Published by Global Banking & Finance Review®
Posted on January 29, 2025
4 min readLast updated: January 27, 2026
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Microsoft's cloud forecast missed expectations, causing a 5% drop in shares. Investors are concerned about AI spending and competition from cheaper Chinese models.
By Stephen Nellis and Deborah Mary Sophia
(Reuters) -Microsoft on Wednesday forecast disappointing growth in its cloud computing business, sending its shares down more than 5% as investors worry about big spending, elusive artificial intelligence revenue and growing competition from cheaper AI models from China.
Azure results for the fiscal second quarter also fell below Wall Street expectations. Despite beating quarterly overall sales estimates, investors want better results from the hundreds of billions of dollars that Wall Street heavyweights have been spending to build AI data centers and infuse their products with the emerging technology.
Chinese rivals have recently claimed to produce competing AI technologies at lower costs than U.S. rivals, sparking fears of a price war. For more than a year, Microsoft and its Big Tech peers have tested Wall Street's patience by plunking down huge amounts of cash in pursuit of profits from AI that have yet to satisfy investors.
"It's OK if that is a few years out, three to five years into the future," said Brian Mulberry, portfolio manager at Zacks Investment Management. "But we really want to start to see a clear road map to what that monetization model looks like for all of the capital that's been invested."
On a conference call with investors, Chief Executive Satya Nadella said costs were coming down, with models showing 10 times better performance for the price as Microsoft irons out the algorithms.
"As AI becomes more efficient and accessible, we will see exponentially more demand," Nadella said.
Microsoft Chief Financial Officer Amy Hood said Azure would grow between 31% and 32% in the current fiscal third quarter, below the 33% Wall Street expects, according to data from Visible Alpha.
Microsoft's Azure unit reported revenue growth of 31% in the quarter, missing Visible Alpha estimates of 31.8%. Microsoft's capital expenditures hit $22.6 billion, above analysts' consensus estimate of $20.95 billion, according to data from Visible Alpha.
DeepSeek's meteoric rise in the past three weeks has sparked worries of stiff competition that could force leading U.S. AI providers to slash prices.
Microsoft said earlier on Wednesday it had added DeepSeek, the breakout Chinese AI model, to its offerings on Azure. Microsoft said AI contributed 13 percentage points of Azure's growth in its fiscal second quarter, up from 12 percentage points the previous quarter.
Responding to questions from analysts, Nadella said Microsoft was spending to build out data centers to develop AI models and offer them to customers. Microsoft is working to make those services more cost efficient, he added.
"We are working super hard on all the software optimizations - not just the optimizations that have come because of what DeepSeek has done, but all the work we have done to reduce the prices of GPT models over the years in partnership with OpenAI," Nadella said.
"In fact, we did a lot of the work on the inference optimizations on it, and that's been key to driving it."
Overall, investors still appear to view Microsoft as a leading bet on AI. Its stock has gained about 8% over the past year, trailing a 29% rally in Alphabet and a 50% surge in Amazon. It is trading at about 32 times expected earnings, slightly above its five-year average of 30, according to LSEG.
Microsoft also posted 67% growth in what it calls commercial bookings, a measure of new contracts signed with large customers.
Brett Iversen, Microsoft's vice president of investor relations, said that figure was mostly driven by a large new Azure contract with OpenAI.
While OpenAI announced a new data center deal with Oracle last week, Microsoft still retains the rights to most of the hosting of OpenAI's models for commercial purposes.
At the company's Intelligent Cloud unit, which includes the Azure platform, revenue rose to $25.54 billion, missing expectations of $25.76 billion.
Total revenue rose 12% to $69.6 billion in the fiscal second quarter ended December, compared with analysts' average estimate of $68.78 billion, according to data compiled by LSEG.
Redmond, Washington-based Microsoft reported a profit of $3.23 per share, beating expectations of $3.11 per share.
(Reporting by Deborah Sophia in Bengaluru; Editing by Sriraj Kalluvila, Maju Samuel and Richard Chang)
The article discusses Microsoft's disappointing cloud forecast and its impact on shares.
Shares dropped due to a disappointing cloud forecast and concerns over AI spending and competition.
DeepSeek is a Chinese AI model added to Microsoft's Azure offerings, sparking competition concerns.
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