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Microsoft Stock Drops Amid Weak Cloud Forecast and Rising AI Costs

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Microsoft’s latest cloud computing forecast has left investors disappointed, leading to a 4.5% drop in the company’s shares during after-hours trading on Wednesday. While the tech giant continues to invest heavily in artificial intelligence (AI), concerns persist over the delayed revenue returns and increasing competition from lower-cost AI models emerging from China. Investors had hoped for stronger growth in Microsoft’s cloud segment, particularly in light of the company’s aggressive AI expansion.

Despite surpassing overall sales estimates for the fiscal second quarter, Microsoft’s Azure cloud business fell short of Wall Street expectations. This underperformance has raised questions about the effectiveness of the company’s massive investments in AI-powered data centers and services. Investors are looking for clearer signs that these expenditures will translate into meaningful revenue growth, especially as AI adoption continues to reshape the tech industry.

Adding to market concerns, Chinese firms have recently developed AI models that claim to offer competitive performance at a lower cost than those from U.S. companies. This has triggered fears of an impending price war that could squeeze profit margins across the industry. As Microsoft and other major tech players continue to pour billions into AI infrastructure, analysts worry that pricing pressures and prolonged monetization timelines could impact their bottom lines.

For more than a year, Microsoft and its Big Tech counterparts have been testing Wall Street’s patience with relentless spending in pursuit of AI-driven profits. While AI remains a transformative force in the industry, investors are increasingly demanding proof that these investments will pay off. With competition intensifying and costs mounting, Microsoft faces the challenge of demonstrating that its AI ambitions will yield sustainable financial returns in the near future.

Microsoft and Meta Defend Heavy AI Investments Despite DeepSeek’s Low-Cost Advantage

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In response to the breakthrough low-cost AI models developed by Chinese startup DeepSeek, CEOs of Microsoft and Meta have defended their substantial investments in artificial intelligence, emphasizing that the heavy spending is essential to staying competitive in the rapidly growing field. DeepSeek’s claims of outperforming Western AI models at a fraction of the cost have sparked concerns over the U.S. tech industry’s dominance, but both executives stressed that building extensive computing infrastructures is crucial to meeting rising corporate demands.

Meta CEO Mark Zuckerberg highlighted the strategic advantage that heavy investments in capital expenditure and infrastructure will bring over time. Microsoft CEO Satya Nadella echoed this sentiment, stating that such investments are needed to address the capacity constraints that have limited the company’s ability to capitalize fully on AI opportunities. Nadella also noted that as AI becomes more efficient and accessible, demand for the technology will grow exponentially.

Microsoft has allocated $80 billion for AI in its current fiscal year, while Meta has committed up to $65 billion. This stands in stark contrast to the roughly $6 million that DeepSeek claims to have spent on developing its AI model. However, U.S. executives and analysts note that DeepSeek’s reported costs are limited to computing power, not including broader development expenses.

Despite these substantial investments, investor patience is waning. Microsoft shares dropped 6% after the company revealed that its Azure cloud business growth would fall short of third-quarter expectations. Brian Mulberry, portfolio manager at Zacks Investment Management, emphasized the need for a clearer path to monetizing the investments.

Meanwhile, Meta’s stock rose more than 4% following a strong fourth-quarter performance, though its first-quarter sales forecast was underwhelming. Analysts, like Daniel Newman from Futurum Group, pointed out the disparity between capital expenditure and revenue generation in the AI sector.

Both companies have indicated efforts to moderate spending. Microsoft CFO Amy Hood stated that capital expenditures for the third and fourth quarters would remain around $22.6 billion, similar to the previous quarter, with growth rate expectations for fiscal 2026 being lower than in fiscal 2025.

 

Microsoft Shares Drop as Cloud Outlook Disappoints, Meta Gains on AI Optimism

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Microsoft saw its shares tumble 6% on Thursday after its artificial intelligence (AI) investments failed to significantly boost cloud revenue. Meanwhile, Meta’s stock rose 4% as CEO Mark Zuckerberg reassured investors of strong growth potential, calling 2024 a “really big year.”

Both tech giants defended their heavy AI spending following concerns sparked by Chinese AI startup DeepSeek’s recent advancements in low-cost AI models. However, while Meta continues to show strong ad revenue growth—justifying its AI investments, according to Evercore analyst Mark Mahaney—Microsoft’s Azure cloud platform has struggled.

Microsoft missed market estimates for Azure’s quarterly revenue growth and provided a third-quarter forecast below expectations. The company had previously promised a second-half rebound, but analysts now express skepticism.

“The second-half re-acceleration story for Azure is not playing out,” said Barclays analyst Raimo Lenschow, adding that Microsoft prioritized AI workloads over core Azure functions, delaying the expected growth recovery.

For Meta, a stronger-than-expected 21% revenue increase eased investor concerns about Zuckerberg’s aggressive AI spending plans, which could reach $65 billion this year. Analysts remain bullish, with Barton Crockett of Rosenblatt stating that “Meta might have more benefits to show from AI than anyone.”

At least 15 brokerages raised their price targets on Meta, which saw a 65% stock gain in 2023, the largest among Big Tech firms. The stock’s rally was set to add over $80 billion to its market value.

Conversely, Microsoft was on track to lose about $182 billion in market capitalization. J.P. Morgan analyst Mark Murphy noted that Microsoft “did not recommit to its Azure second-half outlook the same way it did 90 days ago,” weakening confidence in the company’s cloud growth trajectory.