Microsoft Cloud Growth Slows, AI Spending Continues to Escalate

Microsoft Corporation has announced a deceleration in the growth of its cloud computing business during the fourth quarter of 2024. Despite the slowdown, the company remains committed to investing heavily in infrastructure for its artificial intelligence (AI) products.

The Azure cloud division posted a 31% revenue increase compared to 34% in the previous quarter, slightly below analyst expectations of 32%. Microsoft, renowned as a leader in commercializing AI products through its partnership with ChatGPT creator OpenAI, has been rapidly introducing Copilot-branded AI assistants. However, monetization efforts have taken longer than anticipated.

According to Chief Financial Officer Amy Hood, Azure AI services experienced a significant 157% growth. However, the overall performance of the cloud unit faces challenges due to insufficient data center capacity to cater to customer demand. Hood highlights commercial service contracts worth nearly $300 billion, representing future revenue that has yet to be recognized.

Strong demand is evident in the 67% increase in commercial bookings, surpassing Microsoft's initial projections. Hood partially attributes this growth to Azure commitments from OpenAI.

Similar to industry rivals Google and Amazon, Microsoft is incurring record-breaking expenses primarily directed towards chips and data centers required for AI services. The company anticipates spending $80 billion this fiscal year on AI data centers.

Wall Street has raised concerns regarding these massive outlays, particularly after DeepSeek, a Chinese startup, released an open-source AI model that reportedly rivals US technology at a lower cost.

During the quarter, Microsoft's capital expenditures reached $22.3 billion, exceeding analyst estimates of $21 billion. The infrastructure expansion has resulted in reduced margins in the cloud business.

Total revenue for the quarter ended December 31, 2024, increased by 12% to $69.6 billion. Net income reached $3.23 per share, surpassing analyst consensus of $68.9 billion in sales and $3.12 per share in earnings.

Azure's growth in the second quarter was attributed to AI by 13 percentage points, compared to 12 points in the first quarter. Microsoft estimates that its AI revenue for the quarter reached approximately $13 billion on an annualized basis.

Initially, Microsoft shares declined 4% in after-hours trading but later recovered.