Microsoft Soars 7% on Strong Earnings and Increased Capital Spending Amidst AI Demand

Microsoft shares surged 8% in after-hours trading Wednesday, buoyed by the software giant's robust fiscal fourth-quarter results and reaffirmation of steady 2026 capital expenditure plans.

Here's how Microsoft's performance stacked up against LSEG consensus estimates:

• Earnings Per Share: Reported at $4.74 adjusted, surpassing the anticipated $4.24 per share.
• Revenue: Achieved $90.01 billion, exceeding the expected $87.62 billion.

Microsoft reported an impressive year-over-year revenue increase of approximately 18% for the quarter ending June 30, according to a company statement.

Net income climbed to $35.77 billion, or $4.81 per share, a significant jump from $27.23 billion, or $3.65 per share, in the same period last year. This growth was attributed to a substantial $3.2 billion gain from its investment in AI research firm Anthropic, alongside lower-than-anticipated costs related to its inaugural voluntary retirement program. Conversely, the company recorded an impairment charge impacting its Xbox gaming division.

As of Wednesday's market close, Microsoft's stock had experienced a 19% decline year-to-date in 2026, contrasting with the S&P 500 index's approximately 7% gain. The technology sector has faced pressure this year, with investors expressing concerns about the potential disruption posed by generative artificial intelligence models.

Amidst these market dynamics, analysts at Deutsche Bank noted "some concentration risk" concerning Microsoft's relationship with OpenAI, particularly with the rise of open-source models. The firm, however, maintains a 'buy' recommendation for Microsoft stock. Earlier in January, Microsoft disclosed that roughly 45% of its $625 billion in remaining commercial performance obligations were linked to OpenAI.

CEO Satya Nadella is navigating the complex task of balancing resource allocation between Azure's cloud services, internal research, and applications like the Microsoft 365 Copilot assistant. Increased demand for AI chips for model training could potentially limit availability for cloud clients.

The company announced that commercial remaining performance obligations—a key indicator of unearned and unrecognized revenue—grew by 8% to $678 billion compared to the previous quarter. Microsoft attributed this sequential growth primarily to commitments from clients beyond AI model developers.

Capital expenditures and finance leases for the quarter saw a significant increase, reaching $41 billion, up 69%.

Microsoft's Chief Financial Officer, Amy Hood, confirmed the company's capital spending plans for 2026 but detailed strategic adjustments. These include extending the useful life of office and data center buildings to 25 years from 15, and a shift towards recognizing more future data center leases as operating leases rather than finance leases. These adjustments are projected to result in approximately $175 billion in capital expenditures and finance leases overall.

Looking ahead to fiscal year 2027, Hood anticipates further growth in capital expenditures, citing strong "demand signals across our portfolio."

Free cash flow for the quarter experienced a 23% decline, totaling $19.64 billion. Nevertheless, Hood expressed confidence in Microsoft's ability to achieve positive free cash flow in fiscal year 2027.

Microsoft's forward-looking guidance projects first-quarter fiscal revenue between $89.85 billion and $90.95 billion, representing a 16% increase at the midpoint. This forecast slightly edges out the $89.66 billion anticipated by LSEG analysts.

The Intelligent Cloud segment, spearheaded by Azure, generated $39.31 billion in revenue, marking a 31.6% year-over-year increase and surpassing the $38.16 billion consensus forecast from StreetAccount analysts.

Azure's growth rate accelerated to 43% (or 43% in constant currency), up from 40% in the preceding quarter. This performance exceeded the 40% and 40.2% constant currency growth anticipated by analysts polled by CNBC and StreetAccount.

Microsoft announced that Azure's revenue for the 2026 fiscal year surpassed $100 billion for the first time, with a 41% growth rate. At this scale, Azure positions itself as a leading cloud provider, trailing only Amazon Web Services but maintaining a lead over Alphabet's Google Cloud.

Hood projected a robust 45% Azure growth at constant currency for the upcoming first quarter, outperforming StreetAccount's consensus estimate of 41.4%.

The Productivity and Business Processes segment, encompassing Office, Dynamics, and LinkedIn, reported $37.85 billion in revenue, an increase of 14.3% and ahead of the $37.19 billion consensus from StreetAccount.

The company highlighted its Microsoft 365 Copilot work assistant, which has now surpassed 30 million paid seats, up from over 20 million recorded in April.

CEO Nadella also noted on an analyst conference call that hundreds of enterprise clients have acquired millions of seats for the premium E7 productivity software bundles. Furthermore, the GitHub Copilot coding assistant has expanded its user base to 50 million.

Microsoft's More Personal Computing segment, which includes Bing, Surface, Windows, and Xbox, contributed $12.85 billion in revenue. This figure represents a 4.4% decline but still exceeded StreetAccount's consensus estimate of $12.17 billion.

The company indicated a 7% decrease in sales of devices and Windows licenses to device manufacturers, aligning with technology industry researcher Gartner's estimate of a 4.2% decline in PC shipments.

Xbox revenue saw a 10% dip. Earlier in July, the division's CEO, Asha Sharma, announced workforce reductions and the planned spin-off of four studios.

During the fiscal fourth quarter, Microsoft launched a cost-effective AI coding model, appointed LinkedIn executive Dan Shapero to lead the business social network, and reduced prices for Xbox Game Pass subscriptions.

Company executives are scheduled to discuss these results and provide further guidance on a conference call commencing at 5:30 p.m. ET.

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