Microsoft has investors really freaking out about Big Tech's AI spending

• Shares fell in post-market trading after Microsoft released its fourth-quarter earnings report.
• Its Azure cloud unit's revenue grew 29%, slightly slower than analysts had expected.
• CEO Satya Nadella highlighted the company's longterm AI goals during the call.

Analysts had big expectations for Microsoft's cloud growth this quarter — and the tech giant seems to have fallen short of them even as it pumps money into its AI plans.

Microsoft released its Q4 earnings Tuesday afternoon, and the company grew its Azure cloud unit's revenue by 29%. That came in slightly shy of Wedbush analysts' expectations for 30% growth in this "most important metric." Shares dropped in postmarket trading.

The results came as companies, including Microsoft, are under the spotlight as they spend heavily on artificial intelligence but are yet to show explosive sales growth from the relatively new tech. Microsoft has invested $13 billion in OpenAI; it also plans to obtain 1.8 million chips to grow its AI abilities.

Earlier this month, Alphabet investors quizzed execs on the same topic of AI spending vs. results, with limited success. Further Big Tech earnings this week, including Meta, Amazon, and Apple, will likely attract a similar line of questioning.

Microsoft broke down its spending in the quarter, saying capital expenditures, including finance leases, were $19 billion — and AI-related spending represented nearly all of that. Roughly half was for infrastructure needs — like building and leasing data centers; the remaining cloud and AI-related spend was primarily for servers, both CPUs and GPUs, execs said.

Microsoft CEO Satya Nadella offered a broader perspective on the shift towards AI, perhaps hoping to soothe investors. He stated that the transition involves knowledge and capital-intensive investments and emphasized the importance of "long-term operating leverage." The CEO also highlighted that Microsoft expanded its data footprint and added new AI accelerators from AMD and Nvidia.

"We know how to manage our capex spend to build a long-term asset," he said on the investor call. Meantime, CFO Amy Hood pointed out that a lot of Microsoft's AI spending will be monetized "over 15 years and beyond."

Microsoft reported a total of $64.7 billion in revenue in the quarter, marking 15% year-over-year growth. Still, shares slumped more than 6% in after-hours trading.

Emarketer senior analyst Gadjo Sevilla also noted that the earnings report comes as the company has had to respond to major cybersecurity incidents, like the CrowdStrike outage a couple of weeks ago and another global outage impacting Microsoft 365 and Azure on Tuesday.

Gadjo said these recurring failures could take a toll on Microsoft's reputation in the short term.

But despite the lackluster reaction to today's results, Microsoft still maintains a leadership position in "productizing AI" with its partnership with OpenAI and Copilot AI rollouts, Gadjo said.