Microsoft Earnings Raise Fears Over AI Spending. Bubble Go Pop?

Jul 31

Playing catch-up is big among the highflyers of technology as the Magnificent Seven club races to slurp up AI demand. But is AI spending going to lead to AI bonanza? It’s not that straightforward.


Microsoft (ticker: MSFT) reported its earnings update for the spring quarter Tuesday after the closing bell. But it failed to appease investors who seem to be waking up to a reality where the billions of dollars jammed into artificial intelligence might not that easily convert into coveted profits.

The AI-optimistic large-cap behemoth has spent piles of cash on advancing its artificial-intelligence capabilities without much to show for it. Markets punished the stock in after-hours trading with shares diving as deep as 8% — a drop that later recovered but still lingered under the flatline.

“Throw Some AI in There, They’ll Love It”

You know how much CEOs love to throw AI in their earnings calls? Microsoft boss Satya Nadella praised the company’s AI efforts in the call with shareholders but even the overuse of AI couldn’t bring the feelgood factor.

Microsoft’s AI-powered cloud business, Azure, grew 29% in the three months to June, falling short of expectations and undershooting the 31% growth in the previous quarter. The company rushed to patch it up and assuage spooked investors, saying the slowdown was due in part to demand for AI running ahead of capacity.

Microsoft: Throws $55.7 billion in capital expenditures.
AI: *giggles, burps* "Thanks for the cash."

For the past three months — the company’s fiscal fourth quarter — Microsoft saw its capital expenditures balloon by almost 80% year-over-year to $19 billion. Moreover, for fiscal 2024, total capital expenditures, or how much the company spent on new stuff, hit $55.7 billion — a figure that is likely to get surpassed next year as Microsoft projects increased spending on AI.

Microsoft’s quarterly results are the latest example, after Google’s (ticker: GOOGL) flop of an earnings report and Tesla’s (ticker: TSLA) profit-squeezing quarter, of Big Tech’s lofty aspirations when it comes to AI. And the pushback reaction from investors shows that expectations are so high, it’s near-impossible to beat them.

Big Tech is racing to build out the infrastructure layer that will allow AI to scale so it can start churning out a profit. But the going has recently gotten tough. The Magnificent Seven club of tech mainstays washed out more than $1.5 trillion from its collective market value in the past three weeks.

The question that lingers on investors’ minds right now is how long can markets stay patient before they see revenue growth from AI materialize?

Let Us Know Your Thoughts!

With all the hype around AI, do you see a bubble in the works? Or justified no-froth, no-nonsense valuations? Share your thoughts below!