Microsoft, once a leader in the generative artificial intelligence (AI) sector, is now encountering a complex landscape that has caused investors to reevaluate their perspectives, the Wall Street Journal reports.
After experiencing a remarkable 57% surge in stock value last year—its best performance since 1999—the company’s year-to-date gains of less than 11% have fallen short of the broader tech market and the S&P 500 index. This decline makes Microsoft the only major tech company to trail the Dow Jones Industrial Average this year.
Despite robust business performance, with a record revenue of $245.1 billion for the fiscal year ending in June—up nearly 16% from the previous year—Microsoft is grappling with rising expenses associated with maintaining its AI leadership. The company’s capital expenditures, which include investments in AI technology and infrastructure, reached $55.7 billion, accounting for 23% of its reported revenue for the year. This figure represents a significant increase from the previous five years, where capital expenditures made up only 14% of revenue.
Microsoft’s Chief Financial Officer, Amy Hood, indicated that capital spending would continue to rise in the coming fiscal years. Analysts predict that these expenses will constitute 28% of Microsoft’s revenue this fiscal year and 27% in the next. However, this elevated spending comes at a cost; projections suggest that Microsoft’s free cash flow will only grow by 3% this year, a stark contrast to the 25% increase seen in the previous year. Additionally, the heavy investment in AI infrastructure is expected to lead to higher depreciation charges against earnings, limiting margin expansion in the near and medium term.
Investor scrutiny has intensified as Microsoft has not provided detailed revenue figures from its generative AI offerings, including its Copilot tools. While Hood noted that AI services contributed to the 29% year-over-year revenue growth in the Azure cloud service, concerns remain about the overall impact of generative AI on revenue trends. Analysts are increasingly questioning whether these investments will yield the anticipated returns.
Microsoft’s recent changes in financial reporting, announced on August 21, have added another layer of complexity. The adjustments will redistribute revenue across various business segments, resulting in a lower revenue figure for the Azure cloud division while simultaneously enhancing its reported growth rates. Critics argue that these changes could obscure true performance, complicating the already intricate nature of Microsoft’s business model, which encompasses cloud contracts, software licensing, hardware sales, and advertising.
Moreover, Microsoft’s significant investment in OpenAI, where it has invested $13 billion and participated in a recent funding round, has raised concerns about the company’s dependency on the AI developer. OpenAI is undergoing a transitional phase towards a for-profit model, marked by the departure of several key executives. This evolving relationship has led to questions about Microsoft’s competitive position in the AI market, with analysts noting that other companies have caught up to Microsoft’s advancements.
Despite these challenges, approximately 93% of analysts continue to rate Microsoft stock as a “buy,” reflecting a prevailing optimism about the company’s long-term prospects.
