Shares of Microsoft fell sharply in after-market trading on January 28, despite the company beating earnings expectations for its second quarter. The company’s stock dropped by more than 6% as investors focused less on the earnings beat and more on concerns around the company’s cloud business, Azure. According to a Business Insider report, analysts raised questions about slowing Azure growth, rising spending and Microsoft’s growing reliance on ChatGPT-maker OpenAI, which now accounts for a large share of the company’s future cloud commitments. The concerns weighed on investor sentiment despite Microsoft’s strong overall financial performance.Notably, this was Microsoft’s first earnings report since OpenAI completed a restructuring and updated its agreement with Microsoft, which owns 27% of the company.

Azure growth and Microsoft’s OpenAI dependency under scrutiny

During the earnings call, analysts pressed Microsoft CEO Satya Nadella and CFO Amy Hood on Azure’s growth outlook. The company revealed that its backlog in commercial bookings, a metric referred to as remaining performance obligations, ballooned 110% year over year to $625 billion. The software company disclosed that OpenAI makes up about 45% of those commitmentsWall Street analysts appeared concerned about how much of Azure’s backlog is tied to OpenAI, especially as Microsoft faces limits on cloud capacity. Nadella explained that acquiring more Azure clients is important to the tech giant, but it can’t come at the expense of neglecting its other services.“If you think about it, acquiring an Azure customer is super important to us, but so is acquiring an M365 or a GitHub or a Dragon Copilot, which are all, by the way, incremental businesses and TAMs for us,” Nadella said adding “And so we don’t want to maximize just one business of ours.”CFO Amy Hood said Microsoft must carefully decide how to use new GPUs and CPUs as they come online. These resources are split across first-party products like Copilot, research and development, and Azure customer demand.“You end up with the remainder going towards serving the Azure capacity that continues to grow in terms of demand,” she said during the earnings call.

Microsoft not alone in facing capacity issues

Microsoft’s capacity challenges mirror those at OpenAI, whose executives have said limited computing power has slowed progress. OpenAI has pledged to spend $250 billion on Azure services, but its executives have repeatedly said the startup is held back by a lack of compute, forcing tough trade-offs between product and research.