Microsoft Corp. shares experienced a decline in extended trading following the company’s forecast of slower growth for its cloud revenue, Bloomberg reports.
This forecast highlights challenges in bringing data centers online quickly enough to meet the surging demand for artificial intelligence (AI) services. During a call with analysts on Wednesday after the release of its first-quarter earnings report, Microsoft executives projected that sales from its Azure cloud-computing division would increase by 31% to 32% in the upcoming quarter. This marks a decrease from the 34% revenue growth reported for the previous quarter, which had already shown a slight slowdown from 35% growth in the prior period.
Despite the cautious outlook, Microsoft’s first-quarter earnings report revealed positive overall results, with revenue rising 16% to $65.6 billion and profit increasing to $3.30 per share, exceeding market estimates. However, Chief Financial Officer Amy Hood indicated that some expected data center capacity that was essential for the company’s AI initiatives did not materialize, which is expected to limit revenue growth in the Azure segment for the current quarter ending in December.
“We are in short supply, and we remain focused on getting that into a more balanced position,” Hood stated in an interview.
Following the announcement, Microsoft shares dropped by 3.7% in premarket trading on Thursday after closing at $432.53 in New York. Analysts have expressed concern about the potential impact of increased spending on data center construction, with Gil Luria from D.A. Davidson & Co. downgrading his rating on Microsoft shares to “neutral.”
“Our fear is the more they throw into data center buildout, the more the drag is going to be on margins,” he commented.
However, he noted that the company has managed to offset some of these costs through savings in other areas.
Under the leadership of Chief Executive Officer Satya Nadella, Microsoft has significantly enhanced its product offerings with AI models developed in partnership with OpenAI. Nadella is now focused on attracting a broader customer base for these upgraded software and services to sustain the company’s growth in the coming years. Additionally, corporations are increasingly relying on Microsoft’s data center capabilities to develop their own AI applications, contributing to demand for Azure services.
