Microsoft Corp. has cautioned that its Azure cloud division will see slow growth in the current fiscal quarter due to insufficient data center capacity needed to meet rising demand for its AI-powered services. This announcement has led to a 5% decline in Microsoft’s shares during extended trading.
The company expects Azure to grow up to 32% in the fiscal third quarter, maintaining a similar growth pace to the previous quarter. Despite being a leader in AI innovation, Microsoft faces delays in monetizing its suite of Copilot-branded AI assistants, leaving investors concerned about the time needed to fully capitalize on AI demand.
AI Drives Azure Growth Despite Infrastructure Bottlenecks
Microsoft’s Azure AI services reported an impressive 157% growth. However, Chief Financial Officer Amy Hood acknowledged that data center capacity constraints continue to impact overall cloud revenue.
“We expect capacity constraints to ease by the end of the fiscal year,” Hood said. The company is managing almost $300 billion in commercial service contracts that it must fulfill in the coming years but has not yet recognized as revenue.
Demand for Microsoft’s services remains robust, with commercial bookings — a metric for future revenue — rising by 67%, surpassing company expectations. Hood credited OpenAI’s Azure commitments for contributing to this surge in demand.
Massive AI Investments Raising Concerns
Microsoft, along with cloud rivals Google and Amazon, is investing heavily in building AI-specific infrastructure, particularly data centers and custom chips. Microsoft expects to spend $80 billion on AI data centers in the current fiscal year.
However, Wall Street analysts are increasingly questioning these high expenditures. Skepticism has grown following the emergence of DeepSeek, a Chinese company that claims its open-source AI model can compete with US tech giants at lower costs.
During the last quarter, Microsoft’s capital expenditures reached $22.6 billion, surpassing analyst expectations of $21 billion. This infrastructure expansion led to narrower margins in the cloud business, even though overall company revenue grew by 12% to $69.6 billion for the quarter ending December 31.
Revenue and AI Contributions to Growth
Microsoft’s quarterly profit stood at $3.23 per share, exceeding analyst estimates of $3.12. Additionally, 13 percentage points of Azure’s growth in the second quarter were attributed to AI services, up from 12 points in the first quarter.
Microsoft stated that its current AI revenue trajectory is expected to generate $13 billion annually.
Also read: Apple Eyes Bharat Forge for India Manufacturing Expansion
The Road Ahead for Microsoft’s Cloud and AI Business
As Microsoft continues to expand its cloud infrastructure, the company must balance AI-driven innovation with capital spending efficiency. Meeting the demand for AI services will require increased data center capacity and sustained investment in AI chips and infrastructure.
Despite near-term growth challenges, Microsoft’s long-term outlook remains promising, driven by strong commercial bookings and growing AI adoption. Industry observers will closely monitor how the company navigates the pressure to scale while managing capital costs and competition from emerging AI players.
