Microsoft's Cloud Growth Slows Amid Data Center Constraints
Microsoft Corp. (MSFT) announced that its cloud computing revenue growth will moderate in the current quarter due to insufficient data center capacity to meet demand for artificial intelligence (AI) products.
Azure's revenue is projected to increase by up to 32% in the fiscal third quarter, a modest gain compared to the previous quarter's 31% growth. The news sent shares down 6% to $415.79 in early trading on Thursday.
Microsoft holds a strong position in commercializing AI products due to its partnership with ChatGPT developer OpenAI. It has introduced numerous AI assistants branded as Copilot, but monetizing these offerings has taken longer than expected.
Despite a 157% surge in Azure AI services, overall cloud revenue is hampered by capacity limitations, according to Chief Financial Officer Amy Hood. She anticipates the constraints to ease by the end of the fiscal year.
Commercial bookings, a future revenue indicator, jumped 67%, driven in part by Azure commitments from OpenAI. Microsoft faces increased spending pressure alongside cloud rivals Google and Amazon to meet the demands of AI services.
The company anticipates investing $80 billion in AI data centers this fiscal year. Wall Street has expressed concerns about these investments, particularly after DeepSeek released an open-source AI model that claims to rival US technology at a lower cost.
Microsoft reported capital expenditures of $22.6 billion for the quarter, surpassing analyst estimates of $21 billion. The infrastructure expansion has reduced cloud business margins.
Total revenue for the three months ended December 31, 2024, climbed 12% to $69.6 billion, while quarterly profit reached $3.23 per share. Analysts expected sales of $68.9 billion and earnings of $3.12 per share.
Azure's quarterly growth was attributed to AI, accounting for 13 percentage points, compared to 12 points in the first quarter. Microsoft estimates its AI revenue to reach an annualized rate of $13 billion.