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Microsoft shares fell as investors were spooked by a 66 per cent surge in data centre spending and slower than expected cloud growth, despite strong demand for AI services boosting profits by almost a quarter.
Quarterly adjusted net income rose 23 per cent year on year to $30.9bn in the three months to the end of December, beating analysts’ expectations for $28.9bn. Revenue increased 17 per cent to $81.3bn, exceeding estimates of $80.3bn.
Shares of the Redmond, Washington-based group were 5.1 per cent lower in after-hours trading as another big jump in AI-related spending soured the market reaction to these record profit and revenue figures.
Capital expenditure, including finance leases, was $37.5bn in the quarter, an increase from $34.9bn in the prior three months and up from $22.6bn in the same period last year.
Previously, Microsoft had forecast almost $140bn of capex in its fiscal year, which ends in June.
The $3.6tn software group is in an expensive race with rival cloud operators including Google and Amazon to build out the infrastructure needed to run advanced AI.
Meta, which also reported earnings on Wednesday, said its capex could rise to $135bn this year, more than double what it spent on AI in 2025. However, its stock rose 9 per cent after it beat earnings expectations.
Microsoft chief executive Satya Nadella remains committed to his bet on AI, arguing that the historic spending will be justified as the technology is adopted by businesses and increases global productivity.
The company is also integrating AI into its Office enterprise software — hoping that productivity gains will allow it to charge more and improve margins — while trying to build a consumer AI app to challenge Google’s Gemini and OpenAI’s ChatGPT.
“We are only at the beginning phases of AI diffusion and already Microsoft has built an AI business that is larger than some of our biggest franchises,” Nadella said on Wednesday.
Sales at Microsoft’s closely watched cloud division, which has seen a surge in AI-related income and includes its Azure computing platform, rose 26 per cent from a year ago to $51.5bn.
However, analysts at Barclays said shareholders were disappointed by sales at its Azure business, which reported 38 per cent growth year on year, a percentage point below the rate in the previous quarter.
“We see a muted reaction [even though] overall numbers look very healthy,” they wrote. “But a lot of focus is on Azure growth . . . we fear buy-side investors might have hoped for more.”
Microsoft said its book of future cloud business rose 110 per cent in the quarter to $625bn “driven by Azure commitments from OpenAI and Anthropic”.
The tech giant previously had an exclusive partnership with OpenAI, but it has been diversifying away from the start-up after restructuring its relationship with the ChatGPT maker.
Anthropic recently committed to purchase $30bn of Azure compute capacity. In return, Microsoft has said it will invest as much as $5bn in Anthropic alongside a $20bn fundraising at a $350bn valuation.
On a non-adjusted basis, net income rose 60 per cent to $38.5bn due to a $7.6bn accounting gain on its investment in OpenAI, reflecting an increased amount of cash on the start-up’s balance sheet after multiple large fundraisings.
Microsoft holds a 27 per cent stake in the AI model builder after it restructured into a more traditional for-profit enterprise from a non-profit in October. OpenAI is pursuing a massive new funding round at a more than $750bn valuation.