Microsoft disclosed record spending on artificial intelligence in its fiscal second quarter, while its cloud-computing growth showed signs of slowing, raising concerns among investors about the payoff from its massive investment and partnership with OpenAI. Shares of the Redmond, Washington-based tech giant fell 6.5% in after-hours trading following the release of the results.
The company’s strategic partnership with OpenAI, which has committed to spend at least $281 billion on Microsoft technology, was once viewed as a key advantage in the AI race. Analysts say that advantage is being challenged by rivals such as Google, whose Gemini AI is gaining traction with large customers including Apple, and Anthropic, which launched autonomous agents like Claude Cowork.
Microsoft reported total revenue of $81.3 billion for the quarter ending December, up 17% from a year earlier, slightly above analyst expectations of $80.27 billion. Revenue at its Azure cloud division grew 39%, narrowly beating the consensus estimate of 38.8%. The company’s cloud backlog more than doubled to $625 billion, although roughly 45% of that remaining performance obligation is tied to OpenAI. Excluding OpenAI, cloud backlog growth was 28%, including a $30 billion deal with Anthropic.
Despite strong top-line growth, costs rose faster than revenue. Microsoft’s capital spending reached $37.5 billion, up nearly 66% year-on-year, with about two-thirds devoted to computing chips. Investors expressed concern over rising costs, with Eric Clark, portfolio manager of the LOGO ETF, noting that “revenues are up 17% and the cost of revenues are up 19%.”
CEO Satya Nadella emphasized that Microsoft’s AI efforts are still in the “early innings” and highlighted the growth of its M365 Copilot assistant, which now has 15 million annual users. The $30-per-month AI assistant represents a growing segment of Microsoft’s business, though the company has said it will take time for AI to generate meaningful profits. Nadella also argued that capital spending on AI supports Microsoft’s own products, which have historically been profitable over the long term.
Looking ahead, Microsoft forecast Azure revenue growth of 37% to 38% for the fiscal third quarter, slightly above analyst estimates of 36.4%, and projected total sales around $81.2 billion, in line with expectations. CFO Amy Hood noted that while capital spending will ease slightly, rising memory chip costs could pressure cloud margins over time.
Microsoft’s reliance on OpenAI reflects both opportunity and risk. The recent restructuring of OpenAI included a commitment to buy $250 billion of Azure services but also freed the startup to pursue cloud deals with other companies, potentially weakening Microsoft’s exclusivity.
As Big Tech continues to invest heavily in AI—Microsoft, Alphabet, Meta, and Amazon are expected to spend more than $500 billion collectively this year—investors are closely watching whether these outlays will generate returns sufficient to justify the enormous expenditures.
