Microsoft broke the ranking and stabilized its outlook for capital spending. And on Wednesday evening, the troubled stocks were amply rewarded. The good news on capital spending was accompanied by better-than-expected fiscal 2026 fourth quarter results, driven by strength in the Azure cloud division and current strong quarterly guidance. Revenue for the three months ended June rose 18% from a year earlier to $90 billion, beating LSEG’s consensus estimate of $87.6 billion. Adjusted earnings per share (EPS) totaled $4.74, an increase of 30% from the prior year period. LSEG said it is unclear whether this is directly comparable to the consensus of $4.24. On a constant currency basis, Azure Cloud’s revenue growth was 43%, compared to the FactSet consensus of 40.26%. On a reported basis, Azure cloud revenue also increased 43%, beating the FactSet consensus of 40.4%. Conclusion Is this the beginning of a shift in the story for Microsoft? The stock has fallen about 24% in the past 12 months on concerns that the company is falling behind in the AI race. Bears have argued that the company has too much seat-based subscription software that is vulnerable to AI disruption. They also feel the company lacks innovation with AI tools and is too reliant on OpenAI for cloud growth. While we don’t want to overreact to the stock’s initial post-earnings performance, Microsoft’s 9% after-hours stock price increase suggests that investors are finally recovering, or at least realizing they had become too pessimistic. Azure revenue growth accelerated to 43%. This was much stronger than management’s 39% to 40% forecast for the previous quarter. Microsoft’s past quarters were bogged down by capacity constraints, putting Azure revenue at risk. Bringing new capacity online faster than expected was one of the key drivers of the quarter’s unexpected upside. Microsoft added 31 new data centers on five continents this quarter, bringing the total to 88 this year. Management said the $51 billion sequential increase in commercial remaining performance obligations (RPO) was driven by customer commitments other than Frontier AI model developers. This is an important detail as investors grow concerned that hyperscalers are becoming too reliant on a small number of customers, such as OpenAI and Anthropic, to invest in large-scale AI infrastructure. A broader and more diverse customer base should alleviate these concerns. RPO is an important measure of signed contracts that have not yet been signed. Another backlash to the bear incident was the M365 co-pilot. Let me be clear: we are not the biggest believers. It is considered to be lagging behind other AI tools. Not surprisingly, Microsoft continues to add customers and user satisfaction scores are improving. According to the company, Copilot now has more than 30 million paid seats, which is a significant improvement compared to more than 20 million three months ago and more than 15 million six months ago. During the conference call, CEO Satya Nadella teased that Copilot’s “super app” will arrive later this quarter. Are hyperscalers spending too much for no return? In fact, Microsoft invested $41 billion in the quarter, including assets acquired under finance leases. This is a 70% year-over-year increase and is in line with what analysts have modeled. But here’s a key difference that may separate Microsoft from other hyperscalers this fiscal year. The company maintained its 2026 calendar year capital expenditure forecast, but the change in accounting from finance leases to operating leases technically lowers the forecast from $190 billion to $175 billion. Capital spending is still up significantly year over year and is expected to rise again in fiscal 2027, but the company doesn’t seem to need to raise its spending outlook every quarter, despite demand outstripping supply. We don’t know exactly how much Microsoft plans to invest in the new fiscal year, but on Wednesday night, the market was rewarding its discipline. Even better, CFO Amy Hood gave great predictions for Azure revenue growth. The business is expected to accelerate again, with revenue growth expected to reach 45% excluding currency effects in the first quarter of fiscal 2027. The Street had predicted growth of about 42%. Microsoft should also be recognized for investing within its means. Unlike Alphabet, which generated negative free cash flow in the second quarter, and Meta Platforms, which generated only $1.7 billion in free cash flow, Microsoft still generated strong cash flow, generating $19 billion in free cash flow during the quarter. This financial discipline allows the company to continue to invest aggressively in AI while returning capital to shareholders, including a $3.4 billion share buyback during the quarter. (Our fourth hyperscaler, Amazon, will report earnings after the close of trading on Thursday.) MSFT 1Y Mountain Microsoft 1 Year The results were encouraging and strong enough to remain interested in this battleground stock. The company’s strategy to offer cloud customers a choice of AI models based on quality, latency, cost, and compliance seems to be resonating. That said, the company is not out of the woods yet. We’re still concerned about the introduction of Copilot and the increase in paid seats, and look forward to learning more about the company’s new super app later this year. We reiterate our two ratings and $500 per share price target. Guidance In addition to the Azure growth forecast discussed above, management expects fiscal first quarter total revenue to be in the range of $89.85 billion to $90.95 billion, representing growth of 16% to 17%. The midpoint of the guidance, $90.4 billion, is higher than the FactSet consensus of $89.7 billion. Operating expenses are expected to be in the range of $16.8 billion to $16.9 billion, representing 7% to 8% year-over-year growth. This is below the FactSet consensus of $17.28 billion. The lower the better. Capital spending for the quarter is expected to exceed $50 billion. Looking at the company’s revenue outlook by reportable segment, Productivity and Business Processes, which includes Office and LinkedIn, is expected to be $36.7 billion to $37 billion in the company’s fiscal first quarter. This beats the FactSet consensus of $36.6 billion. Intelligent cloud, including Azure and servers, is expected to cost between $40.95 billion and $41.25 billion. This beats the FactSet consensus of $40.1 billion. Personal computing, including Windows and games, is expected to add another $12.2 billion to $12.7 billion. This is below the FactSet consensus of $12.9 billion. (The Jim Cramer Charitable Trust is long MSFT, GOOGL, META, AMZN. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, as well as our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
