Microsoft Profit Rises But Cloud Business Misses Mark

Microsoft on Wednesday reported profits of $24.1 billion in the recently ended quarter, but shares slid on worries over its vital cloud computing business.

Microsoft revenue grew to $69.6 billion and the amount of money taken in by its "intelligence cloud" unit climbed to $25.5 billion but the market had expected more.

Shares slipped slightly in after-market trades.

"Microsoft had a fine quarter, but 'fine' isn't what investors want from an AI juggernaut spending like it's building the Death Star," Emarketer principal analyst Jeremy Goldman said, referring to a planet-sized space station from the Star Wars films.

"The cloud is still a growth engine, but AI competition -- especially from unexpected players like DeepSeek -- is real."

Microsoft chief executive Satya Nadella spotlighted the tech titan's artificial intelligence investments, saying the company is "innovating across our tech stack" to unlock the ability for customers to make money from the technology.

Nadella said Microsoft's AI business is on pace to bring in more than $13 billion annually, in a near tripling of the rate a year earlier.

The Redmond-based company has been at the forefront of the generative AI revolution, largely thanks to its partnership with OpenAI, the creator of ChatGPT.

The company has rolled out AI features at a furious pace, mainly under its Copilot brand, leaving investors hopeful for a return on investment from the expensive technology.

The company is on track to pump about $80 billion into artificial intelligence this fiscal year, according to Microsoft president Brad Smith.

Smith contended AI is poised to transform all aspects of life, and it is imperative that the United States be the global leader when it comes to the technology, he wrote in an online post.

China and the United States are racing to spread their AI systems to other countries in an effort to become the de facto standard, according to Smith.

"The Chinese wisely recognize that if a country standardizes on China's AI platform, it likely will continue to rely on that platform in the future," Smith said.

The emergence of the DeepSeek chatbot has sent Silicon Valley into a frenzy, with calls to go faster on advancing AI and beat communist-led China before it is too late.

Despite US government efforts to maintain AI supremacy through export controls on advanced chips, DeepSeek has found ways to achieve comparable results using authorized, less sophisticated Nvidia semiconductors.

"The Chinese AI startup's R1 model, trained at a fraction of the cost of OpenAI's systems, rattled markets and raised tough questions for Microsoft," analyst Goldman said.

"Is its $80 billion AI infrastructure spend truly necessary when cheaper AI is proving viable?"

Microsoft rivals Amazon, Google and OpenAI have also been spending billions of dollars on AI even though it remains unclear how and when they expect to profit from those investments.

Meanwhile, Microsoft is listed among potential suitors of TikTok, which faces being banned in the United States if not divested by its Chinese owner ByteDance.

"Microsoft is reportedly circling the platform, with the White House brokering a possible deal," Goldman said.

"If Microsoft grabs a stake, it would instantly bolster its struggling ad business and supercharge its AI ambitions with a firehose of user data."

Microsoft stands out as a compelling potential buyer, armed with deep pockets and significant technological capabilities.

Asked late Monday if Microsoft was in discussion for acquiring TikTok, US President Donald Trump told reporters: "I would say yes."

According to CFRA Research senior vice president Angelo Zino, Microsoft's interest stems from a desire to strengthen its position beyond LinkedIn, which it owns, in the digital advertising space.