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By Emily Bary

Microsoft showed investors that it's able to grow rapidly while keeping spending in check

Microsoft's stock is rising while Alphabet's is falling, showing how investors are paying more attention to whether AI spending is paying off.

Microsoft delivered a combination of growth and profitability that impressed Wall Street on Wednesday - especially against the backdrop of greater scrutiny over artificial-intelligence investments.

This was the first quarter in which Microsoft (MSFT) broke out the revenue contributions of its Azure cloud-computing business in absolute terms. Azure revenue amounted to $33.2 billion in the September quarter, up 48% from a year before. An Evercore ISI analyst said prior to the report that institutional investors were expecting perhaps 47% growth.

What's more, Microsoft expects Azure to grow even more rapidly in the current quarter, as the company's forecast calls for as much as 50% growth.

In the current market, investors are focused on more than pure cloud growth, however. Just look at Alphabet (GOOG) (GOOGL), which saw revenue from its cloud business more than double in the latest quarter. Its stock was down 9% in Wednesday's extended session as Wall Street took issue with disappointing growth in search revenue all while the company spend more on infrastructure investments than it generates in cash from its business.

Microsoft shares, meanwhile, were up 3% in Wednesday's after-hours trading as the company did enough to demonstrate that its AI investments are paying off.

On the earnings call, Jefferies analyst Brent Thill noted not just the 50% revenue growth rate that's the high end of Microsoft's cloud projection for the December quarter, but also the 50% operating margin that Microsoft just sported for its overall business.

That operating margin illustrates that Microsoft is able to retain about half of the revenue that it brings in after accounting for the cost of business operations. By contrast, Alphabet only had a 32% operating margin in the September quarter.

"The best solution here is revenue growth," Microsoft CFO Amy Hood said on the company's earnings call. It's not that Microsoft isn't focused on driving business efficiencies, but it's also working to demonstrate "product excellence" and appeal to its customers more and more.

Luke Lango, an independent technology analyst, highlighted that Microsoft was able to achieve its latest results by spending less than investors expected.

"Microsoft just delivered the quarter AI bulls needed," he wrote.

In his view, "Wall Street keeps asking whether AI spending will ever pay off, and Microsoft just answered: Demand is real, monetization is accelerating and management is being disciplined about the bill."

Jesse Cohen, an analyst at Investing.com, called Microsoft's results a "counterweight" to Alphabet's and Meta Platforms' (META) earnings.

"Demand still exceeds supply, the commercial backlog is enormous, and returns are finally showing up in earnings and overall revenue," he wrote.

-Emily Bary

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