Many investors were probably disappointed with Microsoft's (MSFT 0.59%) fiscal 2024 fourth-quarter update after the market closed on Tuesday. The tech giant didn't hit Wall Street's expectations for cloud revenue. As a result, its shares opened lower on Wednesday.
However, some investors were quite happy with Microsoft's latest quarterly update -- Nvidia (NVDA +2.59%) shareholders. Here's why Microsoft just delivered good news for Nvidia.
NASDAQ: MSFT
Key Data Points
Microsoft's capital expenditures are increasing
Microsoft executives spent a lot of time in the company's fiscal Q4 conference call discussing businesses with strong growth. Azure and other cloud services revenue jumped 29% year over year. Azure Arc hybrid and multi-cloud management customers soared by 90%. Azure AI customers increased nearly 60%. Copilot customers increased more than 60%.
The common thread behind all of this growth is the continued high demand for artificial intelligence (AI) products and services. Microsoft doesn't expect this demand to wane. CEO Satya Nadella said in the conference call that the company has added new data centers that are "long-term assets around the world to drive growth for the next decade and beyond."
It was Microsoft CFO Amy Hood, though, who explained the financial impact of this AI-fueled demand. She noted that the company's capital expenditures in fiscal Q4 were $19 billion. For the full year, Microsoft's capex increased significantly.
Now for the most important part. Hood said, "To meet the growing demand signal for our AI and cloud products, we will scale our infrastructure investments with FY '25 capital expenditures expected to be higher than FY '24."
Microsoft's already soaring capex will increase -- and quickly. Hood stated, "We expect capital expenditures to increase on a sequential basis given our cloud and AI demand, as well as existing AI capacity constraints."
Why that's good news for Nvidia
Hood didn't mention Nvidia in her remarks about Microsoft's increased capital spending. But she didn't have to.
What she did say, though, should be good news for Nvidia. Hood explained that roughly half of capital expenditures in the latest quarter were for infrastructure, specifically building and leasing data centers. She said the other half was "primarily for servers, both CPUs and GPUs."
Don't assume that the increased spending will be split equally between CPUs and GPUs. Hood mentioned that Microsoft can "throttle" investment in CPUs, adding "which we've done for, I guess, a long time at this point." GPU spending will almost certainly be much higher than CPU spending.
We don't have to guess who will be the biggest beneficiary of much of (if not most of) Microsoft's increased investments in GPUs. Sure, Nadella mentioned that the company has bought some AI accelerators from AMD and deployed its own Azure Maia silicon. However, Microsoft is one of Nvidia's biggest customers. That isn't likely to change.
Nvidia continues to dominate the GPU market
None of Microsoft's executives brought up Nvidia's upcoming Blackwell GPU architecture. However, it's a safe bet that some of Microsoft's increased capex will go toward buying the powerful new Blackwell-based chips.
Nvidia is poised to continue its dominance of the GPU market with Blackwell. The company claims that the Blackwell architecture can support building and running trillion-parameter large language models (LLMs) at up to 25 times less cost and energy usage than its previous Hopper architecture. CEO Jensen Huang believes Blackwell will probably be "the most successful product" in the company's history.
Microsoft is one of several AI leaders who have already committed to using Blackwell. Nadella said in Nvidia's press release announcing Blackwell, "We are committed to offering our customers the most advanced infrastructure to power their AI workloads." For now and the foreseeable future, that means Microsoft will buy Nvidia's GPUs.
