By Aditya Soni and Deborah Mary Sophia

(Reuters) -Microsoft ( MSFT ) said on Wednesday it spent nearly $35 billion on artificial intelligence in its fiscal first quarter, surpassing market expectations and overshadowing blockbuster growth in its cloud-computing business.

Shares of the company dipped 3% in extended trading, as the higher-than-expected capital expenditure number spooked investors who are growing increasingly concerned about an AI bubble.

Microsoft's ( MSFT ) capital expenditures in the quarter stood at $34.9 billion, compared with Visible Alpha estimates of $30.34 billion.

CLOUD BUSINESS GROWS 40%

Microsoft ( MSFT ) said the Azure cloud business, its key AI unit, grew 40% in the July-September period, outpacing Visible Alpha estimates of about 38.4%.

Total revenue rose 18% to $77.7 billion, beating expectations of $75.33 billion, according to data compiled by LSEG.

The results still highlight the growing returns from Microsoft's ( MSFT ) massive AI investments. They come as a web of circular deals, soaring valuations and limited evidence of AI productivity gains have raised doubts about how long the boom will last.

The results follow Microsoft's ( MSFT ) revised deal with OpenAI this week that gave it a 27% stake worth about $135 billion, as well as a cut of sales and access to intellectual property, clearing up uncertainty about the collaboration with the company synonymous with the AI boom.

The partnership, which gives Microsoft ( MSFT ) exclusive access to the models behind ChatGPT, has been key to Azure's rapid growth in recent quarters and strengthened its challenge to top cloud provider Amazon.com. It is also crucial to Microsoft's ( MSFT ) other AI services, such as 365 Copilot for businesses.

That AI push has turned Microsoft ( MSFT ) into the world's second-most valuable firm with a $4 trillion market value, trailing only the $5 trillion chip company Nvidia. The stock, up nearly 30% this year, is among the best performers in the "Magnificent 7."

Some analysts have praised Microsoft's ( MSFT ) decision in recent months to let some OpenAI contracts go to Oracle, saying it shows discipline in steering limited AI capacity toward more profitable enterprise customers. The move is part of a broader strategy to lessen its dependence on OpenAI by building its own models and partnering with other AI firms, including Anthropic.

Still, capacity limits have hampered Microsoft's ( MSFT ) ability to fully cash in on AI. The company and other major cloud providers are expected to spend about $400 billion on data centers and AI chips this year, with executives and analysts saying such spending is necessary to harness the technology's potential.