Microsoft is up 24%. What’s next?

Microsoft CEO Satya Nadella has “never been more confident” 

With a 24% positive move over five days(1), Microsoft has recovered all its year-to-date losses. The stock is now up 3% since the start of 2026. That’s a completely different story to where it was trading just weeks ago! 

With a 52-week high of $553.72 and a 52-week low of $349.20(2), one of the world’s most important technology companies has been tossed around like a rag doll by the markets.

Bulls and bears clearly have differing views on the prospects for capex-hungry hyperscalers like Microsoft. 

But having just signed off on record fiscal year revenue, CEO Satya Nadella has “never been more confident in Microsoft's opportunity to drive durable long-term growth and ensure the benefits of AI flow broadly.” 

Confident though he may be, Microsoft is up against the largest capex budgets in the world for AI-era supremacy. What does this mean for its investors?

Record annual revenue 

Microsoft’s latest quarter (Q4’FY26) sent a strong message to the doubters. Group annual revenue increased by 18% for both the quarter and the full year(3). This took the tech giant to a new fiscal year record. 

Cloud revenue is raining down

Microsoft Cloud revenue grew 27% for the quarter. Within that, the growth engine the market is really focused on at the moment is Azure, where revenue has jumped 43%. 

In a related area, Microsoft’s ability to move with the times is evidenced by Microsoft 365 Copilot’s growth. There are over 30 million paid seats. Importantly, average weekly engagement with Copilot by users is now on par with Outlook and Teams.

This kind of user acceptance is why Microsoft can tap into enterprise customers with the largest global technology procurement budgets. To give an idea of what this looks like in practice, the number of customers with over 50 000 seats increased more than 7x year-on-year.

Other growth engines

Microsoft touches many tech verticals. For example, it competes directly with Alphabet (Google) with Bing and Edge, where it claims to have won market share for 5 straight years.

In LinkedIn, it has an impressive social media business that just achieved double-digit member growth and 12% revenue growth. 

The elephants are fighting

The volatility in Microsoft’s share price reflects market uncertainty around who will emerge victorious in the AI era. 

Competitors like Alphabet and Meta are investing heavily in AI technology and infrastructure. SpaceX is also relevant, with Grok and X creating a powerful combined ecosystem in generative AI. Don’t forget about Amazon from an infrastructure perspective!

These are vast technology budgets fighting for talent and hardware in a supply-constrained environment.

Return on investment

Having initially put its weight behind OpenAI, Microsoft has also invested heavily in Anthropic. It’s already realised multi-billion-dollar gains on that investment, but the reality is that Microsoft is carrying multiple layers of exposure (and thus risk) to the rapidly developing AI space. 

There is also still much debate on the returns on underlying capex in areas like data centres and model development. The risk for investors is that the AI infrastructure build-out could be seen as a game of musical chairs. We don’t know when (or if) the music will stop, or which company won’t find a seat in time, but we do know that capital is being poured into this asset class at anunprecedented rate. 

Notably, two-thirds of Microsoft’s $41 billion capex bill for the quarter was for short-lived assets, i.e. CPUs and GPUs. This will hit the income statement as higher depreciation charges.

Weak spots

Lower PC market demand due to higher component costs and deferred purchases by consumers has put a dent in the growth of Windows OEM and Devices. Revenue was down 7% this quarter. Concerningly, this segment’s revenue is expected to drop by “low 20s” in the first quarter of fiscal 2027. 

In gaming, Xbox has been extremely weak. The latest quarter saw a 10% decline in revenue. Although gross margin improved, gross profit still fell 2%. It hopes to return to growth in fiscal 2027, but Microsoft has guided an expected mid-single-digit drop in the first quarter of the new year.

Looking ahead

As a sign of the times among hyperscalers, CFO Amy Hood’s guidance for the first quarter of fiscal 2027 included a note that Microsoft expects to be free cash flow positive! 

The share price response to these earnings suggests that the market likes Microsoft’s guidance. Analysts on the earnings call focused on one number: the expected 45% growth of Azure (in constant currency). That’s a strong acceleration from current levels.

Even after the latest move, Microsoft’s share price is down 9% over 12 months. Alphabet is up 90% over the same period. Perhaps most interestingly, the share prices have almost identical moves over 5 days. Instead of closing the gap with Alphabet, Microsoft’s rally has been echoed by the company. 

There’s clearly all to play for among the hyperscalers. 

Readers should consider both the opportunities and risks discussed above when evaluating the information presented. It’s also important to further research the company’s performance when forming a view, as there are many more bull and bear arguments that can be made.

Disclosure: The Finance Ghost has a long position in Microsoft at the time of writing 

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(1) Based on close of trade on 3 August 2026 in the US market 

(2) Google Finance, 4 August 2026 

(3) Microsoft growth rates, margins and market share comments are from the Q4’2026 earnings transcript