Investors to Microsoft: Where's the AI Payoff?

IT and cloud giant Microsoft saw overall revenue growth in its fiscal year fourth quarter earnings, but a slight miss on Microsoft cloud revenue expectations and AI growth sent shares falling Tuesday afternoon.

Microsoft's stock price fell nine percent from $424 to $390 on Tuesday after the company's earnings release. Although Microsoft produced overall revenues $64.7 billion (investors had predicted $64.5 billion) and overall Microsoft cloud revenue grew 21% to $36.8 billion, investors came away disappointed with the company's Intelligent Cloud segment, which includes Microsoft Azure.

Microsoft's fiscal year fourth quarter ended June 30, 2024.

Inside Microsoft Cloud Revenue

Intelligent Cloud just missed expectations of $28.7 billion, generating $28.5 billion for the quarter. Nevertheless, that represents a 19% growth from Q1 2023. Specifically, its public cloud service Azure grew 29%, missing estimates of 30.6%, Reuters reports.

That miss may seem too infinitesimal to merit such a penalization by Wall Street, but financial analysts said investors are closely watching for tech companies' investments in AI to pay off. Microsoft's capital expenditure rose 77.6% to $19 billion in the latest quarter.

Microsoft chief financial officer Amy Hood said in the earnings call Microsoft will increase its capital expenditures in the upcoming year "to meet the growing demand signal for our AI and cloud products."

Related:Microsoft-CrowdStrike Outage: 32% of Partners Saw No Client Impact

"As a reminder, these expenditures are dependent on demand signals and adoption of our services that will be managed through the year," Hood told investors.

Microsoft's Intelligent Cloud division and the Azure service therein looks poised to benefit the most from Microsoft's multibillion-dollar investment in OpenAI.

But exactly how much, and how soon, are another question.

For now, Microsoft reports that AI services accounted for 8 points of overall 29% cloud services growth. That may not enough short-term gains to please investors, who also punished Google Cloud parent Alphabet for adding more AI spending than AI revenue in its latest quarter.

"The street doesn't have a lot of patience. They see you spending billions of dollars and they want to see a pickup in revenue of that amount," Synovus Trust senior portfolio manager and Microsoft shareholder Daniel Morgan told Reuters. "If these companies do not hit it out of the ballpark and are far better than the estimates then they are going to be knocked back."

Synovus' Daniel Morgan

Investors asked CEO Satya Nadella about the near-term and long-term impact of the company's AI investments.

Related:How MSPs Can Harness AI Demand to Boost Revenue

"At the end of the day, GenAI is just software. So, it is really translating into, fundamentally, growth on what has been our M[icrosoft] 365 SaaS offering with a newer offering that is the Copilot SaaS offering, which today is on a growth rate that's faster than any other previous generation of software we launched as a suite in M[icrosoft ]365," Nadella said.

Nadella also said Microsoft's AI-baked Dynamics 365 Contact Center offering will save Microsoft money on customer support.

On the same day, Microsoft reported an outage in multiple 365 applications, including Outlook and Word. It came less than two weeks after a faulty CrowdStrike update caused a worldwide outage of Windows devices.