Microsoft's AI Bet Sends Spending Soaring, Cloud Growth Cools; Shares Tumble
Microsoft Corp. (NASDAQ: MSFT) faced a sharp market correction late Tuesday as its massive bet on artificial intelligence collided with the reality of slowing cloud revenue growth. The tech giant's fiscal second-quarter earnings revealed capital expenditures skyrocketing to $37.5 billion—a 66% year-over-year surge—primarily to fund its AI data center build-out. While revenue grew 17% to $81.3 billion, costs climbed even faster at 19%, squeezing margins.
The centerpiece of Microsoft's growth story, the Azure cloud platform, saw revenue increase by 39%, only slightly ahead of analyst forecasts but signaling a deceleration from previous quarters. The company forecast Azure growth of 37% to 38% for the current quarter, further confirming a cooling trend. In a new disclosure, Microsoft revealed its M365 Copilot product now boasts 15 million annual users, a bright spot in the report. However, investors zeroed in on the swelling costs and the $625 billion cloud contract backlog, nearly half of which is tied to its partner OpenAI.
"We are accelerating our investments to lead in the AI era," said Microsoft's CFO in a statement, addressing the spending spike. She also cautioned that rising memory chip prices could pressure profitability in coming quarters. The market's reaction was swift and severe: shares plunged over 6.5% in extended trading, adding to a year-to-date decline exceeding 8%. Analysts point to intensified competition from Google's Gemini and other AI rivals as a key concern, questioning whether Microsoft's spending will translate into durable market leadership or erode its financial discipline.
Market Voices:
"This is the cost of playing for the top spot in AI," said David Chen, a portfolio manager at Horizon Capital. "The capex number is staggering, but necessary. The Azure growth moderation was expected as the law of large numbers kicks in. The real story is the 15 million Copilot users—that's monetization happening in real-time."
"It's a classic case of 'show me the money,'" argued Sarah Fitzpatrick, a tech analyst known for her blunt commentary. "They're burning cash like it's 1999, hoping AI is the next bubble they can ride. A 39% growth in Azure is fantastic for almost any other company, but for Microsoft, it's a miss that reveals saturation. The street is losing patience with blank checks written to OpenAI."
"The backlog doubling to $625 billion is the most underrated figure here," noted Marcus Wright, an independent investment advisor. "It provides incredible revenue visibility. Short-term pain for long-term gain—this sell-off might be an overreaction, creating a buying opportunity for those who believe in the AI thesis."
The earnings call highlighted the strategic tightrope Microsoft must walk: fueling the expensive AI arms race while managing investor expectations for steady, profitable growth in its core cloud business.