Microsoft's Capital Spending Surges, Revenue Disappoints, Shares Fall

Microsoft's Financial Performance Overview

By Deborah Mary Sophia, Aditya Soni and Stephen Nellis

Jan 28 (Reuters) - Microsoft's capital expenditures hit a record high in the latest quarter, the company said on Wednesday, while sales slightly beat Wall Street expectations, raising concerns among investors who had expected a major payoff from massive spending on artificial intelligence including a cloud megadeal with OpenAI.

Microsoft's shares tumbled more than 7% in extended trading.  

Capital Expenditures and Revenue

The tech giant said revenue at its Azure cloud division grew 39% in the October-December period, its fiscal second quarter. That just squeaked past a consensus estimate of 38.8%, according to Visible Alpha. 

The Windows maker has long enjoyed a first-mover advantage in Big Tech's AI race thanks to its early bet on OpenAI, whose technology powers most of its offerings, including M365 Copilot.

Microsoft owns a 27% stake in the ChatGPT maker, whose recapitalization effort last year helped push Microsoft's overall earnings upward after a change in how Microsoft accounts for its stake.

But a strong reception for Google's latest Gemini model and the launch of autonomous agents, such as Anthropic's Claude Cowork, have posed risks both to Microsoft's AI business and the software offerings that have long been central to the company.

"Microsoft's stock sentiment is very much heavily levered towards how OpenAI is doing and I think that's a bit uncontrollable from a Microsoft standpoint, at least right now with the ChatGPT model versus Gemini," said Ryuta Makino, research analyst at Gabelli Funds. 

Competition has weighed on Microsoft's stock as investor doubts persist over whether Big Tech will deliver enough returns to make up for the AI spending. 

Collectively, Microsoft, Alphabet, Meta and Amazon are expected to spend more than $500 billion on AI this year.

Impact of AI on Microsoft's Business

In the reported quarter, Microsoft's capital spending totaled $37.5 billion, a jump of nearly 66% from last year and with about two-thirds of the spending going toward computing chips. That was more than market estimates of $34.31 billion, according to Visible Alpha.

Total revenue rose 17% to $81.3 billion in the second quarter, while analysts expected $80.27 billion, based on estimates compiled by LSEG. 

Outlook and Investor Sentiment

Microsoft said the contracted backlog in its cloud business more than doubled to $625 billion. The figure was above the $523 billion reported by cloud rival Oracle in December. 

But roughly 45% of Microsoft's remaining performance obligation was driven by OpenAI alone, underscoring its reliance on the startup which has pledged around $1.4 trillion in overall AI expenditure with few details on how it plans to fund the spending.

Microsoft said that excluding OpenAI, its cloud backlog grew at 28%, even when including a $30 billion deal with Claude-maker Anthropic.

Late October's major OpenAI restructuring gave Microsoft that stake. And while the overhaul included a commitment from OpenAI to buy $250 billion of Azure services, it also freed the ChatGPT creator to pursue cloud deals with other companies that could lower its reliance on Microsoft. 

(Reporting by Deborah Sophia and Aditya Soni in Bengaluru; Editing by Alan Barona and David Gregorio)