Microsoft said its Azure cloud business grew revenue by 39% in the October-December quarter, its fiscal second quarter, a figure that slightly exceeded the Visible Alpha consensus of 38.8%.
The result underscores a view inside the company that substantial investment in artificial intelligence is starting to translate into top-line gains for its core cloud operations. Microsoft’s early commercial relationship with OpenAI has been a central element of that strategy, with OpenAI technologies integrated into many of Microsoft’s AI-driven offerings, including M365 Copilot.
Despite that advantage, the competitive landscape has become more crowded. The market has reacted to a strong reception for Google’s latest Gemini model and to the arrival of new autonomous agents such as Anthropic’s Claude Cowork. Those developments present direct competition for Microsoft’s AI initiatives and for legacy software products that have long been strategic revenue drivers.
Investor concern about whether returns from AI will offset the large investments has weighed on Microsoft’s stock. Market participants have voiced doubts about the scale and timing of returns given the extensive spending plans across industry leaders. Collectively, Microsoft, Alphabet, Meta and Amazon are expected to spend in excess of $500 billion on AI this year, according to the reporting in the quarter.
Microsoft owns a 27% stake in OpenAI, a position it acquired following a major restructuring at OpenAI in late October. That restructuring included a commitment from OpenAI to purchase $250 billion of Azure services, a condition that supports Microsoft’s cloud demand outlook. At the same time, the reorganization removed certain restrictions on OpenAI’s ability to negotiate cloud contracts with other providers. Since that restructuring, OpenAI has signed a $38 billion cloud services agreement with Amazon Web Services.
Some analysts have also raised the possibility that OpenAI’s mounting losses could increase expenses for Microsoft, because the company would book its share of those losses. The combination of heightened competition, evolving vendor relationships, and the scale of AI spending across Big Tech means Microsoft and other cloud providers face both revenue opportunities and cost pressures as the market adapts to AI-driven product changes.
Key takeaways
- Azure revenue rose 39% in the fiscal second quarter, slightly above Visible Alpha expectations of 38.8%.
- Microsoft’s early partnership with OpenAI remains a foundational element of its AI strategy, supporting products like M365 Copilot.
- Heightened competition from Google and autonomous agents, plus large-scale AI spending across Big Tech, are shaping investor sentiment and market dynamics.
Impacted sectors: cloud infrastructure, enterprise software, AI services, and technology equities.
Risks and uncertainties
- OpenAI’s mounting losses could raise Microsoft’s expenses if the company records its share of those losses - impacting Microsoft’s profitability and the broader software sector.
- OpenAI’s ability to secure cloud deals with other providers, illustrated by a $38 billion AWS agreement, may lessen its dependence on Microsoft and alter cloud demand patterns - affecting cloud infrastructure providers.
- Investor doubts over whether AI investments will deliver sufficient returns relative to the massive spending plans across Big Tech could continue to pressure technology stocks and influence capital allocation decisions.