Microsoft’s rising costs under scrutiny as AI payoff delays concern investors

When Microsoft announces profits on Tuesday, investors will be asking one key question: has growth in its Azure cloud computing business gone up enough to justify the billions of dollars spent on artificial intelligence infrastructure?


Microsoft, widely seen as the front-runner in the battle to profit from AI due to its partnership with ChatGPT developer OpenAI, is expected to disclose that Azure’s growth remained consistent quarter after quarter at around 31% between April and June, according to Visible Alpha statistics.

That is consistent with the company’s expectation, but investors expect a greater contribution from its AI business in the fiscal fourth quarter, after accounting for 7 percentage points of Azure’s growth in the first three months of the year.


According to 16 experts polled by LSEG, Microsoft’s capital investment increased by around 53% year on year to $13.64 billion over this time period. This represents a significant increase from the previous quarter’s expenditure of $10.95 billion.

Fears that IT giants’ reckless spending on data centers would offer little payback in the short term have haunted the US stock market this month, along with signals that Wall Street may have become overly bullish about earnings growth.

Alphabet’s shares tumbled more than 5% last week after the firm disclosed quarterly capital investment that exceeded expectations by about $1 billion, while revenue growth from AI integrations remained low, causing a selloff in big tech companies.

Alphabet stated that its quarterly capital expenditures would remain high for the rest of 2024, at or above $12 billion.

“Investors will be highly focused on Microsoft’s ability to continue to accelerate revenue growth, particularly in the AI segment. “If revenue acceleration does not occur and capex increases continue, investors may be disappointed,” said Gil Luria, senior software analyst at D.A. Davidson.


Microsoft has stated that it has to invest in data centers now to overcome capacity bottlenecks that are impeding its ability to capitalize on AI demand.

Its viewpoint is similar to that of other technology giants, notably Alphabet. Sundar Pichai, CEO of Google, stated last week that the “risk of under-investing (in AI infrastructure) is dramatically greater than the risk of over-investing.”

Well positioned.


The increased spending has enabled Microsoft to court additional business from its large enterprise clients by expanding access to its AI cloud service and introducing features such as the 365 Copilot assistant for Word and Excel.

Microsoft claims that half of the Fortune 500 firms use its $30-per-month Copilot service, which can summarize tens of thousands of emails into a few bullet points or quickly complete lines of computer code.
The Redmond, Washington-based software giant has yet to publish the service’s financial contribution, and analysts predict Copilot’s impact will be more visible in the second half of calendar year 2024.

“While a lot of focus has been on consumer-facing applications like ChatGPT, (generative AI) is potentially a larger opportunity for enterprise, and Microsoft is just incredibly well positioned to capitalize on their install base,” said Igor Tishin, an analyst at Harding Loevner, a $55 billion asset manager with Microsoft and Alphabet among its largest holdings.

Microsoft shares have increased by approximately 13% this year, adding more than $350 billion to the company’s market capitalization. The stock achieved a record high on July 5, but has since dropped roughly 9% due to the recent tech selloff. This year, it has underperformed the S&P 500, which has increased by 14.5%.


Generative AI surge drives raise the market value of IT companies. Generative AI surge drives raise the market value of IT companies.

Generative AI surge drives raise the market value of IT companies. The generative AI explosion increases the market value of IT behemoths.

The company’s entire revenue is predicted to expand by 14.6% from April to June, compared to 17% growth in the preceding quarter.

The company’s productivity business, which includes Office suite of programs, LinkedIn, and 365 Copilot, is forecast to expand by around 10%, despite slower growth in its personal computer business (which includes Windows and Xbox gaming).