Microsoft's cloud growth, cash flow offer respite from AI spending fears

[BENGALURU] Microsoft beat expectations for quarterly cloud revenue on Wednesday (Oct 28), offering fresh evidence that its hefty artificial intelligence investments were paying off as Wall Street grows increasingly wary of Big Tech’s debt-fuelled spending.

The software and cloud company also generated US$18.6 billion in free cash flow in its fiscal first quarter ended September – some US$10 billion more than analysts expected – as capital spending came in below the company’s own forecast and Microsoft’s Azure cloud computing business surged 48 per cent.

That financial firepower set Microsoft apart from rivals such as Alphabet and Meta, whose heavy AI investments have squeezed free cash flow and increased their reliance on borrowing.

Alphabet reported negative free cash flow of US$9.07 billion in the third quarter as capital spending jumped, overshadowing a doubling of its cloud sales and sending its shares down 8 per cent in extended trading.

Shares of Redmond, Washington-based Microsoft rose 2.6 per cent in extended trading, paring earlier gains.

The stock has risen about 9 per cent so far in 2026, through Wednesday’s close.

Its five-year credit default swaps – a measure of perceived default risk – remain the tightest among the largest tech companies, according to Truist, even as spreads have widened across much of the AI trade.

The results also show Microsoft capitalising on corporate demand for AI, easing fears that the technology threatens its software empire and that its AI fortunes are too closely tied to unprofitable OpenAI.

Nadella’s lower-cost strategy

CEO Satya Nadella has sought to capture that demand by giving customers cheaper options, as businesses grapple with the rising cost of deploying AI.

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Microsoft has rolled out a string of lower-cost models, while its new Copilot Cowork agent allows users to switch between models.

“By helping organisations build and own their own intelligence, and earning trust through agent safety and security, we are translating our innovation into growing adoption,” Nadella said in a statement on Wednesday.

Strong azure growth

“Microsoft’s first-quarter report was about as clean as it gets for a company this size,” said Jesse Cohen, senior analyst at Investing.com.

“After Meta’s and Alphabet’s numbers revived AI-spending anxiety, this is the counterweight. Demand still exceeds supply, the commercial backlog is enormous, and returns are finally showing up in earnings and overall revenue.”

In September, Microsoft said it would disclose Azure revenue in dollars, instead of just growth rates, offering a clearer picture of how its cloud business stacks up against rivals Amazon Web Services and Google Cloud.

Revenue at Microsoft’s Azure cloud computing business grew to US$33.17 billion in the quarter, topping Visible Alpha’s estimate of US$32.84 billion.

Overall revenue rose by a fifth to US$92.28 billion, and an adjusted profit of US$4.89 per share beat an average estimate of US$4.73 a share.

Lower spending than forecast

Capital expenditure for the quarter rose to US$45.2 billion from US$34.9 billion in the year-ago period, but came in below the company’s own projection of US$50 billion.

So far in calendar 2026, Microsoft’s capital expenditure has been US$118.1 billion, which means it would have to spend US$56.9 billion in the final three months of 2026 to hit its own forecast of US$175 billion given in July.

Jonathan Neilson, Microsoft’s vice-president of investor relations, attributed the lower-than-expected capital expenditure to delays rather than any changes to the company’s underlying spending plans.

“We did see some third-party capacity deliveries that we expected in first quarter were actually delayed,” Neilson said.

Earlier on Wednesday, hyperscaler Oracle said it expects capital spending to peak this fiscal year and next, but pledged to raise no more than US$20 billion in additional financing for ​AI through fiscal 2030.

Overall, Big Tech is expected to pump more than US$700 billion in 2026 into building data centres and securing the hardware and energy needed to develop and run AI technologies.

While faster revenue growth at these companies indicates their bets could be paying off, concerns over the cost of financing the outlay have heightened over the past few weeks.

Shrinking cash flows and rising debt loads at US tech companies, including recent stress at neocloud company CoreWeave as well as record-high costs to insure Meta’s debt against default, have added to market turmoil. REUTERS