stock rose as much as 10 per cent after it said AI was improving advertising efficacy.
“Meta talked up its plans for AI-targeted ad placement and was rewarded, while Microsoft posted good but not great Azure revenue and got dinged,” said Dec Mullarkey, managing director of $300bn asset manager SLC Management.
“The road to AI revenue will continue to be a bumpy ride due to these massive frontloaded investments,” he added.
Microsoft chief executive Satya Nadella remains committed to his bet on AI, arguing that the historic spending will be justified as the technology is adopted by businesses, with demand for its Azure cloud computing services still outstripping supply.
The company is integrating AI into its Office enterprise software — hoping that productivity gains will allow it to charge more and improve margins. It is also trying to build a consumer Copilot AI app to challenge Google’s Gemini and OpenAI’s ChatGPT.
“As an investor, when you think about our capex, don’t just think about Azure, think about Copilot,” Nadella said on a call with analysts. “We don’t want to maximise just one business of ours. We want to be able to allocate capacity, while we are supply constrained, that allows us to build the best portfolio.”
Revenue at Microsoft’s cloud division rose 26 per cent from a year ago to $51.5bn. But analysts at Barclays said shareholders were disappointed by slowing momentum, as Azure reported 38 per cent year-on-year growth, a percentage point below the rate in the previous quarter.
“We see a muted reaction [even though] overall numbers look very healthy,” they wrote. “But a lot of focus is on Azure growth . . . we fear buy-side investors might have hoped for more.”
Microsoft also faces a looming risk from over-reliance on a single customer, after it disclosed for the first time that 45 per cent of its $625bn book of future cloud contracts was from OpenAI.
Chief financial officer Amy Hood said investors should instead focus on the fact that $350bn of those contracts were for other customers spanning multiple sectors around the world.
“We are more diversified than most peers and we have super-high confidence in that,” Hood said on the earnings call. “We continue to be [OpenAI’s] provider of scale. We’re excited to do that.”
Microsoft previously had an exclusive partnership with OpenAI, but it has been diversifying away from Sam Altman’s company after renegotiating its relationship with the start-up.
Rival Anthropic recently committed to purchase $30bn of Azure compute capacity. Microsoft, meanwhile, said it would invest as much as $5bn in Anthropic alongside a $20bn fundraising at a $350bn valuation.
Microsoft also revealed a $7.6bn accounting gain in the quarter deriving from its investment in OpenAI, which boosted reported net income 60 per cent to $38.5bn. That reflected an increased amount of cash on the start-up’s balance sheet after multiple large fundraisings.
Microsoft holds a 27 per cent stake in the AI model builder after it restructured into a more traditional for-profit enterprise from a non-profit in October. OpenAI is pursuing a massive new funding round at a more than $750bn valuation, netting Microsoft a huge return on its $14bn investment.
