Microsoft’s downbeat Azure growth sparks tech sell-off as AI payoff takes longer

By Aditya Soni, Yuvraj Malik and Anna Tong

(Reuters) – Microsoft’s weaker-than-expected revenue growth in its Azure cloud business dragged its shares down 5% in after-hours trading on Tuesday and rocked other big tech stocks, in another sign the payoff in hefty AI investments may take longer.

Shares of Amazon.com fell 2.3%, and those of Nvidia pared losses to trade flat after falling 10%.

Microsoft’s shares have climbed nearly a quarter in the past 12 months on optimism that the company is the frontrunner in the AI race thanks to its investments in ChatGPT maker OpenAI. But they have lost 10% since a record high on July 5 amid a broader market sell-off driven largely by megacap stocks, following disappointing results from EV maker Tesla and Google parent Alphabet’s higher expenditure forecast.

Microsoft said revenue from its Intelligent Cloud unit – home to the Azure cloud-computing platform – rose to $28.5 billion in the quarter ended June 30, missing analysts’ estimates of $28.68 billion, LSEG data showed.

Azure revenue rose 29%, lower than the 30.6% growth estimate from market research firm Visible Alpha. Microsoft does not break out the absolute revenue figure for Azure, the part of its business best situated to capitalize on booming interest in AI.

The miss came as the Windows maker is pouring billions of dollars into data centers to prepare for a potential surge in demand for AI services.

The company’s capital expenditure including finance leases rose 77.6% in the quarter to $19 billion. It also marked a big step up from the $14 billion it recorded in the previous three months.

Microsoft has said the spending was needed to expand its global network of data centers and overcome the capacity constraints that were hampering its efforts to meet AI demand.

CEO Satya Nadella has pushed the company to go all-in on the technology, weaving AI into almost every product from search engine Bing to productivity software such as Word.

Large parts of those efforts have been fueled by technology from OpenAI, in which Microsoft has invested about $13 billion, including the 365 Copilot assistant for enterprises that costs $30 a month and became widely available last year.

Microsoft – seen as a bellwether for the tech industry thanks to its wide-spanning business – said total revenue rose 15% to $64.7 billion in its fiscal fourth quarter ending in June. Analysts had expected $64.39 billion, according to LSEG data.

(Reporting by Aditya Soni and Yuvraj Malik in Bengaluru and Anna Tong in San Francisco; Writing by Sayantani Ghosh; Editing by Sriraj Kalluvila and Matthew Lewis)