Microsoft (MSFT +0.56%) delivered another strong quarterly report last week, though the stock ticked lower in after-hours trading following its release. The price dropped 3% on concerns about the tech giant's enormous capital expenditures on AI. It slid another 1% on the day after the release.
Nonetheless, Microsoft still delivered an impressive set of numbers for its fiscal 2026 first quarter. For the period, which ended Sept. 30, revenue jumped 18% to $77.7 billion, topping the analyst consensus at $75.4 billion. Its operating margin remained strong, hovering near 50%, and adjusted earnings per share jumped 23% to $4.13, well ahead of the analysts' consensus figure of $3.66.
Like its peers, Microsoft is showing no signs of slowing down its AI-related spending as it responds to increasing demand for Copilot and other AI products. Management said on the earnings call that it's "adding AI capacity at an unprecedented scale," and that it plans to increase its AI capacity by more than 80% in its fiscal 2026, which will end in June.
However, one number stood head-and-shoulders above the rest in Microsoft's latest report.
Azure growth accelerates
Microsoft may be best known for its Windows operating systems and its Office productivity suite, but its most important product these days is likely Azure, its cloud infrastructure business.
Azure is the cornerstone of its AI strategy, and AI is a large reason for Azure's recent success and its rapid growth. In fact, in the quarter, Microsoft said revenue from Azure jumped 40%, though it doesn't report specific dollar figures for Azure. That growth rate represents a significant acceleration from recent periods.
Revenue from its intelligent cloud division, which includes Azure, could soon surpass revenue from its productivity division. Azure's growth is also outpacing that of Google Cloud and Amazon Web Services, the biggest cloud infrastructure service.
NASDAQ: MSFT
Key Data Points
Why it matters
Spending on Azure creates a virtuous feedback loop for Microsoft: As its customers spend more on the platform, that enables Microsoft to invest in increased capacity and new features.
The success of Azure also gives Microsoft cover to hike its capital expenditures, though investors seem skeptical of those growing outlays. CFO Amy Hood noted on the earnings conference call that demand for Azure services is "significantly ahead of the capacity we have available."
Given that outlook, taking advantage of the stock's small sell-off this week makes sense for investors. Microsoft not only has the fastest-growing cloud computing business of the big three, but it's the most diversified business of any "Magnificent Seven" company. OpenAI's recent restructuring also solidifies its partnership and recognizes that Microsoft's stake in it is worth $135 billion.
With all that in its favor, Microsoft has earned the credibility to ramp up its spending on AI.
