Microsoft's AI bets pay off as Azure growth beats forecasts and shares jump
Strong cloud demand, accelerating Copilot adoption and solid guidance reassured investors that Microsoft's massive AI investments are beginning to deliver returns.
Microsoft reassured investors on Wednesday that its massive investment in artificial intelligence is beginning to pay off, delivering stronger-than-expected cloud growth, beating Wall Street's quarterly estimates, and forecasting another quarter of robust sales and Azure expansion.
The software giant also signaled that it expects to continue generating strong cash flow throughout its newly started fiscal 2027, while forecasting capital expenditures below Wall Street expectations following an accounting change that extends the depreciation period for long-term data center leases from 15 years to 25 years.
The combination of accelerating AI-driven growth, solid profitability, and lower reported capital spending eased concerns that Microsoft was spending aggressively without generating sufficient returns. The results also reinforced confidence that the company can maintain its position as the world's second-largest cloud provider behind Amazon Web Services despite intensifying competition from Google Cloud.
Microsoft shares rose more than 8% in after-hours trading.
Revenue from Azure grew 43% year-over-year during the fiscal fourth quarter ended June 30, comfortably ahead of analysts' expectations of approximately 40%.
During a conference call with analysts, CEO Satya Nadella said Microsoft is increasingly relying on its own AI models and custom-designed chips alongside technology from OpenAI, rather than depending solely on ChatGPT's creator to power products such as Copilot.
According to Nadella, Microsoft's internally developed AI infrastructure is already delivering efficiency gains of up to 40%.
He described a future in which both Microsoft and its customers can choose among multiple AI models based on performance, cost, and workload requirements rather than relying on a single provider.
"That's really the enterprise design architecture that we are going to evangelize. We ourselves are using it," Nadella said.
Microsoft's results come just one week after Google Cloud reported an exceptionally strong quarter, with cloud revenue surging 82%, fueling speculation that Alphabet was taking market share from rivals.
"It seemed kind of like Google was taking market share from everybody and they could catch up to the market share of Azure if they keep on that trajectory," said Dave Wagner, portfolio manager at Aptus Capital Advisors. "But what Azure is showing us is that it's staying right there in the race."
Microsoft forecast first-quarter fiscal 2027 revenue of approximately $90.4 billion at the midpoint of its guidance, above analysts' expectations of $89.66 billion.
The company also projected Azure growth of 45% in constant currency during the quarter, significantly ahead of analysts' expectations of roughly 41%.
Microsoft said reported capital expenditures will decline because it has extended the accounting life of long-term data center leases from 15 years to 25 years. The company stressed that the accounting change does not reflect lower investment, and that its underlying AI infrastructure spending plans remain unchanged.
The company expects reported capital expenditures of approximately $50 billion during the first quarter of fiscal 2027 and $175 billion during calendar 2026, both below previous analyst expectations.
Microsoft's spending forms part of an unprecedented wave of roughly $700 billion in AI infrastructure investment across the largest technology companies, raising concerns among investors about whether demand will ultimately justify the enormous buildout.
Free cash flow totaled $19.6 billion during the quarter, comfortably above analysts' expectations of $13.4 billion, although it was down 23% from a year earlier as AI investment accelerated.
Capital expenditures reached $41 billion during the April-June quarter, an increase of more than 70% year-over-year.
However, Microsoft's infrastructure expansion remains far from complete.
The company disclosed that it has an additional $329.1 billion of data center lease commitments that have not yet commenced. Those leases are scheduled to begin between fiscal 2027 and fiscal 2033, although some remain subject to contractual conditions before taking effect.
Microsoft's contracted commercial cloud backlog climbed to $678 billion, up from $627 billion in the previous quarter. The company said the entire sequential increase, roughly $50 billion, came from customers outside the leading U.S. AI model developers, suggesting broad-based enterprise demand for AI infrastructure.
Meanwhile, paid seats for Microsoft 365 Copilot surpassed 30 million, well ahead of analysts' expectations of roughly 27 million and up from 20 million reported just one quarter earlier.
Overall quarterly revenue increased 18% to $90 billion, beating Wall Street estimates, while earnings per share, excluding the impact of investments in OpenAI, reached $4.74, well above analysts' expectations of $4.24.
Despite Wednesday's rally, Microsoft shares remain down about 18% this year, making the company one of the weaker performers among the so-called "Magnificent Seven" technology stocks.
