As Microsoft Anticipates Its Slowest Annual Growth, Concerns About AI Demand Rise

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As Microsoft Anticipates Its Slowest Annual Growth, Concerns About AI Demand Rise

Microsoft Corp (NASDAQ:MSFT) is set to report its slowest quarterly revenue growth in the last five quarters on Wednesday, and investors are eagerly awaiting evidence of demand for the company’s artificial intelligence (AI) products. Concerns are growing over the slow return on significant investments in AI technologies.

With its support for OpenAI, the owner of ChatGPT, Microsoft is perceived as a leader in the generative AI race, yet it faces challenges with the slow adoption of key products such as the $30 per month Copilot assistant for enterprises. Analysts at Morgan Stanley (NYSE:MS) have expressed concerns about rising capital expenditures, tightening margins, and a lack of net returns from AI investments, indicating that the complexities following the financial restructuring in August have compounded the situation.

This restructuring, aimed at better aligning management of reported business segments, has blurred the ability to assess performance in the last quarter. Microsoft’s shares have shown a modest increase of about 1% since the last results were announced at the end of July, significantly lagging behind the S&P 500 index. However, the stock has risen approximately 14% year-to-date.

According to analysts surveyed by Visible Alpha, the Azure cloud computing segment is expected to grow by 33% in the fiscal first quarter ending September 30. This aligns with Microsoft’s forecasts but represents a slight slowdown compared to the previous quarter. AI has become a more significant part of Azure, contributing 11 percentage points to growth in the fourth quarter, though the overall pace has decelerated. Microsoft had previously announced in July that it anticipated a ramp-up in Azure’s growth in the second half of the fiscal year.

Analysts polled by LSEG expect Microsoft’s total revenue for the September quarter to rise by 14.1% to reach $64.51 billion. Nonetheless, Microsoft, alongside its competitors in the AI sector, signaled that investment in this technology will continue significantly.

According to Visible Alpha’s report, estimated capital expenditures for the September quarter rose by 71.7% to $19.23 billion. However, the adoption of Copilot has not met Microsoft’s expectations. A Gartner survey conducted in August revealed that the vast majority of IT companies have not progressed beyond the pilot phase with Copilot. Some analysts remain optimistic, suggesting that recent enhancements to Copilot, such as the development of autonomous AI agents, could promote wider usage of the assistant. Melius Research analyst Ben Reitzes noted that while investors are skeptical about the adoption of 365 Copilot, the assistant’s customer base has been improving.

In terms of business units, Microsoft’s productivity and business processes segment, which includes Office products, LinkedIn, and 365 Copilot, is expected to show stable quarter-on-quarter growth of 12%, according to Mark Moerdler from Bernstein. The smart cloud segment hosting Azure is likely to exhibit consistent revenue growth of 20% compared to the previous quarter. Moerdler also suggested that there could be potential upside in the more personal computing unit encompassing Windows and gaming, as the PC market shows signs of stability.