For Immediate Release
Chicago, IL – July 31, 2026 – Today, Zacks Investment Ideas feature highlights Microsoft MSFT and Alphabet GOOGL.
Microsoft Answers Capex Question – and the Stock Finally Responds
For three quarters, Microsoft has been the market’s cautionary tale: a company beating expectations and watching its stock fall anyway.
That pattern broke Wednesday evening. Microsoft closed its fiscal year with revenue of $90.0 billion, up 18%, and non-GAAP diluted EPS of $4.74, up 23% — comfortably clearing the Zacks Consensus Estimates of $87.44 billion and $4.21. Shares rose roughly 15% in the early going on Thursday, a meaningful reversal for a stock that had shed nearly a fifth of its value this year and dropped 10% on a beat back in fiscal Q2.
The Number That Mattered: Azure at 43%
In our pre-earnings commentary, we argued that Azure’s growth rate (in part) would decide the reaction, not the headline. And Azure delivered emphatically. Azure and other cloud services revenue increased 43%, well above management’s own 39% to 40% guidance and an acceleration from 40% last quarter.
That matters enormously for the thesis we laid out: it confirms that Alphabet’s 82% cloud surge was an industry-wide demand acceleration rather than Google taking share. Both hyperscalers accelerated in the same quarter. Microsoft Cloud revenue reached $59.3 billion, up 27%, and Satya Nadella disclosed that Azure revenue surpassed $100 billion for the first time — a milestone that reframes the scale of what’s being defended.
The Quality-of-Earnings Asterisk
Microsoft disclosed that discrete items produced a $0.27 benefit to diluted EPS relative to its earlier guidance, including a $3.2 billion gain from its investment in Anthropic and lower-than-expected voluntary retirement program expenses, partially offset by severance and Xbox impairment charges. This is precisely the dynamic that distorted Alphabet’s headline last week.
But strip the discrete items out and EPS lands near $4.47 — still roughly 6% above consensus. Critically, management stated that adjusting for these items, the company still exceeded expectations across revenue, operating income, and diluted EPS. That’s the key distinction from Alphabet, whose core operating EPS came in slightly light once mark-to-market gains were removed. Microsoft’s beat survives the adjustment; operating income of $40.6 billion, up 18%, carries no investment-gain contamination whatsoever.
The Margin Verdict: Compression Continues, Leverage Wins
Our framework for margins held up almost exactly. Total company gross margin compressed to roughly 67.2% from 68.6% — a 138-basis point decline, continuing the AI-driven staircase we tracked — as depreciation, amortization and other charges climbed to $11.0 billion from $9.3 billion. Yet operating margin still expanded, to 45.1% from 44.9%, and for the full fiscal year reached 46.8% versus 45.6%, delivering precisely the “up about one point” that management promised.
The more encouraging detail sits in the segments. Intelligent Cloud operating margin came in at 40.6%, essentially flat year over year — a marked improvement from last quarter’s 180-basis point erosion. Productivity and Business Processes expanded to 57.9% from 57.4%, with segment revenue of $37.8 billion beating the $37.0 to $37.3 billion guide. Microsoft is paying for AI margin dilution with operating leverage, and for now the leverage is winning.
The Cash Bridge Starts to Build
This is where the story genuinely improved. Free cash flow remains under pressure — roughly $19.6 billion in the quarter against $25.6 billion a year ago, as capital expenditures on property and equipment more than doubled to $35.8 billion from $17.1 billion.
But the denominator is finally moving. Operating cash flow surged 30% to $55.4 billion in the quarter and 34% to $182.9 billion for the year. That’s the component we identified as essential to a credible bridge, and it’s now accelerating.
Commercial remaining performance obligation rose 84% to $678 billion, up roughly $51 billion sequentially. The growth rate decelerated from 99%, which bears watching, but $678 billion of contracted future revenue against $331.8 billion of annual revenue is the strongest demand-coverage ratio in the industry — and it is the single best answer to the charge that this capex is speculative.
On monetization, Microsoft 365 Copilot surpassed 30 million paid seats, up from over 20 million just a quarter ago. That roughly 50% sequential jump is the cleanest evidence yet that AI infrastructure is converting into high-margin software revenue.
Bottom Line
Microsoft beat for the 16th consecutive quarter, and the practical consequence is that analysts will now likely revise estimates upward, which is the mechanism that could lift the stock’s rating. Estimate revisions are the engine of the Zacks Rank, and this print gives them a clear direction.
The larger conclusion is that Microsoft just did what Alphabet could not: it delivered accelerating cloud growth, expanding operating margins, accelerating operating cash flow, and a beat that survives scrutiny — and got paid for it. Full-year revenue of $331.8 billion, up 18%, with operating income up 21%, is a remarkable result for a company of this size.
The capital intensity story is not over; free cash flow is still declining, gross margins are still compressing, and property and equipment on the balance sheet has ballooned, which means the depreciation drag builds from here. But for the first time in three quarters, the market appears willing to grant that the spending is buying something real.
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