Microsoft Corporation (MSFT  ) CEO Satya Nadella has acknowledged the significant AI advancements made by China's DeepSeek. However, he did not confirm whether these innovations would lead to reduced AI costs.

What Happened: During the company's second-quarter earnings call, Nadella responded to analyst Brent Thill's inquiry about AI scaling and cost reduction.

He compared AI developments to the regular compute cycle, underscoring the role of Moore's Law and AI scaling laws in driving software optimizations, which have led to a tenfold improvement per cycle.

"I think DeepSeek has had some real innovations. And that is some of the things that even OpenAI found in 'o1," he stated, adding, "All gets commoditized and it's going to get broadly used."

He said that these software cycles benefit customers, as falling token and inference computing prices allow for increased consumption and more app development.

The CEO also pointed out the potential for running powerful AI models on PCs, which previously required substantial cloud infrastructure.

Why It Matters: DeepSeek has said that it created its low-cost R1 model in only two months with a $5.6 million investment using less-powerful Nvidia Corporation chips.

However, OpenAI has alleged that DeepSeek used its proprietary models without permission, raising concerns over intellectual property protection.

DeepSeek's $5.6 million investment number has also come under scrutiny. Wedbush analyst Dan Ives called it "a fictional story."

Microsoft's quarterly revenue reached $69.6 billion, surpassing the analyst consensus estimate of $68.78 billion, but cloud revenue missed expectations, causing a slide in Microsoft shares.

Price Action: Microsoft stock dropped 4.63% in after-hours trading, settling at $421.85. During Wednesday's regular trading hours, it closed at $442.33, reflecting a 1.09% decline, according to Benzinga Pro data.