Microsoft announced slow business growth in its cloud business in Q1 2025 as it struggles to create data centers that can handle the demand for its AI.
The trend may continue from the last quarter when its cloud computing business saw disappointing growth due to constraints in the data supply network.
Microsoft shares dropped 4.5% in after-hours trading, with most investors frustrated by big spending, slippery AI revenue, and stiff competition from China’s AI models. Azure may grow 31% or 32% this quarter, a projection that adds misery to investors.
DeepSeek, an AI model built in China, has sparked fear among investors due to its quick success. The concerns are real, driving most known AI stocks down, including Azure. However, Microsoft Chief Executive Satya Nadella is standing strong that his firm is progressing in the AI model it develops and operates.
Nadella said that whatever Microsoft is experiencing is common in regular computer cycles. Other chip-based technologies have, at one point, also experienced cost declines.
The chief executive officer praised DeepSeek’s innovation and the technology it used. The Chinese-made AI technology is likely to be replicated due to its affordability and efficiency.
Microsoft leads in commercializing AI products
Microsoft is a leader in commercializing AI products, driven by its partnership with OpenAI. In 2024, The software maker released a snowstorm of Copiloted AI assistants but has failed to adequately monetize them.
The snail pace of monetizing these products worries most investors, who may consider other options should the trend persist.
According to Microsoft, Azure AI services increased by 157%. However, the growth has not translated into sales due to the company’s insufficient data centre capacity to meet users’ needs. The company is consolidating efforts to improve its data centre capacity before the financial year ends.
Azure has almost $300 billion worth of commercial service contracts that Microsoft must provide in the future, but this revenue has not yet been recognized.
Microsoft’s Chief Financial Officer Amy Hood said:
Demand remains strong, with commercial bookings rising 67%, far ahead of what Microsoft had expected.
– Amy Hood
Hood partly attributed this to Azure commitments from OpenAI.
Microsoft and its cloud rivals, Amazon and Google, are spending a lot on chips and data centres that would drive the power-angry AI services. Microsoft will likely spend $80 billion on AI data centres this fiscal year. Yet Wall Street is concerned with such huge amounts, drawing lessons from Chinese upstart DeepSeek, which rivals US technology at a fraction of the cost.
Microsoft AI revenue is stronger, but cloud business is pulling the gains
Microsoft’s capital expenditures rose to $22.6 billion last quarter, a $2.6 billion increase from September. Last fiscal year, it spent $55.7 billion.
The company said that its AI revenue is getting stronger, as the business generates over $13 billion when computed annually. Total revenue rose 12% to $69.6 billion last quarter, and net income was up 10% to $24.1 billion. The firm forecasted that revenue in the current quarter will be between $67.7 billion and $68.7 billion.
Executives noted that cloud AI revenue was stronger than expected. However, they noted that cloud business was pulled down by trouble delivering for traditional, non-AI cloud customers. Hood said she expects capacity constraints, which it experienced in its September quarter, to be resolved by the end of the fiscal year.
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Source: https://www.cryptopolitan.com/microsofts-cloud-misses-growth-targets/