Microsoft Shares Plunge 6% on Azure Growth Concerns Amid AI Expansion Challenges

Microsoft's shares witnessed their largest single-day drop in two years following predictions of a slowdown in quarterly cloud business revenue growth. This outcome underscores the challenge the software giant faces in synchronizing the deployment of data centers with the burgeoning demand for AI services.

During a conference call post its first-quarter earnings release, Microsoft executives indicated that sales for the closely-watched Azure cloud computing division are projected to grow between 31% and 32% for the current quarter. Adjusted for currency fluctuations, Azure's revenue grew by 34% in the first quarter, slightly down from the previous quarter's 35% growth rate.

CFO Amy Hood noted that some data center capacity, crucial for Microsoft's AI expansion, has yet to materialize. This shortfall is expected to constrain the growth of Azure's revenue for the quarter ending in December.

Despite surpassing earnings expectations, Microsoft's shares fell over 6% to $406.47. This marks the steepest decline since October 2022 when the shares plummeted by 7.7% as investors pivot attention to the company's current earnings forecast rather than past performance.

As Microsoft eyes a revenue range of $68.1 billion to $69.1 billion for the fiscal quarter ending December, this poses a predicted mid-point growth of 10.6%, slightly below analysts' estimates of $69.83 billion.

Azure’s performance remains under scrutiny as its revenue growth hit 33%, with Hood forecasting a growth range of 31% to 32% for the second fiscal quarter, adjusted to constant currency. This follows rival Google’s report of a 35% annual growth in its cloud business.

Late delivery of data center infrastructure by external vendors complicates Microsoft’s ability to meet demand in the second fiscal quarter. Yet, CEO Satya Nadella remains optimistic about supply-demand alignment in the fiscal year's latter half.

Investors continue to focus on Microsoft’s AI investments as the company strengthens its infrastructure, bolstering chip expenditures to handle increasingly demanding workloads. Meanwhile, Hood disclosed that Microsoft's current income will see a reduction of $1.5 billion, primarily due to anticipated losses from AI startup investments.

Notably, expenditures on real estate and equipment surged by 50% year-over-year to $14.92 billion, surpassing market expectations of $14.58 billion. As of Thursday midday, Microsoft’s stock showed just over a 9% gain year-to-date, in comparison to Nasdaq's 21% increase.