Microsoft Corp. shares edged lower in premarket trading Wednesday, slipping 0.25% to $410.35, as the market weighed the tech giant's massive $190 billion artificial intelligence bet against a backdrop of intensifying cloud competition. The stock ended Tuesday at $411.38, down 0.54%, and continued to underperform even as broader tech indices rallied.
U.S. index futures pointed higher ahead of the open, with Nasdaq 100 futures up 0.81% early Wednesday, buoyed by positive sentiment from chipmaker Advanced Micro Devices Inc. (AMD) and easing concerns over geopolitical tensions. "Wall Street is still betting that Middle East tensions will not derail an earnings-led rally," said Kyle Rodda, senior financial market analyst at Capital.com.
Microsoft reported solid fiscal third-quarter results, with revenue jumping 18% to $82.9 billion for the period ended March 31, and diluted earnings per share rising 23% to $4.27. CEO Satya Nadella highlighted that the company's AI business now has an annual revenue run rate exceeding $37 billion. However, the cost of supporting that growth is substantial, with capital expenditures surging to $15.8 billion in free cash flow as Microsoft invests heavily in data centers, servers, and chips.
CFO Amy Hood told analysts that demand for Azure cloud services is outpacing supply, and signaled that further significant investment is on the horizon. The company's Azure cloud forecast anticipates 39% to 40% growth this quarter in constant currency, but investors are parsing how that stacks up against the hefty bill for hardware and energy tied to AI.
Competition is heating up in the cloud market. Google Cloud's revenue soared 63% in the first quarter, outpacing Azure's 40% growth and Amazon Web Services' 28% increase. Alphabet Inc. (GOOGL) market value has drawn closer to Nvidia Corp. (NVDA) as investors latch onto its AI and cloud traction. Some clients are shifting to Google, viewing its AI tools as "more accurate and trustworthy" compared with Microsoft's Copilot assistant, according to Rebecca Wettemann, CEO at Valoir.
Microsoft's relationship with OpenAI also continues to evolve. Last week, the companies revised their agreement: Microsoft remains OpenAI's primary cloud provider but no longer holds exclusive rights to resell OpenAI's products via its cloud. The new terms lock in more predictable OpenAI revenue for Microsoft but also open the door for Amazon.com Inc. (AMZN) and Google to compete for a slice of OpenAI's cloud business.
"There's a chance the outlays hit before any real benefit lands," said Joe Maginot, who manages large-cap portfolios at Madison Investments. He noted that operating cash flow is increasingly consumed by these investments. Even so, Microsoft brings an arsenal competitors can't easily replicate: Azure, Office, Windows, LinkedIn, GitHub, and a war chest that enabled $10.2 billion in shareholder returns last quarter via dividends and buybacks.
For Microsoft, the immediate question isn't about the existence of AI demand. The real issue is whether Azure can expand, Copilot can gain traction, and revenue tied to OpenAI can climb quickly enough to justify one of the heftiest AI infrastructure tabs out there—and keep investors on board.
