Microsoft’s cloud computing forecast has fallen short of market expectations, sending its shares lower in after-hours trading. The software giant projected growth in its Azure cloud arm of 31%-32% for the current quarter, below Wall Street’s estimate of 33%, raising concerns over its AI-driven revenue trajectory, ongoing capital expenditures, and rising competition from lower-cost AI models in China.
The forecast comes amid growing concern among investors about the financial impact of AI investments. Microsoft, along with other US tech giants, has spent billions on AI infrastructure, but returns on these investments remain under scrutiny. Concerns have been amplified by the rapid rise of DeepSeek, a Chinese AI startup that claims to offer competitive AI models at a fraction of US costs, fueling fears of a price war.
Details of Microsoft’s Q2 FY25 results
Microsoft reported fiscal second-quarter (Q2 FY25) earnings that exceeded overall revenue expectations but showed signs of slowing cloud momentum. The company posted a 12% year-over-year (YoY) revenue increase to $69.6bn, surpassing the consensus estimate of $68.78bn. Net income rose 10% to $24.1bn while operating income climbed 17% to $31.7bn. Redmond reported second-quarter earnings per share of $3.23, surpassing Wall Street’s expected $3.11.
Azure and other cloud services grew 31% compared to the previous year, missing analyst estimates of 31.8%. AI contributed approximately 13% of Azure’s growth, and Microsoft said its AI business has now surpassed an annual revenue run rate of $13bn, reflecting a 175% YoY increase. Capital expenditures reached $22.6bn, exceeding analysts’ forecasts of $20.95bn. The increase highlights Microsoft’s continued investment in AI infrastructure, which remains a key focus for the company despite ongoing investor concerns about profitability.
“We are innovating across our tech stack and helping customers unlock the full ROI of AI to capture the massive opportunity ahead,” said Microsoft chairman and CEO Satya Nadella.
The Intelligent Cloud division, which includes Azure, reported revenue of $25.5bn, slightly below analysts’ estimates of $25.76bn. In its Productivity and Business Processes segment, which includes Microsoft 365, LinkedIn, and Dynamics 365, revenue increased by 14% to $29.4bn. Microsoft 365 Commercial cloud revenue rose 16%, while LinkedIn revenue climbed by 9%.
The More Personal Computing segment, which covers Windows, Xbox, and advertising, generated revenue of $14.7bn, remaining relatively unchanged. Windows OEM and devices revenue increased by 4%, while Xbox content and services grew by 2%. Search and news advertising revenue, excluding traffic acquisition costs, rose by 21%.
Following the earnings announcement, Microsoft shares dropped more than 4.5% in after-hours trading. The results reflect broader concerns about the impact of AI investment spending across the technology sector. Microsoft faces increasing competition from Chinese AI firms, particularly DeepSeek. The company’s AI assistant quickly became the most downloaded AI app on Apple’s App Store, overtaking OpenAI’s ChatGPT. The development contributed to volatility in AI-related stocks, with Nvidia seeing a sharp decline in market value before partially recovering.
As competition in the AI market intensifies, Microsoft has expanded its AI offerings beyond its partnership with OpenAI. The company announced that DeepSeek’s R1 AI model will be available on its Azure cloud platform and GitHub, joining a catalogue of more than 1,800 AI models on Microsoft’s platforms. Additionally, Microsoft plans to allow customers to run the R1 model locally on their Copilot+ PCs, a move aimed at addressing privacy and data-sharing concerns.
Read more: Microsoft set to invest $80bn in AI-powered data infrastructure for FY25
