By Deborah Mary Sophia, Aditya Soni and Anna Tong

(Reuters) -Microsoft predicted increased spending on artificial intelligence this quarter but slower growth in its cloud business Azure, signaling that big AI investments were not enough to keep pace with capacity constraints at its data centers.

Shares of the Redmond, Washington-based company dipped 3.6% in after-market trading, giving up earlier gains. The company beat Wall Street's estimates for first-quarter revenue and profit.

Facebook-owner Meta, which reported results ahead of analyst expectations as well, warned of "significant acceleration" in AI-related infrastructure expenses, sending its share price down 3.1% in after-market trading.

Brett Iversen, Microsoft's vice president of investor relations, reiterated that Microsoft will not be able to address AI capacity constraints until the second half of its fiscal year.

Microsoft forecast second-quarter Azure revenue growth of 31% to 32%, lagging the 32.25% growth expected on average by analysts, according to Visible Alpha. Azure revenue rose 33% in its fiscal first quarter ended Sept. 30, slightly ahead of estimates.

AI contributed 12 percentage points to Azure's growth in the first quarter, compared with 11 percentage points in the prior three-month period.

Microsoft has been pouring billions into building its AI infrastructure and expanding its data-center footprint. For the quarter, Microsoft said capital expenditures rose 5.3% to $20 billion, compared with $19 billion in the previous quarter. That was higher than Visible Alpha estimates of $19.23 billion.

Its hefty spending has raised concerns among some investors.

The company has been the worst performer among Big Tech names this year, having gained just over 15%, while Meta has surged 68% and Amazon.com climbed 28%.

Microsoft will spend over $80 billion this fiscal year, which began in July, according to analyst estimates from Visible Alpha. That is an increase of more than $30 billion from its last fiscal year.

"Microsoft is escalating a CapEx war that it may not be able to win. That level of investment is very high, it created a very big drag on free cash flow and will create a very big drag on margins going forward," said Gil Luria, head of technology research at D.A. Davidson.

Microsoft's rival Google has benefited from AI growth. On Tuesday, Alphabet said AI helped drive a 35% surge in its cloud business. Its shares closed up over 2.8% on Wednesday and were down 0.4% after the market closed.

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The quarterly earnings are Microsoft's first since it restructured the way it reports its businesses to align them more closely with how they are managed. That move has, however, made it harder to estimate the quarter's performance.