Microsoft Shares Fall Due to Disappointing Cloud Growth Forecast

31.10.2024

Microsoft Corp. shares fell in after-hours trading following a forecast for slower cloud revenue growth this quarter. The company’s Azure cloud segment is expected to grow by 31% to 32% in the current period, a slight drop from the 34% gain in the previous quarter, highlighting the company’s challenges in meeting rising demand for AI-powered services due to data center limitations.

Despite a strong first-quarter report with revenue up 16% to $65.6 billion and profit per share at $3.30, the cautious cloud outlook dampened investor sentiment. CFO Amy Hood explained that some anticipated data center capacity for AI growth was delayed, which would impact Azure’s growth in the December quarter. “We’re focused on balancing supply to meet demand,” she noted.

Microsoft’s substantial investments in data centers have been aimed at supporting AI services, competing with other major players like Google and Amazon. Quarterly capital expenditures hit a record $14.9 billion, up 50% from a year ago, underscoring Microsoft’s commitment to expanding AI capabilities. In line with this, Microsoft recently entered a deal to acquire nuclear power to support its energy-intensive AI infrastructure needs.

AI investments have been crucial for Microsoft, with CEO Satya Nadella’s strategy centering on integrating OpenAI’s models to drive long-term growth. While AI contributed 12 points to Azure’s growth last quarter, the high spending has yet to fully convince Wall Street, as Microsoft’s shares fell 3.7% during the September quarter. Nadella expressed optimism, however, expecting Microsoft’s AI business to exceed $10 billion in annual revenue in the near future.

Beyond cloud services, Microsoft’s AI-enhanced Office products, which add $30 per user per month to the standard Office cost, have gradually increased average revenue per user. Search ad revenue also grew by 19%, benefiting from AI improvements to Bing. With strong AI-related gains, Microsoft is positioning itself to capture more corporate clients, though some clients have been cautious in their adoption due to the higher costs of these advanced features.