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Cloud AI Demand Outstrips Supply: Microsoft Capital Surge Falls Short.
Microsoft is ramping up its spending at a pace not seen since at least 2016, yet it may still fall short. In its recent earnings report, the tech giant revealed a staggering 79% surge in capital expenditures compared to the previous year, reaching $14 billion. Despite this aggressive investment, revenue growth lags behind, rising only 17% during the same period.
Even with this considerable investment, Microsoft finds itself facing a shortage of data center infrastructure, particularly for deploying artificial intelligence models. CFO Amy Hood acknowledged this gap during the earnings call, stating that demand surpasses supply to some extent.
The demand for computing power continues to soar as companies integrate human-like generative AI features into their products, a trend catalyzed by OpenAI’s ChatGPT. Microsoft has embraced this trend by incorporating assistants into its Teams communication app, Bing search engine, and other services, enabling tasks like summarizing meeting transcripts and composing emails.
Microsoft isn’t alone in facing supply challenges.
However, Nvidia, a leading processor developer for AI models, has also experienced constraints, with revenue more than tripling in consecutive quarters. As one of Nvidia’s significant customers, Microsoft is now feeling the pressure.
In Microsoft’s fiscal third quarter, revenue from its Azure cloud platform surged by 31%, with AI contributing 7 percentage points to this growth. CFO Amy Hood indicated that capacity constraints may have impacted AI performance and are expected to continue to affect results in the fiscal fourth quarter. The supply limitation means Microsoft has less capacity available to lease to clients for deploying AI models during the inference stage.
Azure plays a pivotal role in Microsoft’s future, generating tens of billions of dollars in revenue each quarter and outpacing growth in most other areas of the company. Within Azure, AI services shine as a standout, attracting new clients as Microsoft competes with Amazon Web Services.
Hood announced plans for a substantial increase in capital expenditures in the current quarter, primarily for expanding cloud infrastructure. She also advocated for higher capital expenditures in the upcoming fiscal year, starting on July 1st.
Microsoft is committed to scaling its operations to meet the growing demand for its cloud and AI products.
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