On Wednesday, Microsoft addressed worries regarding excessive spending on AI, showcasing increased profits despite interruptions in its Azure cloud services and 365 office software. This strong earnings report follows a deal with OpenAI that raised the tech leader’s valuation to over $4 trillion.

Following disruptions to both the Xbox and Investor Relations pages, Microsoft issued a statement, noting, “We are actively resolving an issue affecting Azure Front Door, impacting the availability of certain services.”

Despite the service interruption, the company’s financial outlook remained robust. Microsoft reported first-quarter earnings of $3.72 per share, surpassing analysts’ expectations of $3.68, with revenue reaching $77.7 billion against an estimate of $75.5 billion, as per Bloomberg consensus.

This marks an increase from $3.30 per share and $65.6 billion in sales during the same period last year.

The Azure cloud division, closely monitored by Microsoft, exhibited approximately 40% growth, exceeding forecasts. Operating income rose 24% to $38 billion, surpassing expectations, with net income reported at $27.7 billion.

“Our global cloud and AI factory collaborates with co-pilots across high-value sectors to promote widespread adoption and tangible impact,” stated Satya Nadella, Microsoft Chairman and CEO.

“This is why we are continuously enhancing our investments in AI, in both capital and talent, to seize significant future opportunities.”

The company revealed spending a remarkable $34.9 billion on AI initiatives during the quarter, a 74% increase from the previous year.

Microsoft’s earnings report arrives as investors are responding positively to modifications in its contract with OpenAI. This shift will transition the once nonprofit AI organization into a for-profit entity, further integrating Microsoft with the company.

Under the amended agreement, Microsoft will possess 27% of OpenAI Group’s PBC shares, amounting to approximately $135 billion, while OpenAI’s nonprofit division will hold $130 billion in stock of the profit-making enterprise.

The earnings report offers Wall Street an updated perspective on the company’s growth in AI and cloud services. Nvidia recently became the first company to surpass a $5 trillion market capitalization, coinciding with favorable signs for a U.S.-China trade agreement. Earlier this week, the overall U.S. stock market achieved record levels, spurred by substantial investments in AI.

Microsoft’s earnings hit the headlines as the week unfolds with reports from the Magnificent Seven, a group of the world’s most valuable publicly traded companies, including Meta Inc. and Alphabet, Google’s parent company.

Amid growing apprehensions about a potential market bubble in AI-related investments reminiscent of the overinvestment seen in the late 1990s, it is suggested that bubbles may not be apparent until they burst.

On the earnings call, Microsoft CFO Amy Hood attempted to ease concerns regarding a potential AI investment bubble, stating that the company’s rapid expansion of AI capabilities (up 80% this year alongside a plan to double its data center size in two years) is to fulfill already booked demand.

“The necessity for ongoing infrastructure development is extremely high, driven by business already booked, not new business,” Hood explained, noting that the company had been experiencing capacity shortages for several quarters.

“I hoped to catch up, but it didn’t happen,” Hood remarked. “Demand is escalating, and usage is growing quickly. When demand signs are visible and you know you’re lagging, spending is essential. But we’re investing with assurance based on our usage patterns and reservations, and we feel positive about that.”

Nonetheless, she cautioned that Microsoft is likely to remain “capacity constrained.”

According to Reuters, the collective valuation of AI and cloud computing firms is projected to hit $20 trillion, with the overall market return reaching 18%, or around $3.3 trillion, by 2025. Investors typically look for signs that AI capital expenditures meet expectations as the market continues to hit new highs.

Major tech firms like Microsoft, Alphabet, Meta, and Amazon are anticipated to invest hundreds of billions in capital next year, primarily directed at developing data centers and infrastructure for artificial intelligence. While investors might be unfazed by a lack of robust revenue growth, they may find reassurance in indicators of strong AI adoption. The Dow Jones Industrial Average reached a notable milestone of $47,943 on Wednesday morning.

“As five of the Magnificent Seven report this week, the market is eager for affirmation that all these AI capital investments are being made and that they are ensuring observable revenue and profit from AI,” commented Scott Wren, senior global market strategist at Wells Fargo Investment Institute in St. Louis, Missouri, to Reuters this week.

Elements of the AI economic surge might stem from cost-saving measures. Microsoft announced approximately 9,000 job reductions at the start of summer, while Amazon is reportedly considering cutting up to 30,000 corporate positions, or 10% of its white-collar workforce, to mitigate overhiring during peak pandemic demand.

As AI technology adoption increases, business leaders are increasingly tasked with justifying human hires, including roles in human resources and other executive positions that entail additional costs like health insurance and pensions, particularly when positions could be executed by AI. Consequently, human resources departments are likely to be among the initial areas downsized as AI continues to grow.