As Microsoft prepares to unveil its fourth-quarter earnings report for fiscal year 2024, the spotlight is firmly on the performance of its Azure cloud-computing division and the substantial investments the company has made in artificial intelligence (AI) infrastructure. Microsoft’s partnership with OpenAI has positioned it at the forefront of AI monetization, and the tech giant is expected to report steady growth for Azure at around 31% for the April to June period. However, investors are eager to see whether AI contributions can provide a more substantial boost in the fiscal fourth quarter.
Microsoft’s capital expenditure has seen a significant increase, projected to have surged by 53% year-over-year to $13.64 billion, up from $10.95 billion in the previous quarter. This substantial rise has raised eyebrows among investors who are wary of the heavy spending on data centers that may deliver only short-term gains. The tech sector has been cautious following Alphabet’s recent report, which highlighted capital expenditures exceeding estimates but yielding only modest revenue enhancements from AI integrations, leading to a selloff in major tech stocks. Analysts stress the need for Microsoft to demonstrate accelerated AI-related revenue growth to meet investor expectations and justify the ongoing high levels of capital expenditure.
The increased spending has facilitated Microsoft’s ability to attract more enterprise clients by expanding its AI cloud services and introducing innovative features such as the 365 Copilot assistant for Word and Excel. Although half of the Fortune 500 companies utilize the $30-per-month Copilot service, Microsoft has yet to disclose its specific revenue contributions. Analysts predict that the impact of Copilot will become more apparent in the latter half of 2024. By focusing strategically on enterprise AI applications, Microsoft positions itself to leverage its extensive client base effectively.
In terms of stock performance, Microsoft shares have climbed approximately 13% this year, adding over $350 billion to its market value, despite a recent dip of nearly 9% amid a broader tech selloff. The company is anticipated to report a 14.6% increase in overall revenue for the April-June period, a deceleration from the 17% growth seen in the previous quarter. This slowdown is primarily attributed to weaker growth in the personal computing segment, which includes Windows and Xbox. Conversely, the productivity segment, encompassing Office apps, LinkedIn, and 365 Copilot, is projected to grow by around 10%.
During the earnings call, Microsoft executives provided updates on several critical areas, including AI investments, capacity constraints, and future outlooks. CFO Amy Hood highlighted that AI-related capacity lagging behind demand, along with some regional weaknesses in Europe, contributed to the company’s softer-than-expected cloud growth. She indicated that AI capacity might continue to lag until the second half of 2025.
In response to the burgeoning demand for AI, Microsoft is amplifying its investments, even as concerns about escalating costs loom. CEO Satya Nadella remarked that capital expenditures are guided by demand signals, including Azure AI growth, and would be adjusted if demand patterns shift. The current capital spending is expected to position the company to meet AI demand in the latter half of fiscal 2025, which could potentially drive significant revenue gains.
Nearly all of Microsoft’s $19 billion in capital expenditures have been earmarked for cloud or AI investments. Approximately half of this spending is directed toward infrastructure, with the company constructing and leading data centers poised to support monetization efforts over the next 15 years and beyond. Executives have underscored the flexibility of AI infrastructure solutions, suggesting that this adaptability could mitigate the risk of overinvestment in the technology.
Looking ahead, Microsoft anticipates double-digit revenue growth in fiscal 2025 as it ramps up capacity to meet the surging demand. Cloud revenue is projected to grow between 28% and 29% year-over-year in the first quarter of fiscal 2025. As the company readies its earnings release, investors are keenly observing for any new AI developments and Microsoft’s ability to sustain its growth trajectory in an increasingly competitive tech landscape.
