Microsoft cloud growth and cash flow ease AI spending fears
Microsoft beat quarterly cloud revenue expectations and generated US$18.6 billion in free cash flow, easing Wall Street concerns over Big Tech's AI spending. Capital expenditure came in below its own forecast, and Azure revenue surged 48 per cent to US$33.17 billion.
Microsoft beat expectations for quarterly cloud revenue on Wednesday, offering fresh evidence that its hefty AI investments were paying off as Wall Street grows increasingly wary of Big Tech's debt-fueled spending. The software and cloud company also generated US$18.6 billion in free cash flow in its fiscal first quarter ended September — some US$10 billion more than analysts expected — as capital spending came in below the company's own forecast and Microsoft's Azure cloud computing business surged 48 per cent.
That financial firepower set Microsoft 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 US$9.07 billion in the third quarter as capital spending jumped, overshadowing a doubling of its cloud sales and sending its shares down 8 per cent in extended trading. Shares of Redmond, Washington-based Microsoft rose 2.6 per cent in extended trading. Its five-year credit default swaps remain the tightest among the largest tech companies, according to Truist.
Revenue at Microsoft's Azure cloud computing business grew to US$33.17 billion in the quarter, topping Visible Alpha's estimate of US$32.84 billion. Overall revenue rose by a fifth to US$92.28 billion, and an adjusted profit of US$4.89 per share beat an average estimate of US$4.73 a share. Chief Executive Satya Nadella has sought to capture corporate demand for AI by giving customers cheaper options, as businesses grapple with the rising cost of deploying AI. Microsoft has rolled out a string of lower-cost models, while its new Copilot Cowork agent allows users to switch between models.
Capital expenditure for the quarter rose to US$45.2 billion from US$34.9 billion a year earlier, but came in below the company's own projection of US$50 billion. So far in calendar 2026, Microsoft's capital expenditure has been US$118.1 billion, meaning it would have to spend US$56.9 billion in the final three months of the year to hit its own forecast of US$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.
Overall, Big Tech is expected to pump more than US$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.