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On Thursday, shares of Microsoft (MSFT, Financial) saw a dip of nearly 4% in pre-market trading after the company reported its Q2 results, forecasted weaker-than-expected cloud growth, and signaled continued high spending on artificial intelligence. Adding to the worrying sentiments, Azure's revenue is anticipated to grow between 31% and 32% in the fiscal third quarter, falling short of Wall Street's 33% estimate, according to Visible Alpha.
Despite reporting $69.6 billion of revenue in the fiscal second quarter, which outpaced analysts' expectations, which were estimated at $68.78 billion, investors seem to be worried about rising costs. Microsoft's capital expenditures figures hit $22.6 billion, surpassing the $20.95 billion analysts had projected.
During the earnings call, CEO Satya Nadella tried to gain investors' confidence by saying that Microsoft is improving AI efficiency, adding that AI-related investments contributed 13 percentage points to Azure's growth last quarter, up from 12 percentage points in the previous quarter. However, competition is increasing, particularly from DeepSeek, a fast-growing Chinese AI model, raising fears of a potential price war.
Furthermore, CFO Amy Hood tells the investors about strong commercial bookings that came through major Azure contracts, including those with OpenAI. While Microsoft remains a dominant AI player, its stock has gained only 8% in the past year, lagging behind Alphabet's 29% increase and Amazon's 50% surge. Investors are looking for clearer signs of how the company will turn AI spending into sustained profits.
This article first appeared on GuruFocus.