Microsoft Spending Jumps 66% as Azure Growth Slows

This article first appeared on GuruFocus.

Microsoft (NASDAQ:MSFT) rattled investors after reporting a sharp acceleration in spending alongside slightly slower cloud growth, a mix that could suggest the payoff from its AI push may take longer than some had anticipated. Capital expenditures surged to a record $37.5 billion in the fiscal second quarter, up 66% from a year earlier and above expectations, while Azure revenue grew 38% on a constant-currency basis, matching forecasts but slowing modestly from the prior quarter. Management guided for Azure growth of 37% to 38% in the current quarter, and the shares fell about 7% in extended trading after closing at $481.63.

During the earnings call, executives sought to reframe concerns around the pace of returns on that spending. Chief Financial Officer Amy Hood said a meaningful portion of new cloud capacity is being used internally, supporting products such as Copilot, and suggested Azure’s reported growth would have been notably higher if all of that capacity had been directed to external customers. Chief Executive Officer Satya Nadella added that companies are now paying for 15 million M365 Copilot subscriptions, pointing to expanding adoption across Microsoft’s large enterprise customer base as AI capabilities are increasingly embedded into productivity software and cloud services.

The quarter still delivered stronger-than-expected financial results, with revenue rising 17% to $81.3 billion and earnings reaching $5.16 per share, aided by $1.02 per share from gains tied to Microsoft’s OpenAI investment. The company also disclosed that customer commitments expected to convert into future revenue more than doubled from a year earlier, driven primarily by a new $250 billion OpenAI deal that accounted for 45% of a $625 billion backlog at the end of December. As the first major cloud provider to report this season, Microsoft’s results arrive ahead of earnings from Alphabet and Amazon, while Meta Platforms (NASDAQ:META) drew a more positive reaction by forecasting higher-than-expected AI capital spending, sending its shares up about 7% in extended trading.