Cloud Computing Concerns Weigh on Microsoft’s Shares
Microsoft’s latest forecast has sent shockwaves through the tech industry, with investors expressing concerns over the company’s cloud computing growth and artificial intelligence (AI) revenue. Despite beating quarterly sales estimates, Microsoft’s shares plummeted 4.5% in after-hours trading.
Azure Falls Short of Expectations
The company’s Azure results for the fiscal second quarter failed to meet Wall Street expectations, sparking worries about big spending and elusive AI revenue. Chinese rivals have been making waves with claims of producing competing AI technologies at lower costs, fueling fears of a price war.
Investors Seek Clear Roadmap to Monetization
For over a year, Microsoft and its Big Tech peers have been investing heavily in AI, but investors are yet to see a clear return on investment. “We want to see a clear roadmap to what that monetization model looks like for all of the capital that’s been invested,” said Brian Mulberry, portfolio manager at Zacks Investment Management.
Costs Coming Down, Efficiency Improving
On a conference call with investors, Microsoft CEO Satya Nadella assured that costs were coming down, with models showing 10 times better performance for the price. “As AI becomes more efficient and accessible, we will see exponentially more demand,” Nadella said.
Azure Growth Projections Fall Short
Microsoft’s Chief Financial Officer Amy Hood projected Azure growth of 31-32% in the current fiscal third quarter, below Wall Street’s expectations of 33%. The company’s capital expenditures hit $22.6 billion, above analysts’ consensus estimate of $20.95 billion.
DeepSeek’s Rise Sparks Competition Concerns
The rapid rise of DeepSeek, a Chinese AI model, has sparked concerns about stiff competition that could force leading U.S. AI providers to slash prices. Microsoft has added DeepSeek to its Azure offerings, but investors remain wary.
AI Contribution to Azure Growth
Microsoft reported that AI contributed 13 percentage points of Azure’s growth in its fiscal second quarter, up from 12 percentage points the previous quarter. The company is working to make its AI services more cost-efficient, Nadella said.
Investors Still Bullish on Microsoft
Despite the concerns, investors still view Microsoft as a leading bet on AI. The company’s stock has gained about 8% over the past year, and it is trading at about 32 times expected earnings, slightly above its five-year average.
Commercial Bookings Soar
Microsoft posted 67% growth in commercial bookings, driven largely by large new Azure contracts with OpenAI. The company retains the rights to most of the hosting of OpenAI’s models for commercial purposes.
Total Revenue Rises
Total revenue rose 12% to $69.6 billion in the fiscal second quarter, beating analysts’ average estimate of $68.78 billion. Microsoft reported a profit of $3.23 per share, exceeding expectations of $3.11 per share.
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