Microsoft’s earnings report saw it deliver better-than-expected results for its fiscal first quarter.
The company stated that revenue increased 18% in the fiscal first quarter from $65.6 billion a year ago, with Microsoft’s Azure cloud business jumping 40%.
Operating income was $38.0 billion, increasing 24%.
Yet despite the strong results and recent positive announcements — including Microsoft holding a 27% stake in a newly restructured for-profit arm of OpenAI — the stock slipped almost 4% in extended trading.
But why did such strong results yield a negative reaction? It has to do with what Microsoft intends to do next.
Microsoft’s Next Move
Across the board, it looked like a success for Microsoft.
Yet it was events surrounding the results that caused a stir among shareholders.
First, Microsoft’s earnings came just hours after the company experienced an outage in Azure and its 365 services.
This is crucial, as Microsoft has made cloud computing the driving force behind its ambitious AI growth. Last quarter, Microsoft for the first time disclosed details on Azure earnings, with it and other cloud services jumping 34% from the prior year to more than $75 billion.
Microsoft CFO Amy Hood followed that announcement with a planned increase in data center investment, forecasting $30 billion in capital expenditures in the three months to September.
Now, following these results, Hood said growth in capital expenditures will accelerate this fiscal year to nearly $35 billion, warning that spending would rise further.
This announcement to spend more may have some investors worried about the company’s near-term future.
Microsoft returned $10.7 billion via buybacks and dividends in the quarter, even increasing its dividend yield by 10%.
The increase in spending may have investors wondering whether the company is stretching itself too thin.
Already, Microsoft said its investment in OpenAI resulted in a $3.1 billion hit to net income in the quarter, equivalent to 41 cents per share.
This concern is intensified by the broader sentiment that AI investment may be in a bubble — one that could soon deflate.
What to Look Out For
The market’s response to Microsoft’s strong quarter reveals a tension at the heart of the AI infrastructure race: confidence in demand versus concern about financial discipline.
Commercial bookings surged 112%, largely driven by OpenAI’s Azure commitments, and the company’s commercial remaining performance obligations jumped 51% to $392 billion — a backlog that effectively functions as a moat.
But investors are weighing that momentum against execution risk and capital intensity as Microsoft gears up to invest even more in cloud services.
Hood made clear that “demand is increasing” across products, and with free cash flow rising 33% year over year to $25.7 billion, it’s a sign that growth is materializing.
However, the near-term signals to watch include whether Azure can maintain its growth trajectory as capacity comes online, whether the OpenAI partnership translates into sustainable enterprise adoption of Copilot and other AI-powered workloads, and — crucially — when operating leverage returns.
