Locator: 49896AI.
AI prompt:
MSFT's earnings 4Q25 suggested a slowing cloud growth. If MSFT's cloud growth is slowing is it due to competition (other clouds growing, like AWS) or is due to less demand overall? Thoughts?
Google Gemini reply:
Based on Microsoft’s Q4 2025 earnings report (ending June 30, 2025), the reported "slowing" cloud growth is not due to a drop in demand, but rather supply constraints—specifically, the inability to build data centers fast enough to meet intense AI demand.
While Azure grew 39% in the quarter (beating expectations), the slight deceleration in growth rate, combined with massive capital expenditures (CapEx) for AI, led to investor concerns.
Here is a breakdown of why growth is "slowing" and the role of competition:
1. The Main Reason: Capacity Constraints (Not Demand)
- infrastructure crunch: Demand for AI and cloud services is outpacing Microsoft’s capacity to supply GPUs and data center infrastructure. CFO Amy Hood noted they are balancing "incoming supply" with "growing Azure demand".
- capacity-driven limitations: If Microsoft had more data center capacity, they could have grown faster.
- massive backlog: Microsoft’s commercial remaining performance obligations (backlog) surged, indicating high demand that is locked in but not yet recognized as revenue.
2. Is it Competition (e.g., AWS)?
- market share shift: While Azure is growing rapidly, there are indications that AWS, which has a larger overall market share (approx. 30% vs. Azure's 20% in Q2 2025), is catching up on AI and potentially regaining some momentum.
- competitive pressures: The "Big Three" (AWS, Azure, Google Cloud) are all aggressively investing in AI, with all three reporting capacity constraints, meaning the market is highly competitive and supply-constrained, not demand-deficient.
- performance comparison: While Azure growth dipped slightly from 40% to 39%, some analysts believe Amazon’s AI offerings (like Bedrock) and custom chips might make it a formidable competitor in the coming quarters.
3. Key Findings on 4Q25 Results
- revenue growth: Microsoft’s Azure cloud sales rose 39%. While this is a slight, minor drop from the previous 40% rate, the overall growth is still high.
- surging CAPEX: To fix the capacity bottleneck, Microsoft is increasing capital spending (over $30B+ in the following quarter), which caused a decrease in margins.
- OpenAI impact: A significant portion of Azure growth is driven by AI, with some reports suggesting a large portion of the revenue backlog is tied to OpenAI’s usage of Azure.
Conclusion: The slowdown in Microsoft's cloud growth is a "bottleneck" problem, not a "customer demand" problem. They are limited by the physical infrastructure (data centers, power, chips) needed to support AI, rather than a lack of customers. Competition with AWS is intense, but both are currently constrained by supply. power, chips) needed to support AI, rather than a lack of customers. Competition with AWS is intense, but both are currently constrained by supply.
