Summary of Key Points
Microsoft's latest financial report for the fourth quarter of fiscal year 2026 showed revenues of $90 billion, with profits and cloud business performance exceeding expectations, resulting in a post-market stock price increase of approximately 8%. However, over the past six months, Microsoft's stock price has dropped by nearly 30% due to factors such as a surge in capital expenditures, low payment rates for Copilot, and changes in cooperation with OpenAI. Essentially, Microsoft is transitioning from a low-capital-intensive company that primarily made money by selling software to an "房东" in the AI era—investing heavily in building data centers (the "buildings") and purchasing GPUs (the "rooms") to rent out its infrastructure to businesses and its own AI products. This financial report has temporarily alleviated market concerns about its unlimited spending and potential loss of tenants, but it still faces challenges such as ongoing capital expenditure pressures and competition from Google Cloud.
Why Microsoft Is Becoming the "Owner" in the AI Era
You can think of the infrastructure of the AI era as "office buildings": data centers are the buildings, and GPU chips represent the offices within them. Businesses that want to use AI must rent these offices. What Microsoft is doing is rapidly constructing more data centers and purchasing necessary equipment before renting them out for a fee.
- Aggressive Spending: Capital expenditures in fiscal year 2024 were $32 billion, and in 2026, they plan to spend $190 billion—sixfold in just three years. This is like going from spending $320,000 per year on a house to $1.9 million per year—either indicating reckless spending or a bet on a future explosion in AI demand.
- Early Signing of Rental Contracts: The value of uncollected rental contracts has increased from $92.7 billion to $196.6 billion within nine months, with effective terms extending until 2031. This means that tenants are paying for buildings that have not yet been completed.
- Rapid Expansion of Assets: Fixed assets have increased by 53% (from $205 billion to $313.1 billion), and server and network equipment costs have risen by 44% in nine months, with accounts payable increasing from $6.9 billion to $22.6 billion. Money is being spent, and the infrastructure is being rapidly developed.
All these actions aim to position Microsoft as a provider of essential infrastructure for the AI world, generating revenue by renting out hardware and services rather than simply selling software.
The Six Major Reasons Behind the 30% Stock Price Drop Over the Past Half Year
The market's previous fears about Microsoft were all based on concrete concerns:
1. Unlimited Spending: Quarterly capital expenditures reached $37.5 billion, with the first half of the fiscal year totaling $72.4 billion—almost matching the entire amount of last year, leading to concerns that Microsoft might deplete its funds.
2. Weakening Cash Flow: Net cash flow decreased to $15.8 billion after deducting costs for building data centers and purchasing equipment, and the gross margin on cloud business dropped from 68% to 64%, meaning less profit per rental transaction.
3. Low Copilot Payment Rates: Only 4.4% of 15 million paid users are contributing to revenue, despite issues with the service's functionality and reports of team reorganizations, which some investors believed mislead the market.
4. Loss of a Major Tenant: OpenAI (Microsoft's largest tenant) signed a cloud contract with Amazon, potentially leading to Microsoft losing its preferred status as a cloud provider.
5. Faster Growth from Competitors: Google Cloud's growth rate was 63% (later rising to 82%), raising doubts about Microsoft's competitiveness.
6. Credit Rating Doubts: Moody's downgraded Microsoft's credit rating, and Wall Street reduced its target price from $540 to $392, suggesting that AI-related investments may be dragging down the company's overall performance.
Four Reconciling Factors in This Financial Report
The market has become more optimistic because Microsoft provided evidence to alleviate these concerns:
1. Outperforming Cloud Growth: Azure's growth rate of 43% exceeded both management's guidance (39-40%) and the most optimistic forecasts (41%). Revenue from its intelligent cloud division surpassed that of its productivity division for the first time, indicating that its infrastructure is in high demand.
2. Accelerating Copilot Revenue: The number of paid users increased from 15 million to 30 million, with a quarter-on-quarter increase of nearly 10 million, and the billing model was changed to pay-per-use, generating actual revenue.
3. Strong Contract Reserves: Unconfirmed contract value reached $678 billion (an 84% year-over-year increase), indicating continued demand despite the loss of a major tenant.
4. Positive Cash Flow: Operating cash flow was $55.4 billion (a 30% increase), and net cash flow after deducting capital expenditures was $19.6 billion—although low, it remains positive, indicating that Microsoft's ability to generate revenue is not compromised.
Future Challenges
Despite the positive financial report, risks still exist:
1. Further Increased Capital Expenditures: The next quarter's expenditure is expected to exceed $50 billion, and the new fiscal year could see spending between $238 billion and $261 billion, potentially pushing net cash flow close to break-even.
2. Intense Competition from Google Cloud: With a growth rate of 82%, Google Cloud is outpacing Microsoft significantly, and it remains to be seen which provider will be more attractive to businesses.
3. Unclear Copilot Revenue: Microsoft only reports the number of paid users without specifying revenue amounts, making it difficult to assess the actual profitability of its AI products.
4. Legal Issues and One-Time Income: There are ongoing lawsuits related to Copilot, and $0.27 per share in profits comes from one-time investments (from Anthropic), which are not part of Microsoft's regular business operations.
Conclusion
Microsoft's financial report has provided some relief to the market, but its transition to becoming a dominant player in the AI era is still an ongoing process. It must continue to invest heavily in infrastructure and compete for customers while proving its ability to generate sustainable revenue. The next quarterly report will be the true test of its success.
(All data comes from Microsoft's financial reports, press conferences, and public reports on Wall Street.)