Microsoft’s fast-growing AI business isn’t fast enough for Wall Street

But when Microsoft said on Tuesday that its Azure cloud unit—a key component of its AI strategy—had grown at that pace, investors reacted as if Simone Biles had just flubbed the uneven bars. They sent the company’s shares tumbling as much as 7% in after-hours before they recovered somewhat; the stock is down just 1.6% at mid-day today.

Never mind that Microsoft’s overall quarterly results slightly exceeded analyst expectations.

There are two key takeaways from this episode:

One is that the current AI frenzy has gotten so out of hand that investors are pricing stocks to perfection and as if rapid growth will continue into perpetuity. When companies fall just a little short, at least in Wall Street’s mind, stocks take a beating.

Microsoft’s 29% cloud growth in its most recent quarter was slower than the 31% in the previous quarter and below the 30% that analysts had expected. Investors worry the deceleration may signal that the AI boom is maturing and slower growth ahead.

Of course, Microsoft executives spun the slowdown as partly a consequence of being unable to keep up with demand. Building cloud infrastructure—i.e. data centers—takes time, which is why Microsoft has partnered with other companies including Oracle to fill in the gap.

That brings us to a second takeaway from yesterday’s earnings: Building those AI-friendly data centers and buying AI chips is super expensive. Big Tech companies are spending tens of billions of dollars each annually on data center construction and expansion, with no end in sight.

Microsoft, for example, poured $13.9 billion into capital expenditures in the latest quarter (and $19 billion if you include leases), a 55% increase from the same period a year ago. Executives expect to continue spending at the same level in the future.

Last week, Google-parent Alphabet reported its own high infrastructure costs (and suffered a big drop in its share price as a result). Wall Street will be paying close attention to the equivalent numbers at Facebook-parent Meta when it reports its numbers later today and Amazon and Apple’s tomorrow.  

Investors seem to think that AI profits can be harvested without much upfront investment. Sorry to break it to you, but no.

To bring it back to today’s Olympic theme, I have no idea which Big Tech company will ultimately win the AI race. But I do know this: Winning a gold medal takes years of preparation and patience.

Verne Kopytoff

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NEWSWORTHY

Google’s explicit deepfake fight. The search engine is adding new safety features that are supposed to stop explicit deepfakes from appearing in its results, according to The Verge. Users who successfully report such an image can also get all similar images automatically blocked using the same or different query keywords. The change is intended to combat a situation like earlier this year when deepfake images of Taylor Swift proliferated online—and in Google’s search results.

Intel’s struggles continue. Lagging in the AI chip race, Intel plans to cut thousands of jobs as early as this week in an effort to free up cash to invest on yet another push to catch up, according to Bloomberg. It would be Intel’s second round of job cuts in the past two years after slashing 5% of its staff in 2023. Intel is hoping to close the gap with rival Nvidia, which now dominates the AI chip market.

StubHub is sued for ‘deceptive’ fees. Online ticket seller StubHub has been sued by Washington, D.C., for using a “bait-and-switch” by showing low prices for tickets but then later tacking on big fees during checkout, says the Washington Post. The lawsuit, filed by D.C. District Attorney Brian Schwalb, also accuses StubHub of failing to disclose how the fees are calculated or what they’re for.

ON OUR FEED

“Let’s show founders that not all V.C.s have turned MAGA.”

—The sign-up form for the VCsforKamala group which has earned support from big-name venture capital investors including Reid Hoffman, Vinod Khosla, and Ron Conway, per the New York Times.

IN CASE YOU MISSED IT

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Why Apple and other tech giants turned to dividends—‘They’ve won’ by Greg McKenna

Singapore’s minister says AI is not the new oil—it’s way better by Nicholas Gordon

The C-suite is fawning over AI, but workers say its productivity gains are a mirage by Marco Quiroz-Gutierrez

How Boston Scientific’s digital and IT boss upgraded her team from order takers to strategic thinkers by John Kell

What it takes for a vertical SaaS company to win in the AI age, according to Tidemark’s David Yuan by Allie Garfinkle

Only an AI breakthrough can help humans live longer, argues drug developer: ‘We need a ChatGPT moment in longevity’ by Christiaan Hetzner

BEFORE YOU GO

CrowdStrike is in Delta’s crosshairs. Delta Airlines has hired top lawyer David Boies to seek damages against cybersecurity firm CrowdStrike, whose recent faulty software update caused the airline’s operations to descend into chaos, CNBC reported. Delta had to cancel thousands of flights, which cost it $350 million to $500 million and infuriated many of its customers in the process. Delta hasn’t filed a lawsuit yet. But you can bet CrowdStrike will want to put the fiasco behind it. Also, stay tuned for many of the other businesses impacted by the global outage to also go after CrowdStrike for compensation. It promises to be a legal feeding frenzy.