The software giant is widely seen as the front-runner in the race to capitalize on generative AI, partly thanks to its investment in ChatGPT-owner OpenAI. However, recent reports point to slow adoption of its essential products, including the $30-per-month Copilot assistance.
In the first quarter, Microsoft’s revenue rose 29% to $52.7 billion, below forecasts of about $53 billion and the company’s slowest quarterly growth in a year. That’s a sign that the payoff from big tech’s hefty investments in AI is taking longer than investors had hoped for.
Investors will look to the company to provide more explicit evidence of strong demand for its artificial intelligence offerings as it seeks to bolster its financial profile after years of investing in cloud computing, AI, and other areas. Microsoft’s stock has slumped 7% in the past three weeks on concerns that it may not be reaping the rewards of its massive investment in AI.
The company is spending $28 billion on a project called Azure Data Center X to build an ecosystem of hardware, software, and services that would allow it to better compete with Amazon Web Services, Google Cloud, and others. The new data centers are expected to open in 2024.
Microsoft’s latest earnings report showed that the company can still grow its revenue despite a cooling economy and a sharp slowdown in PC sales. The company’s cloud business, which has been a primary growth driver in recent years, was up 29%. And about 8 percent of that increase was attributed to AI, up from 7 percent in the previous quarter.
While the quarterly results fell short of estimates, the company’s profit per share topped expectations. A tax benefit of $1 billion, which was larger than analysts had expected, also helped the results.
However, the company’s outlook for the current quarter was tepid. The company expected growth in its cloud and AI businesses to slow, adding that its total addressable market remains more than $100 billion. That’s a lot of room for potential competitors to expand their market share and profits, making it more difficult for Microsoft to maintain its dominance.
Microsoft has been making some significant changes lately in its AI strategy. Earlier this week, the company dropped its observer seat on the board of OpenAI, in which it invested $13 billion, indicating that it wants to be less dependent on the independent GenAI vendor. It’s also reportedly putting its money into chip designer Arm Holdings, which makes the intellectual property used by original equipment manufacturers to make central processing units, graphics processing units, and neural processing unit chips for their computers.
Investors will look for signs that Microsoft’s investment in AI is paying off as it grapples with the slowdown in its Azure cloud-computing division. It will be especially important to see whether the company can show that its newer, generative AI products are popular with customers.
