Photo Credit: Tawanda Razika from Pixabay

Microsoft (Nasdaq: MSFT) recently announced strong quarterly results, but despite their performance, the market was not happy. The stock slid 12% after results were announced as investors remain concerned about the high spending on AI and slow growth on cloud. This was the biggest fall for Microsoft since 2020.

Microsoft’s Financials

Microsoft’s second quarter revenues grew 17% to $81.27 billion, beating analyst estimates of $80.27 billion. EPS of $4.14 also exceeded analyst estimates of $3.97 per share.

Revenue from its Intelligent Cloud unit, which includes Azure, grew 29% to $32.9 billion, ahead of the market’s estimate of $32.4 billion. Microsoft’s Productivity and Business Processes segment grew 16% to $34.12 billion compared with the estimate of $33.48 billion. The More Personal Computing unit saw revenues fall 3% to $14.25 billion, missing the $14.38 billion consensus.

Microsoft expects revenues of $80.65-$81.75 billion for the quarter compared with market estimates of $81.19 billion. It expects Azure to grow 37-38% over the year, ahead of the market’s forecast of 37.1% growth.

Microsoft’s Growth Focus

While Microsoft’s overall performance may have come strong, the market was not pleased with the performance on cloud and the continued investment in AI. Its capex spends increased 66% last quarter to $37.5 billion as Microsoft continues to invest in AI infrastructure. Nearly two thirds of this expenditure was on GPUs, CPUs and other short-lived assets Meanwhile, Azure reported a growth of 39% during the quarter, which was short of the 40% growth reported a quarter ago.

Microsoft is not worried about market concerns. This quarter, the Microsoft Cloud surpassed $50 billion in revenue for the first time reflecting the continued demand. Its investments are driven by its vision to build infrastructure for heterogenous and distributed nature of workloads. It is focused on optimizing tokens per watt per dollar through higher utilization and lower cost using silicon, systems, and software.

It is already seeing increase in throughput and reported a 50% increase in throughput in OpenAI inferencing powering Copilots. It is driving efficiency in datacenter utilization by investing in Fairwater interconnected AI data centers. By connecting both the Atlanta and Wisconsin sites through AI WAN, Microsoft was able to build a first-of-its-kind AI superfactory that can run higher GPU densities and improve performance and latencies for high-scale training.

At the silicon layer, besides their tie-ups with NVIDIA and AMD, they also have their own Maia chips that are delivering strong performance. Last month, it released the Maia 200 accelerator online that delivers 10+ petaFLOPS at FP4 precision. As AI workloads increase, there is a growing demand for large amounts of compute. Microsoft is addressing that demand by improving the CPU offering. It released Cobalt 200 which claims to deliver over 50% higher performance.

Within AI, Microsoft enhanced support for GPT 5.2 and Claude 4.5. Over 1,500 customers have used both Anthropic and OpenAI models on Foundry. It is seeing a strong demand for region-specific models, including Mistral and Cohere. Within Foundry, Microsoft allows customers to customize and finetune models. The AI models are connected to the customer’s systems of record, operational data, analytical data, along with semi-structured and unstructured communications data through Microsoft’s unified layer of Fabric, Foundry, and Microsoft 365. Two years since it became available, Fabric is now operating at an annual revenue run rate of over $2 billion with more than 31,000 customers, growing 60% year on year.

Analysts were not too pleased. Within Microsoft’s own 365 Copilot, it may boast of 15 million paid users, but that is a mere 3% of its total Microsoft 365 user base. Microsoft’s remaining performance obligations were up 110% to $625 billion, but 45% of these were tied to OpenAI. Microsoft is both an investor and a supplier for OpenAI.  Investors are getting critical of “circular” deals where tech players are both investing in and getting revenues from each other, and they want to see returns from these big AI investments.

Microsoft’s stock is currently trading at $411.21 with a market capitalization of $3.09 trillion. It hit a 52-week high of $555.45 in October. It was trading at a 52-week low of $344.79 in April last year.

More By This Author:

Cloud Stocks: Analysis Of IBM’s Confluent Acquisition
Cloud Stocks: AMD Chips Away At Nvidia
Cloud Stocks: For Adobe, Is The Semrush Acquisition Enough?