Despite strong sales results, Microsoft investors are unimpressed: a combination of high spending, capacity constraints and unrealistic expectations.

Microsoft submitted its quarterly report for the fourth quarter of the 2024 fiscal year last night. The figures from the cloud division, Microsoft’s most lucrative division, are receiving the most attention. Revenue from the entire cloud business rose by 19 percent to $28.5 billion, and Azure grew by 29 percent, according to Microsoft.

These may be strong numbers, but the stock market was not very enthusiastic about them. The shares immediately fell by eight percent after the figures were announced. Investors are more likely to see Azure’s growth slowing down, from over thirty percent to just under. Azure is therefore continuing to grow strongly, but less quickly than expected.

High costs and limited capacity

Chief Financial Officer Amy Hood has an explanation for the somewhat slower cloud growth. Microsoft is facing “capacity constraints” in order to continue to meet demand for AI products. The demand for AI is higher than what Microsoft itself can support: Microsoft itself had to turn to Oracle’s competitors for more capacity. The capacity constraints will last until 2025, Microsoft admits.

The AI ​​push that Microsoft has been making since the beginning of 2023 has driven the company’s spending to unprecedented levels. Last quarter, spending increased by eighty percent to $19 billion. For the full fiscal year, Microsoft spent $55.7 billion and the company expects spending to increase. According to Satya Nadella, it is necessary to “take advantage of the opportunities that AI offers.”

Unrealistic expectations

We saw a similar trend in the quarterly figures that Google announced last week. Google Cloud achieved record revenues, but at the same time saw an increase in expenses due to training AI models and the supporting infrastructure. Microsoft itself states that AI has a direct share of eight percent of Azure revenue. Since few figures are known about the number of (paying) users of Copilot, it is difficult to do your own analysis.

Generative AI was heralded by Microsoft and the other giants of the tech industry as a technology that would bring unprecedented profits. That seems to be partly true, although it is a technology that costs a lot of money. Microsoft itself may have raised unrealistic expectations about AI among investors, conclude Financial Times analysts.

Later this week, AWS and Meta are due to report quarterly results: two other companies that are very active in the AI ​​space. I wonder if we will see the same trend with them.