Microsoft drops most since 2020 amid slowing cloud growth

Capital expenditures for the fiscal second quarter hit $37.5 billion, up 66% from a year earlier and exceeding analyst estimates for $36.2 billion.

• Microsoft shares fell 11% after record spending and slower Azure cloud growth
• Capital expenditures rose 66% to $37.5B, exceeding analyst estimates
• Sales and profit beat expectations, boosted by OpenAI investment

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Microsoft Corp. plunged the most in almost six years after reporting record spending and slowing cloud sales growth, fueling investor concerns that it could take longer than expected for the company’s AI investments to pay off.

The shares sank by as much as 11% to $429.24, for the biggest intraday slide since March 2020.

Capital expenditures for the fiscal second quarter hit $37.5 billion, up 66% from a year earlier and exceeding analyst estimates for $36.2 billion.

The Azure cloud-computing unit posted a 38% revenue gain during the quarter when adjusting for currency fluctuations, just meeting analysts’ projections. That growth rate slowed — by a percentage point — from the prior quarter. The company expects Azure sales to rise 37% to 38% in the current quarter.

“One of the core issues that is weighing on investors is cap ex is growing faster than we expected, and maybe Azure is growing a little bit slower than we expected,” Morgan Stanley analyst Keith Weiss said during an analysts’ call. Investors, he said, were concerned about the return on that spending.

Chief Financial Officer Amy Hood responded by saying that a chunk of cloud capacity is going toward internal teams, which boosts products such as Copilot. Had all of the new capacity gone toward Azure, the growth rates would have been notably higher, she said.

The world’s largest software maker has experienced rapid growth in its cloud computing business, thanks in part to a landmark partnership with leading artificial intelligence startup OpenAI. But despite spending heavily on data centers, Microsoft has struggled to get capacity online quickly enough to meet demand.

Microsoft has been rushing to bake AI tools, including those powered by OpenAI, into its products, betting that chatbots and automation technology will boost sales of the company’s productivity software and cloud services.

During the analyst call, Microsoft Chief Executive Officer Satya Nadella said companies are now paying for 15 million subscriptions to the M365 Copilot, Microsoft’s main AI tool for office workers. Adoption is growing among the company’s enormous base of corporate users, Nadella said.

Total sales increased 17% to $81.3 billion during the quarter, while profit was $5.16 a share, the company said in a statement on Wednesday. The net income figure was boosted by gains from Microsoft’s investment in OpenAI, which lifted per-share earnings by $1.02.

Analysts had expected sales of $80.3 billion and per-share earnings of $3.92.

The value of commitments from customers that Microsoft expects to materialize as sales in future years more than doubled from a year earlier, primarily the result of a new, $250 billion deal with OpenAI. The startup accounted for 45% of Microsoft’s backlog, which stood at $625 billion at the end of December.

Microsoft is the first of the Big Three cloud services companies to report quarterly financial results this year. Alphabet Inc. is scheduled to release its earnings on Feb. 4, Amazon.com Inc. the following day.

Meanwhile, Meta Platforms Inc. got a more positive investor reception after saying it’s spending more than anticipated to build out its AI business. As part of its quarterly earnings report Wednesday, Meta, the owner of Facebook, said full-year capital expenditures will be $115 billion to $135 billion, exceeding the $110.6 billion average analyst estimate — and the shares jumped about 7% in extended trading.