Published by Global Banking & Finance Review®
Posted on January 28, 2026
5 min readLast updated: January 29, 2026
Microsoft's cloud revenue beat expectations, but AI spending concerns and competition from Google and Amazon weigh on its stock.
By Deborah Mary Sophia, Aditya Soni and Stephen Nellis
Jan 28 (Reuters) - Microsoft said on Wednesday it had spent a record amount on artificial intelligence in the last quarter and posted slower cloud-computing growth, worrying investors who had expected a major payoff from the outlay and its mega-deal with OpenAI.
Microsoft's shares tumbled 6.5% in after-market trading after the company released its fiscal second-quarter financial results.
The tech giant's strategic partnership with OpenAI, which plans to spend at least $281 billion with Microsoft, was once seen by investors as its strongest competitive advantage in the artificial intelligence race. But that has morphed into a possible drawback for the Redmond, Washington-based firm as Google's Gemini makes progress in winning massive customers such as Apple.
On a conference call with analysts, Microsoft executives tried to persuade Wall Street to assess its success in AI by looking not only at its sales from selling cloud computing services, but also at its increasing business selling AI assistants of its own. The company for the first time disclosed core metrics about business usage of its Copilot assistant.
But despite Microsoft CEO Satya Nadella's insistence that AI remains in the "early innings," the company has spent more than $200 billion on the technology since the start of its fiscal 2024, and investor patience is waning.
"One big obvious issue is that revenues are up 17% and the cost of revenues are up 19%. So if that is a new long-term trend, that is one of my concerns," said Eric Clark, portfolio manager of the LOGO ETF, which holds Microsoft shares.
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.
FIRST-MOVER ADVANTAGE
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 it 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.
For the current fiscal third quarter, Microsoft forecast Azure revenue growth of 37% to 38%, versus analyst estimates of 36.41%, according to data from Visible Alpha. The company forecast overall sales in a range with a midpoint of $81.2 billion, in line with analyst estimates of $81.19 billion, according to LSEG data.
Chief Financial Officer Amy Hood said capital spending will be slightly lower than in the just-completed quarter but noted that over time, the rising cost of memory chips will start to weigh on Microsoft's cloud computing margins.
M365 COPILOT USER NUMBERS DISCLOSED
CEO Nadella revealed for the first time that Microsoft now has 15 million annual users for M365 Copilot, the $30 per month AI assistant that is Microsoft's main offering for business users. The figure does not include use of Microsoft's more limited chat features without a license for the software.
Nadella argued that a meaningful portion of Microsoft's capital spending is supporting its own products, which have historically been profitable over the long term.
"We want to be able to allocate capacity while we're supply constrained in a way that allow us to essentially build the best (lifetime value) portfolio," Nadella said on the conference call.
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.
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.
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 and Stephen Nellis in San Francisco; Editing by Alan Barona, David Gregorio and Jamie Freed)
Cloud computing is the delivery of computing services over the internet, allowing users to access and store data and applications on remote servers instead of local computers.
Artificial intelligence (AI) refers to the simulation of human intelligence in machines programmed to think and learn like humans, enabling them to perform tasks such as problem-solving and decision-making.
Market competition refers to the rivalry among businesses to attract customers and achieve higher sales, often leading to innovation and improved services or products.
A revenue projection is an estimate of a company's expected revenue over a specific period, often based on historical data, market trends, and economic conditions.
Stock market reaction refers to the changes in stock prices in response to news or events that affect a company's perceived value or performance.
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