Microsoft plans to increase spending this year to develop its AI infrastructure, despite the slowdown in its cloud business.

This move serves as a clear indication that the substantial returns from investing in this technology may take longer than what Wall Street initially anticipated.

After Microsoft's announcement during a post-earnings call that Azure cloud growth is expected to surge in the second half of fiscal 2025, the company's shares initially dropped by 7% due to the spending forecast. However, the company later recovered slightly, trading down by 4% after the bell on Tuesday.

To take advantage of the rise in generative AI, large technology corporations have been investing billions of dollars in data centers. Alphabet, Google's parent firm, issued a warning last week about continuing to increase its capital spending for the remainder of the year.

In its fiscal fourth quarter, which ends on June 30, Microsoft said that its capital investment increased by 77.6% to $19 billion, with almost all of the expenditures being connected to cloud and artificial intelligence. In fiscal year 2024, capital expenditures amounted to $55.7 billion.

According to Group CFO Amy Hood, the company was investing in assets that will be monetized over the course of the next 15 years and beyond, and the investment was required to sustain the demand for AI services. Nevertheless, the Azure growth disappointed investors, who had driven up Microsoft shares by over a quarter over the previous 12 months on the back of AI expectations.

Compared to forecasts of 29.7%, Microsoft estimated that the company will increase by 28% to 29% on the basis of constant currency in the July-September quarter, as reported by Visible Alpha. That came after a 29% increase in the quarter that concluded on June 30. This was slower than expected, coming in at 30.6%.