Microsoft Shares Fall As Investor Fears grow

Microsoft Shares Slide As AI Infrastructure Costs Eclipse The Beat

What stood out this week the divergence between the fate of Microsoft shares and Meta shares. Meta rose about 10% after what we would call a mixed quarterly result, while Microsoft fell roughly 10% despite beating expectations on both revenue and earnings. It is a fair reminder that share prices do not always move on the headline numbers alone.

In Microsoft’s case, the quarter was clearly driven by cloud. Headline revenue reached around US$81 billion, up about 17% year on year, which is strong double digit growth at this scale. Roughly US$64 billion came from the services side of the business, with cloud a major contributor.

The takeaway is that the market is not simply rewarding beats and punishing misses. It is reacting to the forward setup, including valuation, guidance, and whether growth and investment are trending in the right direction for the next few quarters.

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Microsoft’s Reality Check

Microsoft’s Intelligent Cloud segment delivered about US$34 billion in revenue for the quarter. More broadly, cloud revenue across the business reached roughly US$51 billion, up 26% year on year. The top line result was clearly strong, but it also highlights how dependent Microsoft’s growth engine is on cloud.

What we like here is that profitability remained steady and impressive. Gross margin came in around 68%, and operating income reached roughly US$38 billion. That translates to an operating margin of about 47%, which tells you Microsoft is still controlling operating expenses well.

When you compare that with Meta, the contrast is obvious. Meta is seeing much faster cost growth relative to revenue, while Microsoft looks more stable and disciplined.

This is exactly why investors obsess over Azure growth and cloud margins. Cloud is now a massive part of Microsoft, and it is typically high margin. The nuance is that AI can temporarily pressure those margins, mainly through higher depreciation and infrastructure costs as the company builds out data centres and capacity.

Microsoft’s Hidden Profit Driver: OpenAI’s US$7.6B GAAP Boost

One detail that we think is worth calling out is the impact from OpenAI on Microsoft’s reported profitability. On a GAAP basis, OpenAI contributed roughly US$7.6 billion to net income. Excluding that contribution, net income was closer to US$30 billion.

In our view, it is not unreasonable for Microsoft to benefit financially from OpenAI, given the scale of its investment and strategic partnership. If you are deploying that much capital and taking that much execution risk, a return should show up somewhere, either through direct earnings contributions, improved product monetisation, or both.

On the investment side, spending is still rising. Capital expenditures were about US$30 billion this quarter, or roughly US$33 billion including acquisitions, up from about US$15.8 billion in the prior year period. The key difference with Microsoft shares versus Meta shares is that MSFT’s elevated spend is not flowing through the income statement in the same way. Operating expenses have not ballooned at the same pace, which points to better cost control and a more measured rollout.

Management’s explanation is consistent with what we would expect: CapEx increased primarily due to purchases of property and equipment to support growth in cloud offerings, alongside continued investment in AI infrastructure and training.

The takeaway MSFT vs. Meta

The market is clearly pricing in continued margin expansion over the next few years.

If we had to choose between Meta and Microsoft on a risk to reward basis, the answer feels fairly clear to us. Microsoft looks better positioned today, largely because its growth is being supported by a business mix that is both durable and high margin, and because cost control has remained disciplined even while investment ramps.
Microsoft does not look cheap by any means. But it still fits the profile of a multi decade compounder, where the core drivers remain intact and execution risk feels more manageable than Meta’s current spend heavy path.