Microsoft Beats Q1 Earnings But Stock Tumbles on Massive AI Spending

Microsoft just posted first-quarter earnings that beat analyst estimates on nearly every front, so why is its stock dropping? The simple answer: It's spending a lot of money to win the AI race.

While Microsoft's revenue hit $77.7 billion (beating $75.5 billion expected) and its cloud business shined, the company also reported a staggering $34.9 billion in capital expenditures. That's a 74% jump from last year.

Microsoft explained that roughly half of that cost around $17.5 billion was spent on essential hardware like GPUs and CPUs. This is the hardware needed to power the massive demand for its Azure cloud platform and generative AI services. That heavy spending spooked investors, sending the stock down 3% in premarket trading.

Despite the spending concerns, Microsoft's core business is booming.

Commercial Cloud: Raked in $49.1 billion, up 26% from last year.

Intelligent Cloud (Azure): Brought in $30.9 billion, comfortably beating Wall Street's $30.2 billion forecast.

The $250 Billion OpenAI Deal

This massive AI build-out is directly linked to Microsoft's deep partnership with OpenAI. The two companies just revamped their deal, which includes a new structure for OpenAI and a massive $250 billion spending commitment from the ChatGPT- maker on Microsoft's Azure platform.

In return for its billions in investment, Microsoft now holds a 27% stake in OpenAI's new for-profit entity. However, Microsoft is giving up its "first right of refusal," which means OpenAI is now free to use other cloud providers, like Oracle, to build out its ambitious "Stargate Project" data centers.

This AI spending is touching every part of Microsoft's business, from its new Copilot+PCs and Windows 11 voice features to bringing the AI assistant to its Xbox apps.