Microsoft (MSFT 1.07%) shares are up about 16% so far in 2025. The move reflects enthusiasm for the company's role in the AI (artificial intelligence) buildout and its position as one of the largest cloud providers.
Recent first-quarter results for fiscal 2026 reinforced that optimism, with another period of double-digit revenue growth led by its cloud offerings. The software and cloud giant continues to add AI features across products like Microsoft 365 and Windows, which deepens customer ties. And its cloud computing operation, Azure, is experiencing soaring demand from customers seeking to expand their AI workloads.
Yet, with the stock already pricing in a long runway of AI-driven growth, the key issue is whether Microsoft's growth story has already been factored in.
Image source: Getty Images.
AI and cloud momentum
In the first quarter of fiscal 2026, Microsoft's revenue rose 18% year over year to $77.7 billion, while earnings per share increased 23% to $4.13. Revenue from its cloud businesses, including Microsoft 365 Commercial, Azure, Dynamics 365, and other cloud services, reached $49.1 billion in the period, up 26% year over year. Its "Azure and other cloud services" (primarily Azure) saw revenue rise 40% year over year as customers shifted more workloads and AI projects to the platform.
For fiscal 2025, Microsoft's cloud businesses saw revenue grow 23%, with Azure revenue specifically growing 34%. So, the latest quarter represents a clear acceleration. This is good news since the company has been ramping up its investments in AI infrastructure. Without accelerating growth, investors could turn more skeptical about the company's AI investments.
Management also highlighted how deeply AI features are being integrated throughout the product line. On the latest earnings call, CEO Satya Nadella said Microsoft now counts roughly 900 million monthly active users of AI features across its products, and more than 150 million users of its Copilot assistants.
The seemingly insatiable demand for AI compute power was particularly evident in Microsoft's commercial bookings, which increased 112% year over year. Similarly, commercial remaining performance obligations (RPOs), which serve as an indicator of demand trajectory, increased 51% to $392 billion. These customer commitments were primarily driven by demand for Microsoft's AI-capable compute power in its Azure business.
Big spending
The issue, however, is that fulfilling this demand will be costly, as AI computing power is a capital-intensive business that requires substantial investment.
Indeed, Microsoft's investments are already sizable. In the first quarter of fiscal 2026, capital expenditures totaled $34.9 billion, directed primarily to GPUs, CPUs, and data center sites to support AI workloads.
Still, free cash flow managed to increase 33% year over year to $25.7 billion in fiscal Q1, as operating cash flow climbed to $45.1 billion, illustrating the substantial cash the business can generate even while funding significant AI infrastructure spending.
Despite embarking on a capital-intensive investment cycle for AI compute power, Microsoft continues to return large sums of cash to shareholders. In the first quarter of fiscal 2026, the company returned $10.7 billion through dividends and repurchases. For fiscal 2025, Microsoft paid about $24.7 billion in dividends and spent roughly $18.4 billion on buybacks, for a combined total near $43 billion.
NASDAQ: MSFT
Key Data Points
Unfortunately, the market appears to have already factored in much of the excitement surrounding Microsoft's growth story. Shares currently trade at a price-to-earnings ratio of approximately 35. This leaves little room for missteps. If the AI cycle or enterprise IT budgets stumble, the stock could take a hit.
Clearly, Microsoft's business is thriving -- and the company's substantial AI spending could generate substantial returns for shareholders over time. But given the unprecedented nature of this AI investment cycle, it is impossible to predict exactly what kind of returns Microsoft will achieve on its AI spending. For this reason, I believe investors may want to wait for a more attractive entry point before building a position in the stock.
