Microsoft’s latest earnings show the company is executing exceptionally well on AI and cloud growth, but the financial story is no longer about easy margin expansion—it's now about whether the company can sustain profitability while investing heavily in AI infrastructure.
For its most recent quarter, revenue grew 18% year over year to $77.7 billion, while adjusted EPS jumped 23% to $4.13, blowing past analyst expectations of $75.3 billion and $3.67 (LSEG). The company guided for next quarter revenue between $79.5 billion and $80.6 billion, which is broadly in line with Wall Street’s $79.95 billion forecast.
Azure remains the key growth driver, while AI-enhanced services across Microsoft 365, GitHub Copilot, and Dynamics continue lifting recurring revenue. But behind the strong performance is a shift in how Microsoft makes money—and how much it now spends to stay ahead.
AI Growth Comes With a Cost
Microsoft had previously told investors it expected capital expenditure (capex) growth to slow in fiscal 2026. That has now changed. Due to “accelerating demand,” management said capex growth will instead be faster than last year, with most of it going toward GPUs and CPUs needed for AI infrastructure.
According to Kevin Marshall, CPA and lead contributor at Smithii Tools, Microsoft’s increased investment isn’t just about capturing AI demand—it's about defending Azure’s competitive position. Cloud infrastructure is becoming a utility-like business, where availability and scale are strategic weapons. He notes that AI helps drive adoption, but the economics are different from Microsoft’s traditional software model: higher spending, longer payback periods, and initially lower margin contribution.
The takeaway? AI isn’t instantly accretive—it’s a long-term moat-building expense.
OpenAI Deal: Strategic Control, Massive Cloud Tailwind
Microsoft also finalized a powerful new agreement with OpenAI—perhaps one of the most strategically important deals in AI history.
Under the new terms:
- Microsoft now owns 27% of OpenAI, valued around $135 billion.
- It retains exclusive IP and API access to OpenAI’s models through 2032.
- OpenAI has committed to spend $250 billion on Azure services over time.
This deal gives Microsoft long-term control over key AI infrastructure, large recurring revenue from Azure contracts, and reinforces its moat vs. Google, Amazon, Oracle, and Meta. For investors, it provides a clearer revenue pipeline behind Microsoft’s AI hype.
Valuation — Is MSFT a Buy?
At today’s price levels, Microsoft trades at a forward P/E of ~33× FY2026 earnings. That’s neither cheap nor frothy—it’s near the middle of its 3-year valuation range.
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