Microsoft’s AI Capacity Constraints Impact Cloud Growth, but Investments Are Being Made to Meet Demand

After Microsoft (MSFT) reported better-than-expected earnings for the fiscal fourth quarter but its cloud growth missed estimates, executives gave investors an update on the tech giant’s investments in artificial intelligence (AI), capacity constraints, outlook, and more in the company’s earnings call.

AI Capacity Constraints Hold Back Cloud Growth

Microsoft CFO Amy Hood said that the company’s AI-related capacity lagging demand, coupled with weakness in some European regions, contributed to the company’s softer-than-expected cloud growth.

The CFO said there “was some softness on non-AI consumption” in some European markets, and that “capacity constraints particularly on AI and Azure” contributed to cloud revenue coming in at the lower end of previous guidance ranges.

Hood added that AI capacity could continue to lag behind demand until the second half of 2025.

Ramping Up Investment in AI To Meet Demand

Microsoft, along with many of its big tech peers, is boosting its investments in AI to secure its position as a leader in the space, raising concerns about higher costs.

When asked about how the company’s investments could pay off, Microsoft CEO Satya Nadella said capital expenditures are being guided by “demand signals,” including Azure AI growth, and that the company’s spending would change if demand shifts.

Microsoft executives said current capital spending would allow the company to meet AI demand in the second half of fiscal 2025, which could drive revenue gains.

Cloud and AI Investments Make Up Nearly All of Microsoft’s Capital Expenditures

Hood said nearly all of Microsoft’s $19 billion in capital expenditures were related to cloud or AI investments.

Around half of the spending was dedicated to infrastructure, with the company building and leading data centers, that the CFO said “will support monetization over the next 15 years and beyond.”

Executives told analysts that the company views its investments in AI infrastructure and data centers as long-term assets and emphasized their flexibility, echoing similar comments from Alphabet (GOOGL) CEO Sundar Pichai last week suggesting the flexibility of AI infrastructure solutions like data centers could lower the risk of overinvesting in the technology.

Double-Digit Revenue Growth Expected in Fiscal 2025

Hood said Microsoft anticipates double-digit revenue growth in fiscal 2025 as the company works to raise capacity to meet demand.

The CFO said that cloud revenue is expected to grow between 28% and 29% year-over-year in the first quarter of fiscal 2025.

Microsoft shares were down close to 3% at $411.40 in extended trading as of 8:40 p.m. ET Tuesday following the company’s earnings call.

Overall, Microsoft’s earnings call highlighted the challenges the company is facing in meeting the growing demand for AI and cloud services. While AI capacity constraints have impacted cloud growth, Microsoft is actively investing in AI infrastructure and data centers to address this issue. The company’s focus on long-term assets and flexibility in its investments demonstrates its commitment to staying ahead in the AI space. With double-digit revenue growth expected in fiscal 2025, Microsoft remains optimistic about its future prospects.

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