By Aditya Soni
(Reuters) – Microsoft has spent months touting a rebound in its Azure cloud business and its quarterly revenue forecast on Wednesday will show whether billion-dollar bets on artificial intelligence are propelling increased growth in its main profit engine.
The software company emerged as a front-runner in Big Tech’s AI race last year thanks to its early bet on OpenAI, but investor doubts have been growing about its ability to make money from the technology that it plans to back with about $80 billion in capital spending this fiscal year.
Azure growth has slowed for two straight quarters even as the contribution of AI has been increasing and Microsoft has said a rebound would only materialize in the third quarter.
Its shares underperformed most Big Tech rivals last year. The stock also fell sharply on Monday in a tech-led global selloff after Chinese startup DeepSeek launched an AI model that it said was cost-effective and ran on less-advanced chips, stirring doubts about United States’ lead in the technology.
Like other U.S. companies with a large global presence, Microsoft is expected to take a hit from a strong dollar, as the greenback firmed nearly 8% in the last three months of 2024.
“Investor sentiment (for Microsoft) has shifted to negative as a ‘wall of worry’ around gross margins, capital expenditure, generative AI monetization and the OpenAI relationship builds,” Morgan Stanley analysts said in a preview note.
Azure, which some analysts say accounts for around a third of Microsoft’s revenue, is expected to grow 31.8% in the second quarter, slower than the 33% growth it saw in the previous three months, according to Visible Alpha.
Some of the growth will come from its business with OpenAI.
Despite OpenAI’s move to work with Oracle on building new data centers, Microsoft still has the rights to handle almost all the traffic for both OpenAI’s consumer business and its business of selling to software developers, according to representatives from Microsoft and OpenAI. That means OpenAI will pay for Azure services as its business grows.
Wall Street expects Microsoft to forecast nearly 33% growth in the Azure business during the third quarter.
Overall, the intelligent cloud business that houses Azure is expected to report revenue growth of 19.7% for the second quarter.
COPILOT PRICING
Doubts have also been rising about the adoption of Microsoft 365 Copilot AI assistant. After reports including a Gartner survey last year flagged tepid demand beyond pilot projects, Microsoft has been experimenting with pricing to boost uptake.