Microsoft, the two sides of maxi investments in artificial intelligence

The stock exchange looks at business expansion. But it also pays attention to the expenditure to support that growth. Especially, when investments are very high.

The proof? The latest round of quarterly figures on Wall Street offers it. Among others, those of Microsoft. The Redmond-based company reported rising revenues and profitability in the first quarter of the 2024-2025 fiscal year. Sales stood at USD 65.6 billion, up 16 per cent from the same period last year. Operating income, for its part, rose to USD 30.6 billion (+14%). Net profit was EUR 24.7 billion. A value that implies an increase of 11% compared to the first quarter of 2023-2024. Accounting items, however, were above consensus estimates. Diluted earnings per share (EPS), for instance, came in at $3.3o (+10%) while market forecasts indicated $3.10. Well: despite this picture, the stock market reacted negatively in the session following the publication of the accounting numbers. The share price dropped 6.05%.

This is a dynamic which, at first sight, appears to be a paradox. However, experts - rightly or wrongly - point to several causes that should give rationality to the trend described. One of these is related to the trend in the ratio of gross margin (industrial margin) to revenue. In the first quarter of 2024-2025, the indicator was 69.3%, compared to 71.15% a year earlier. That is to say: in absolute terms, the Industrial Margin rose from 40.2 billion to the current 45.5 billion. The speed of increase, however - also in the wake of the jump in the cost of sales - was lower than that of turnover. Hence the lower percentage that made investors turn up their noses. The disappointment, moreover, was accentuated by the fact that one of the causes of the trend in question was cloud computing. In the usual post-quarterly chat with analysts, the group founded by Bill Gates indicated that its cloud computing revenues "were $38.9 billion, up 22% year-over-year". Microsoft cloud's gross margin percentage, however, fell to 71%. A trend, the latter, which is a consequence of the investment and start-up process of the new data centres. In other words: the project of spending on the expansion of cloud computing - to which the training and development of Artificial Intelligence (AI) is doubly linked - is currently squeezing the division's margins and this is contributing to squeezing that of the entire company. The dynamic, however, is expected to continue. Microsoft estimates that, in the current quarter, 'the gross margin percentage in the cloud is expected to be around 70 per cent'. That is to say: down from what was achieved a year ago and still in the wake of the Artificial Intelligence (Ai) infrastructure expansion programme.

Not only that. The operators emphasised - again with reference to the cloud - another aspect. The rise in sales in the last quarter, more or less in line with forecasts, is clearly robust. That said, however, it is pointed out that the increase has slowed down. In the first quarter of 2023-2024, Microsoft cloud had grown by 24 per cent. The pace was confirmed in the second quarter (+24% year-on-year) but then slowed down in the third (+23%) and fourth quarter (+21%). True! Between the beginning of July and the end of September there was a slight recovery (+22%). And yet, operators - even in the face of strong competition - did not gloss over the situation. This, combined with what has already been mentioned regarding the Gross margin percentage, led to the negative reaction of the stock exchange immediately after the company accounts. Not least because the CFO herself, Amy Hood, stated - according to Bloomberg - that some data centre capacities on which Microsoft had relied for its Ia push had not materialised. In other words: there would have been a (temporary) shortage of supply of infrastructure and services in the face of the still high demand. In short: on the one hand, the group does not seem (today) to be able to keep up completely with the demands on artificial intelligence; on the other hand, the huge investments - inevitably - tend to squeeze margins. And on this dual scenario, the stock exchange has carried out its reasoning and calculations.

Yes, reasoning by calculation. Beyond the individual figures and percentages, the common thread that emerges - among the considerations of the stock market experts - is the topic of capitalised investments. The so-called Capex (Capita expenditure). These are cash outgoings that, being amortised pro-rata from year to year, affect the net profitability of the company. The sofwtare giant, like all big hi-tech companies, is facing major investment programmes in artificial intelligence. In particular on the infrastructure and data centre front (the theme of cloud computing is returning).