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![Microsoft stock price drops despite strong earnings amid AI growth challenges](https://d15shllkswkct0.cloudfront.net/wp-content/blogs.dir/1/files/2025/01/satyanadella-copilot-ignite2023.png)
The Microsoft Corp. stock price dipped after-hours despite a 10%rise in profit from its fiscal second quarter, as the company strives to capitalize on the massive investments it has made in artificial intelligence infrastructure.
The company said its revenue from AI products and related services has now hit an annual run rate of $13 billion, growing from the previous $10 billion run rate it reported three months ago.
However, while its profit and revenue surpassed Wall Street’s expectations, the company’s overall cloud computing business fell just short of analyst’s targets. Moreover, its guidance for the current quarter came up short, sending its stock lower after-hours.
Microsoft reported earnings before certain costs such as stock compensation of $3.23 per share, besting Wall Street’s forecast of $3.11. Revenue from the October to December quarter reached $69.63 billion, above the Street’s $68.78 billion target.
The company published its fiscal 2025 second-quarter earnings report in the wake of larger questions about spending in the AI industry following the emergence of Chinese AI startup DeepSeek, which has achieved dramatic cost-efficiency gains through the use of novel AI training techniques. DeepSeek’s rise has led to some serious scrutiny over the billions of dollars spent on AI infrastructure by Microsoft and its rivals.
In the quarter, Microsoft’s capital expenditures reached a new record high of $22.6 billion, with officials citing the need to continue boosting data center capacity to meet demand for its AI offerings and cloud customers.
The company said revenue from its Azure cloud computing platform and other cloud services increased 31% in the quarter, a slower pace than the 33% growth recorded three months earlier. Officials said 13% of that growth was attributed to AI services.
Azure’s overall growth rate was lower than analysts had expected, causing the Microsoft stock price to fall more than 4% in extended trading.
Overall, the company’s Intelligent Cloud segment, which includes revenue from Azure, delivered $25.54 billion in sales, up 19% from a year earlier but just shy of the $25.83 billion consensus estimate.
Elsewhere, the company’s productivity segment, which includes the Office suite and Teams messenger platform, added $29.4 billion in revenue, up 14% from a year earlier. Sales from the personal computing business, which includes Windows, remained flat at $14.7 billion.
Looking to the current quarter, Microsoft’s chief financial officer Amy Hood said on a conference call that the company is looking at sales of between $67.7 billion and $68.7 billion, shy of the Street’s consensus of $69.8 billion. She’s forecasting Azure revenue to grow by 31% to 32%, below the Street’s guidance of 33.4%, blaming it on the need to address execution challenges and problems with capacity constraints. However, Hood said she’s confident that Azure’s growth will accelerate in the second half of the fiscal year, compared to the first half.
The latest revenue numbers highlight the rapid pace of Microsoft’s ongoing transition from a product-focused business to a services one, said Holger Mueller of Constellation Research Inc. He pointed out how product revenue declined more than $2.5 billion in the quarter compared to the previous year, though services-based revenue made up for it, growing more than $10 billion. But the successful transition is creating new problems for the company, he said.
“The result of this is that earnings per share were up 30 cents year-over-year, but the question on investor’s lips is how long can the company keep this up,” Mueller said. “They’ll be concerned by the comments from Hood, who acknowledged Azure is facing capacity constraints for the first time.”
Although the company’s stock fell slightly after-hours, it was still higher than it was on Monday, when it was hit by a broader selloff of technology stocks that was driven by the reaction of ChatGPT competitor DeepSeek.
Investor concerns over competition from DeepSeek and Azure’s capacity constraints weighed on the Microsoft stock price, which had slipped more than 4% at earlier in the week. The Chinese company debuted an open-source “reasoning” model earlier this month that it said was trained at a cost of just $5.6 million, excluding the expense of data and previous research. That sent shockwaves through the AI industry, as its performance matched and sometimes even outperformed comparable models created by OpenAI, Google LLC and Meta Platforms Inc., which cost much more to train.
Microsoft is a key backer of OpenAI and it has committed to spending $80 billion on AI infrastructure this year in order to expand its global network of high-powered data centers to meet demand for the specialized chips required to train and run AI models.
Somewhat surprisingly, Microsoft Chief Executive Satya Nadella (pictured) said DeepSeek’s R1 model is now available to download through the Azure AI Foundry platform and via GitHub. He added that customers will soon be able to select DeepSeek on Copilot+ personal computers.
Regarding DeepSeek’s perceived cost-efficiency gains, Nadella told analysts on the call that “scaling laws” are compounding with regards to both pretraining and inference time compute. “We ourselves have seen significant efficiency gains in both training and inference for years now,” he said. “On inference, we have typically seen more than two-times price-performance gains for every new hardware generation and more than 10-times for every new model generation.”
The rise of DeepSeek has stoked fears among some investors that Microsoft may have put its eggs in the wrong basket by throwing its weight behind OpenAI and the infrastructure that supports it, said Valoir analyst Rebecca Wettemann.
“We don’t expect companies to move their AI to DeepSeek yet, but that company’s release of lower-cost and less resource-intensive AI models tells us that AI is going to become more commoditized in future,” Wettemann said. “It’s the surrounding platform features that support greater accuracy, security and customization to specific needs that will be the real differentiators, and that’s where Microsoft needs to invest.”
Prior to today’s earnings call, Microsoft’s stock had gained 5% in the year to date, outperforming the S&P 500 Index, which was up 3% so far.
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