Microsoft prepares to spend more on AI as its sales and profit surge

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Microsoft on Wednesday reported its quarterly sales grew 18% to $77.7 billion, beating Wall Street expectations while also surprising some investors with the huge amounts of money it is spending to expand its cloud computing infrastructure and meet demand for artificial intelligence tools.

The software maker said it spent nearly $35 billion in the July-September quarter on capital expenditures to support AI and cloud demand, nearly half of that on computer chips and much of the rest related to data center real estate.

That overshadowed Microsoft's report of a 22% increase in quarterly profit to $30.8 billion, or $4.13 per share, which easily beat Wall Street expectations for the period. Microsoft said those results excluded the impacts of money it invested in OpenAI, in an attempt to “help clarify” how those losses affected Microsoft's core business.

Microsoft was expected to earn $3.67 per share on revenue of $75.38 billion, according to analysts surveyed by FactSet Research.

The results came a day after a new deal with OpenAI pushed Microsoft to $4 trillion in valuation for the second time this year. But shares in Microsoft then dropped in the hours before it disclosed its earnings Wednesday as the company battled an outage affecting its Azure cloud computing platform. They dropped further — by more than 3% — in after-hours trading Wednesday as investors considered the significance of the earnings report.

Driving investor enthusiasm on Tuesday was the announcement of Microsoft's revised business deal with its longtime partner OpenAI, maker of ChatGPT and now the world's most valuable startup. While no longer OpenAI's exclusive cloud provider, a relationship that helped bankroll the startup's early growth, Microsoft will retain commercial rights to OpenAI products through 2032 and get a roughly 27% stake in OpenAI’s new for-profit arm.

Microsoft also said Wednesday that it has already invested $11.6 billion of the total $13 billion it has committed to OpenAI.

Microsoft’s valuation previously passed $4 trillion in July, making it the second company after Nvidia to reach the milestone. Microsoft again and Apple for the first time crossed $4 trillion this week, while Nvidia went on to achieve a different milestone: the first $5 trillion company.

The sky-high valuations highlight the investor frenzy around artificial intelligence, which some fear could turn into a bust if AI products aren't as transformative or profitable as promised.

Quarterly revenue from Microsoft's cloud-focused business segment was $30.9 billion, up 28% from the same time last year and just slightly above what analysts were expecting. Revenue from Microsoft's workplace software, which includes its email and word processing tools, was up 17% to $33 billion.

Microsoft's recent focus has centered around pitching its flagship AI assistant Copilot to help with a variety of work tasks, and last week gave it a new animated avatar exterior called Mico.