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Microsoft investors are ignoring this number that suggests better growth ahead

In Finance
January 30, 2025

Microsoft Corp. investors focused on the company’s disappointing revenue of its Azure cloud business on Wednesday, but they should also be looking at another number indicative of future growth: bookings.

The software giant told Wall Street in its fiscal third-quarter earnings that revenue at Azure grew 31%, just below estimates, but also said that future bookings – which cannot yet be considered revenue – grew 67% (or 75% in constant currency).

Much of that projected growth could come from OpenAI, the creator of ChatGPT, which Microsoft still hosts exclusively on Azure. Microsoft also is currently capacity-constrained on its cloud-services platform, as it looks to add data centers and capacity.

“We remain very happy with the partnership with OpenAI,” Microsoft Chief Executive Satya Nadella told analysts. “And as you saw, they have committed in a big way to Azure, and even in the bookings, what we recognize is just the first tranche of it.”

Microsoft stock (MSFT) sank 4.6% after hours. But analysts appeared to be heartened by the big bookings numbers and what they portend for the second half of Microsoft’s fiscal year.

“It would seem to bode well for Azure growth once more capacity comes online,” Evercore ISI analyst Kirk Materne said in a note to clients.

Nadella also told investors that the company’s AI business now had a revenue run rate of over $13 billion, up 175% from a year ago.

There are still some risks of putting too much emphasis on bookings numbers, which are indicative of signed contracts. And there could be terms that let customers walk away after a certain amount of time, or if certain obligations are not met.

Clearly one big customer – OpenAI – is still looking for additional data-center capacity. Last week, it formed a joint venture with SoftBank Group (JP:9984) and Oracle Corp. (ORCL) to build more data centers in Texas to train and then execute its AI models.

Read also: Elon Musk has his doubts about Stargate. Here’s why he might be right.

And then there is the question of DeepSeek, the new AI model from a small Chinese company that has spooked Wall Street and wreaked havoc on Nvidia Corp.’s (NVDA) valuation. If its claims about building an AI model for under $6 million are true, the cost of data-center buildouts could slow.

See: DeepSeek could represent Jensen Huang’s worst nightmare.

Nadella seemed to be taking all the moving parts on the AI front in stride, even mentioning that he does not want to spend too much on capacity all at once, since prices will come down.

“Remember, you don’t want to buy too much of anything at one time, because Moore’s Law every year is going to give you 2x, your optimization is going to give you 10x [the performance],” Nadella said. “You want to continuously upgrade the fleet, modernize the fleet … and at the end of the day, have the right ratio of monetization and demand-driven monetization to what you think of as the training expense.”

Investors should definitely study Microsoft’s bookings numbers when considering Azure’s slight miss. Whether all of that business will come through as revenue in fiscal 2025 will be answered gradually, as Microsoft balances its spending with the demands and needs of customers. It’s not a bad problem to have.

-Therese Poletti

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