When Microsoft reports its earnings on Tuesday, investors are likely to be keenly focused on one key question: has Azure’s cloud-computing business shown enough growth to justify the billions invested in artificial intelligence infrastructure?

Microsoft, widely regarded as a leader in monetizing AI through its partnership with ChatGPT developer OpenAI, is expected to announce that Azure’s growth rate remained steady at around 31% for the quarter from April to June, according to data from Visible Alpha. This aligns with the company’s forecast, but shareholders are looking for a more significant impact from its AI ventures in the fiscal fourth quarter, especially after AI contributed 7 percentage points to Azure’s growth in the first quarter.

Analysts surveyed by LSEG predict that Microsoft’s capital expenditure will jump by approximately 53% year-over-year to $13.64 billion, up from $10.95 billion in the previous quarter.

Concerns over the high spending by tech giants on data centers, with little short-term payoff, have plagued the US stock market recently. This comes as signs emerge that Wall Street might have been overly optimistic about earnings growth. Alphabet’s shares fell over 5% last week following its quarterly capital expenditure that exceeded estimates by nearly $1 billion, with AI revenue gains proving modest, leading to a tech selloff.

Alphabet has indicated that its capital expenditure will remain elevated for the rest of 2024, staying at or above $12 billion.

“Investors will be closely watching Microsoft’s ability to boost revenue growth, particularly from AI. If the expected revenue growth doesn’t materialize and capex continues to rise, it could disappoint investors,” said Gil Luria, senior software analyst at D.A. Davidson.

Microsoft asserts that current investments in data centers are essential to address capacity limitations and better capitalize on AI demand. This perspective is shared by other tech giants, including Alphabet. Sundar Pichai, CEO of Google’s parent company, stated last week that “the risk of under-investing in AI infrastructure is significantly greater than the risk of over-investing.”

This spending spree has enabled Microsoft to expand its business with large enterprise clients by enhancing access to its AI cloud services and introducing features like the 365 Copilot assistant for Word and Excel. The $30-per-month Copilot service, which can summarize emails into bullet points or quickly write code, is reportedly used by half of the Fortune 500 companies. However, Microsoft has not yet disclosed the revenue generated from this service, with analysts expecting its impact to become more evident in the latter half of 2024.

“While consumer-facing applications like ChatGPT have garnered a lot of attention, generative AI represents a much larger opportunity for enterprises, and Microsoft is exceptionally well-positioned to leverage its existing customer base,” noted Igor Tishin, analyst at Harding Loevner, a $55 billion asset manager holding significant stakes in Microsoft and Alphabet.

Microsoft’s shares have risen about 13% this year, boosting its market value by over $350 billion. The stock reached a record high on July 5 but has since dropped nearly 9% amid the recent tech selloff, underperforming the 14.5% rise in the S&P 500.

The company is expected to report a 14.6% increase in overall revenue for the April-June period, down from the 17% growth seen in the previous quarter. This deceleration is mainly attributed to slower growth in its personal computing segment, which includes Windows and the Xbox division. Meanwhile, the productivity segment, which encompasses Office apps, LinkedIn, and 365 Copilot, is anticipated to grow by about 10%.

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