Microsoft's timeline for its massive AI bet is testing everyone's patience

Investors will need to hold their nerve as monetization from Microsoft's AI investments looks set to remain many years away.

• Investors want to know when Big Tech's huge investments in AI will generate returns.
• They probably didn't like what they heard during Microsoft's earnings call.
• The timeline for monetization is "the next 15 years and beyond," the company said.

Big Tech would like you to believe that AI is forever.

From Silicon Valley to the Evergreen State, leaders of the world's most powerful companies have been busy spinning a tale that the technology will one day deliver a generational payday big enough to make their investment blitz worthwhile.

It's becoming less clear when, or even if, that payday will ever arrive.

On Tuesday, Microsoft left Wall Street wondering if a monstrous payout would ever come from billions of dollars of capital expenditure on AI as the Redmond-based heavyweight reported second-quarter earnings for the year.

Though revenue and net income in the quarter rose 15% and 10% year-on-year to $64.7 billion and $22 billion, respectively, Microsoft's leaders shared a cautious message about when its AI investments could be expected to deliver the outsized returns investors wanted.

The way Amy Hood, Microsoft's longtime chief financial officer, tells it, "the next 15 years and beyond" is the timeline investors should prepare to wait out. Why? Because building out the computing networks and infrastructure needed to power AI is very, very expensive.

Capital expenditure at the company jumped almost 80% year-on-year in the April-June quarter to $19 billion, with Hood noting on an earnings call that "cloud and AI-related spend" represents nearly all of that total.

Investors have known for some time that this is the case. Microsoft is directing roughly half of its capital expenditure toward building and leasing data centers that host AI models and the other half toward things like servers and GPUs bought from chip firms like Nvidia.

Investors will also know that tech firms are looking at AI as a long-term opportunity. Last year, in the month his company invested billions of dollars into OpenAI, Microsoft CEO Satya Nadella said that "AI is just at the beginning of the S-curve."

But if climbing up that S-curve means enduring heavy capital expenditure without near-term returns, investors aren't so sure if it'll all be worth it. Azure, Microsoft's cloud business that should be having a clear boom moment in the AI era, saw growth slow this quarter.

It partly explains why, in after-hours trading, Microsoft's stock fell by as much as 7%.

Some remain optimistic. Gregg Moskowitz, research analyst at Mizuho, wrote in a note that despite Azure revenue growth missing expectations — which Microsoft attributed to capacity constraints — "revenue growth opportunities over the medium term and beyond are greater than many realize."

Wedbush analyst Dan Ives, meanwhile, noted that "AI monetization trends" should accelerate as Microsoft expects to bring more enterprise customers on board. They no doubt will.

Whether investors are willing to put up with the capital expenditure needed to justify that customer acquisition is another matter.