Microsoft’s AI spending guide is music to our ears, quieting the bears — for now
Tech
Microsoft broke ranks and kept its capital expenditures outlook steady — and the troubled stock was handsomely rewarded Wednesday evening. The good news on capex was accompanied by better-than-expected fiscal 2026 fourth quarter results, driven by strength in its Azure cloud unit, and strong current quarterly guidance. Revenue in the three months ended in June rose 18% year over year to $90 billion, beating the LSEG consensus estimate of $87.6 billion. Adjusted earnings per share (EPS) totaled $4.74, up 30% from a year earlier. It’s unclear if that’s a direct comparison to the $4.24 consensus, according to LSEG. Azure cloud revenue growth on a constant currency basis came in at 43%, versus the FactSet consensus of 40.26%. On a reported basis, Azure cloud revenue was also up 43%, ahead of the FactSet consensus of 40.4%. Bottom line Is this the beginning of the turn in the Microsoft story? Shares have dropped about 24% over the past 12 months on concerns that the company has fallen behind in the AI race. The bears have been loud, saying the company has too much seat-based subscription software that’s vulnerable to AI disruption. They also feel the company lacks innovation with its AI tools and was too reliant on OpenAI for cloud growth. We don’t want to overreact to a stock’s initial move after earnings, but Microsoft’s 9% after-hours rally suggests investors are finally coming around or at least recognizing they had become too pessimistic. Azure revenue growth accelerated to 43%, which was much stronger than the 39% to 40% forecast management gave last quarter. Past Microsoft quarters were held back by capacity constraints that left Azure revenue on the table. Bringing new capacity online faster than expected was one of the key drivers behind this quarter’s upside surprise. Microsoft added 31 new data centers across five continents in the quarter, bringing its total to 88 this year. Management said the $51 billion sequential increase in its commercial remaining performance obligation (RPO) was driven by customer commitments outside of frontier AI model developers. That’s an important detail because investors have grown increasingly concerned that hyperscalers are becoming overly reliant on a handful of customers, such as OpenAI and Anthropic, for their massive AI infrastructure investments. A broader and more diversified customer base should help ease those concerns. RPO is a key measure of signed contracts that have not been executed yet. Another pushback to the bear case was M365 Copilot. Let’s be clear: We are not the biggest believers. We think it’s fallen behind some of the other AI tools out there. For what it’s worth, Microsoft keeps adding customers and user satisfaction scores are improving. The company said Copilot now has over 30 million paid seats, which is a strong improvement from the over 20 million we heard three months ago and 15 million six months ago. During the conference call, CEO Satya Nadella teased that a Copilot “super app” is coming later this quarter. Hyperscalers spending too much and not seeing the return? Indeed, Microsoft invested $41 billion in the quarter, including assets acquired under finance leases. That’s up 70% year over year and in line with what analysts had modeled. But here is a key difference that may separate Microsoft from the other hyperscalers this earnings season: It left its calendar year 2026 capital expenditure investment expectations unchanged, although an accounting change from finance to operating leases technically adjusts its expectations lower to $175 billion from $190 billion. Capital expenditures are still up significantly from a year ago and are expected to increase again in fiscal 2027, but the company doesn’t appear compelled to raise its spending outlook every quarter even as demand exceeds supply. We don’t know the exact amount Microsoft plans to invest in its new fiscal year, but the market is rewarding its discipline Wednesday evening. Even better, CFO Amy Hood gave a terrific Azure revenue growth forecast. The business is expected to accelerate once again, with revenue growth guided to 45% in constant currency in the first quarter of fiscal year 2027. The Street was expecting growth of about 42%. It should also be appreciated that Microsoft is investing within its means. Unlike Alphabet , which generated negative free cash flow in the second quarter, and Meta Platforms , which reported just $1.7 billion in free cash flow, Microsoft remained highly cash generative, producing $19 billion in free cash flow during the quarter. That financial discipline allows the company to continue investing aggressively in AI while also returning capital to shareholders, including $3.4 billion of share repurchases during the quarter. ( Amazon , our fourth hyperscaler, reports earnings after Thursday’s close.) MSFT 1Y mountain Microsoft 1 year The results were encouraging and strong enough to keep us interested in this battleground stock. The company’s strategy of giving cloud customers a choice of AI models based on quality, latency, cost, and compliance appears to be resonating. That being said, the company isn’t out of the woods yet. We still have some reservations about Copilot adoption and paid seat growth, and we look forward to learning more about the company’s new super app later this year. We reiterate our 2 rating and $500-per-share price target. Guidance In addition to the aforementioned Azure growth forecast, management expects total revenue for fiscal Q1 in the range of $89.85 billion to $90.95 billion, implying growth between 16% and 17%. The $90.4 billion midpoint of the guidance is above the FactSet consensus of $89.7 billion. Operating expenses are seen in the range of $16.8 billion to $16.9 billion, implying 7% to 8% year-over-year growth. That’s below the FactSet consensus of $17.28 billion. Lower is better. Capital expenditures are expected to be over $50 billion for the quarter. Why we own it Microsoft is a core backbone of global productivity, thanks to its cloud platform, Azure, and its Office 365 suite. The company is a key player in the artificial intelligence race. Competitors : Amazon , Alphabet , and Salesforce Most recent buy : Aug. 5, 2024 Initiated : Dec. 4, 2017 Looking at the company’s revenue outlook by reporting segment, Productivity and Business Processes, including Office and LinkedIn, is expected to be between $36.7 billion and $37 billion in the company’s fiscal first quarter. That is above the FactSet consensus of $36.6 billion. Intelligent Cloud, including Azure and servers, is seen at $40.95 billion to $41.25 billion. That exceeds the FactSet consensus of $40.1 billion. More Personal Computing, including Windows and gaming, is projected to be $12.2 billion to $12.7 billion. That is below the FactSet consensus of $12.9 billion. (Jim Cramer’s Charitable Trust is long MSFT, GOOGL, META, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Microsoft’s AI spending guide is music to our ears, quieting the bears — for now
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