Microsoft shares have declined approximately 6% over the past week, a surprising turn for investors following the company's announcement of strong fiscal first-quarter results. The tech giant reported significant growth in revenue and profit, largely driven by its cloud and artificial intelligence divisions, yet market sentiment has been tempered by concerns over the company's escalating spending.
Key Takeaways
- Microsoft's stock fell about 6% in one week despite reporting revenue and earnings that surpassed expectations.
- Revenue for the first fiscal quarter of 2026 grew 18% year-over-year to $77.7 billion, with Azure cloud services jumping 40%.
- Investors are concerned about a surge in capital expenditures, which reached $35 billion in the quarter, to fund AI infrastructure.
- Despite spending concerns, the company's backlog of commercial commitments has nearly doubled in two years, indicating strong future demand.
Strong Performance Meets Market Skepticism
Microsoft's latest financial report for the quarter ending September 30 painted a picture of robust health. The company posted an 18% increase in year-over-year revenue, reaching $77.7 billion. This performance translated directly to the bottom line, with operating income climbing 24% and adjusted earnings per share rising 23%.
The primary engine of this growth was the Microsoft Cloud division, which saw its revenue expand by 26% to $49.1 billion. The standout performer within this segment was Azure, the company's cloud computing platform, which reported a remarkable 40% revenue increase. This acceleration highlights the surging demand for AI-powered services integrated into Microsoft's ecosystem.
In the company's earnings release, CEO Satya Nadella emphasized the strategic importance of this trend. "AI integration across our products and services is driving broad diffusion and real-world impact," he stated. This success, however, is precisely why the company is ramping up its investment.
What Are Capital Expenditures (Capex)?
Capital expenditures, or capex, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, technology, or equipment. For a tech company like Microsoft, this includes massive investments in data centers, servers, and specialized hardware like GPUs and CPUs needed to power cloud and AI services. High capex can pressure short-term cash flow but is often necessary for long-term growth.
The High Cost of AI Dominance
Despite the strong results, the market's focus quickly shifted to the company's spending habits. Microsoft's capital expenditures soared to approximately $35 billion for the quarter. This figure, driven by investments in AI infrastructure, caught the attention of Wall Street.
The concern was amplified by comments from management, who signaled that this level of spending is not temporary. During the earnings call, CFO Amy Hood explained the company's strategy.
"With accelerating demand and a growing [remaining performance obligations] balance, we're increasing our spend on GPUs and CPUs. Therefore, total spend will increase sequentially, and we now expect the [fiscal 2026] growth rate to be higher than [fiscal 2025]."
This aggressive spending plan, while intended to meet future demand, creates near-term pressure on the company's free cash flow. Investors often react cautiously to such announcements, weighing the potential for future returns against the immediate financial impact. The 6% dip in the stock price reflects this uncertainty.
Demand Indicators Remain Solid
While the spending figures have caused jitters, other metrics suggest Microsoft's investment is a direct response to overwhelming customer demand. The company is not building capacity on speculation alone; it is racing to keep up with existing and future orders.
Microsoft's commercial remaining performance obligations (RPOs)—a measure of future revenue under contract—jumped 51% to $392 billion. This balance has nearly doubled in the last two years.
This massive backlog indicates that customers are locking in long-term commitments for Microsoft's cloud and AI services. The challenge for Microsoft is not finding customers but rather building out the infrastructure quickly enough to serve them. This context suggests the increased capex is a necessary step to capitalize on a clear growth opportunity.
Beyond the cloud, other business segments also showed strength. The Productivity and Business Processes unit, which includes Microsoft 365, grew its revenue by 17%, demonstrating continued adoption of its core software suite.
Valuation and Long-Term Outlook
Following the recent price drop, Microsoft's stock trades at a valuation of 33 times its projected forward earnings. While not considered cheap, this premium multiple can be justified if the company continues to execute on its growth strategy. The central risk for investors is one of timing: the heavy investments being made today will take several years to fully pay off.
If the monetization of its AI services continues at its current pace, the decision to invest heavily now will likely be seen as a prudent long-term move. However, any slowdown in demand could lead investors to question the high valuation and the capital-intensive strategy.
For now, the story is one of a company investing aggressively to solidify its leadership in the AI revolution. The market's short-term apprehension about spending may, in time, be viewed as an overreaction if Microsoft successfully converts its massive capital outlay into sustained revenue and profit growth.
