This Tech Giant Is Making Big Moves With Generative AI, but Here Are 3 Risks Investors Need to Know About

Generative artificial intelligence (AI) is a hot ticket these days, and some of the world's largest tech companies are building their futures around AI strategies. At the same time, game-changing AI can pose serious business risks. Tech titan Microsoft (NASDAQ: MSFT) is not afraid to share its AI-related risk analysis with the public, and you should take a look at management's concerns before making any AI investments -- in Microsoft or other tech stocks.

How Microsoft talks about AI risks

A recent Motley Fool research report reviewed how five of the "Magnificent Seven" companies discuss AI topics on their earnings calls in the first three quarters of calendar year 2024.

Start Your Mornings Smarter! Wake up with Breakfast news in your inbox every market day. Sign Up For Free »

None of the tech giants spent a whole lot of conference call time on AI risks, but Microsoft did stand out as a leading analyst of risk factors.

Amazon (NASDAQ: AMZN) devoted only 4% of its AI mentions to risk factors, mostly focused on the high costs of setting up powerful AI services. Apple (NASDAQ: AAPL) gave even less space to risk discussions, with just 3% of the mentions centered on strict regulations slowing down the rollout of Apple's AI tools.

Microsoft took a different approach and directed 10% of its AI mentions toward risk analysis. More broadly, the company related almost all of its AI talk to the Copilot AI assistant tool and the Azure cloud-computing platform, and the risk discussion stayed within those guardrails to develop a theme of extreme demand making it tough to satisfy every order for Azure and Copilot AI services.

Risk 1: Building AI infrastructure is a massive and expensive challenge

Microsoft CEO Satya Nadella is not surprised by the soaring demand for generative AI services, but real-world limitations still make it difficult to capitalize on that demand.

"We have run into obviously lots of external constraints because this demand all showed up pretty fast, right?" Nadella said on the Q1 2025 earnings call in October 2024. "We ran into a set of constraints, which are everything because [data centers] (DCs) don't get built overnight. So there is DCs. There is power. And so that's sort of been the short-term constraint."

Building lots of data center capacity and securing large-scale electric power feeds is a slow and expensive process, but Microsoft is building assets with massive long-term value.

Risk 2: It's hard to keep up with surging AI demand

Despite its enormous business scale and generous infrastructure investments, Microsoft still finds it hard to keep up with the soaring AI demand.

• In the April 2024 call, CFO Amy Hood noted that "near-term AI demand is a bit higher than our available capacity."
• Three months later, Hood explained that Azure's AI demand "remained higher than our available capacity."
• I just showed you the October call, where Nadella highlighted the "constraints" holding back Microsoft's AI business. On the same call, Hood stated that "demand continues to be higher than our available capacity."
• Jumping ahead to last month's second-quarter call, Hood simply repeated her demand analysis from October. There's no stopping the inflow of AI-related orders for Azure's cloud-based computing capacity.

Risk 3: DeepSeek and other up-and-coming competitors

More recently, the Chinese DeepSeek engine emerged as a threat to the current AI leaders. A small team with a modest budget for computing hardware can generate AI results comparable to the big-budget leaders. Of course, DeepSeek came up often in the second-quarter call, earning more than 8% of Microsoft's total AI discussion.

Nadella said that the AI market is developing much like the old-school computing industry did. New innovations drive down costs and improve the quality of computing services, and the entire market is always adapting to a steady stream of game-changing shifts.

"Obviously, now that all gets commoditized and it's going to get broadly used," Nadella said. "And the big beneficiaries of any software cycle like that is the customers."

So DeepSeek presents new risks to Microsoft's AI business but it's also a normal and healthy part of this emerging market. We're about to find out what happens when deep-pocketed tech giants apply huge data centers and computing budgets to the same technology that worked wonders at DeepSeek's limited scale.

In the end, AI tools from the phone in your pocket to massive-scale cloud solutions will benefit from unexpected challenges such as the DeepSeek approach. And that's why you won't be stuck with today's AI quality in the long term, just like you're not using Pentium processors or Windows 3.1 in 2025.

You can't stop progress. You can only slow it down. But why would you want to?

Don’t miss this second chance at a potentially lucrative opportunity

Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.

On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:

• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $361,026!*
• Apple: if you invested $1,000 when we doubled down in 2008, you’d have $46,425!*
• Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $562,659!*

Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

Learn more »

*Stock Advisor returns as of February 3, 2025

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anders Bylund has positions in Amazon. The Motley Fool has positions in and recommends Amazon, Apple, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.