Microsoft on Wednesday delivered a big cash flow beat and forecast strong cloud growth, offering fresh evidence that its hefty AI bets were paying off even as concerns mount over Big Tech’s spending spree.
The results underscore a widening financial divide among the industry’s biggest AI spenders, as soaring infrastructure costs force some rivals to turn more heavily to capital markets.
Microsoft’s shares rose more than 3% in after-hours trading. The company posted market-beating 48% growth in its Azure cloud business in its fiscal first quarter ended September, and generated $18.6 billion in free cash flow — some $10 billion more than analysts expected.
That financial firepower set the maker of the Windows operating system apart from rivals such as Alphabet and Meta, whose heavy AI investments have squeezed free cash flow and increased their reliance on borrowing.
Alphabet reported negative free cash flow of $9.07 billion in the third quarter as capital spending jumped and growth in its core ad business slowed, overshadowing a doubling of its cloud sales and sending its shares down 8% in extended trading. Meta last week posted its first cash burn in more than a decade, and said it planned to issue new stock to fund its growing capital costs.
“Microsoft’s first-quarter report was about as clean as it gets for a company this size,” said Jesse Cohen, senior analyst at Investing.com. “After Meta’s and Alphabet’s numbers revived AI-spending anxiety, this is the counterweight. Demand still exceeds supply, the commercial backlog is enormous, and returns are finally showing up in earnings and overall revenue.”
The results also showed Microsoft capitalizing on corporate demand for AI, easing fears that the technology threatens its software empire and that its AI fortunes are too closely tied to unprofitable OpenAI. Still, its ties to the AI lab netted it $10 billion in revenue in the September quarter.
Microsoft shares have risen about 9% so far this year compared with a 13% rise in the S&P 500 index Microsoft’s five-year credit default swaps — a measure of perceived default risk — remain the tightest among the largest tech companies, according to Truist, even as spreads have widened across much of the AI trade.
NADELLA’S LOWER-COST STRATEGY
CEO Satya Nadella has sought to capture enterprise demand by giving customers cheaper options, as businesses grapple with the rising cost of deploying AI.
On a conference call with analysts, Nadella said the company was giving customers a range of AI options, some of them at lower cost than cutting-edge AI models such as Anthropic. The company is trying to make its Copilot products more useful with each model release by “consolidating the frontier gains for broad deployment,” he added.
Last month, Microsoft said it would disclose Azure revenue in dollars, instead of just growth rates, offering a clearer picture of how its cloud business stacks up against rivals Amazon Web Services and Google Cloud.
Revenue at Microsoft’s Azure cloud computing business grew to $33.17 billion in the quarter, topping Visible Alpha’s estimate of $32.84 billion. Overall revenue rose by a fifth to $92.28 billion, and an adjusted profit of $4.89 per share beat an average estimate of $4.73 a share.
The company expects second-quarter Azure growth of 49% to 50%, above analyst estimates of 47.6%, according to Visible Alpha data. It forecast total sales of $96 billion to $97.1 billion, above estimates of $95.6 billion, according to LSEG data.
LOWER SPENDING THAN FORECAST
Capital expenditure for the quarter rose to $45.2 billion from $34.9 billion in the year-ago period, but came in below the company’s own projection of $50 billion. So far in calendar 2026, Microsoft’s capital expenditure has been $118.1 billion, which means it would have to spend $56.9 billion in the final three months of the year to hit its own forecast of $175 billion given in July.
Jonathan Neilson, Microsoft’s vice president of investor relations, attributed the lower-than-expected capital expenditure to delays rather than any changes to the company’s underlying spending plans.
“We did see some third-party capacity deliveries that we expected in first quarter were actually delayed,” Neilson said.
Earlier on Wednesday, hyperscaler Oracle said it expects capital spending to peak this fiscal year and next, but pledged to raise no more than $20 billion in additional financing for AI through fiscal 2030.
Overall, Big Tech is expected to pump more than $700 billion this year into building data centers and securing the hardware and energy needed to develop and run AI technologies.
While faster revenue growth at these companies indicates their bets could be paying off, concerns over the cost of financing the outlay have heightened over the past few weeks.
Shrinking cash flows and rising debt loads at US tech companies, including recent stress at neocloud company CoreWeave as well as record-high costs to insure Meta’s debt against default, have added to market turmoil.
(Reuters)
