Microsoft AI investments cause cloud operating income growth to plunge

The fact that the AI space is growing so astronomically and so fast also plays a role. Nvidia is struggling to keep up with the demand for its chips. 

Microsoft is also capacity-constrained. “We have more customers wanting to buy [AI] services from us than we have the capacity to sell,” said the source, noting that the company has $298 billion in signed contracts that have not yet been  fulfilled.

Forrester Principal Analyst Lee Sustar said that, although “Microsoft’s topline earnings continue to rack up big gains as the result of its AI offerings, the company’s Intelligent Cloud segment, which includes Azure and various other services, saw operating expenses spike 10%, a sign that maintaining AI momentum is getting expensive.”

“Investors and customers are watching closely to see if Microsoft can continue to deliver, after the company noted a 70% decline in gross margin for Microsoft Cloud as the result of scaling out AI infrastructure,” Sustar said. 

Jason Anderson, a principal analyst with Moor Insights & Strategy, said he is not surprised by Microsoft’s falling growth percentages in the intelligent cloud.

“I cannot comment on specific numbers, but the downward trend makes total sense. Expect to see more of it,” Anderson said. “Why? It comes down to many factors, [including] fewer humans per system due to business scale and software automation, investing in and a pretty successful launch of lower power technologies such as Cobalt chips, which are ARM-based, versus Intel.”