Shares in Microsoft were down 1% on Thursday, caught in the sell-off that followed Alphabet's shock third-quarter update, even though its own first-quarter results were strong.
But Wednesday's Q3 figures were more than decent. Robust numbers, in fact, which raises the question of whether the dip is a buying opportunity.
Alphabet's rout was driven by slowing Search growth and negative free cash flow, as investors worried that heavy spending on artificial intelligence is outrunning the returns.
Microsoft's report card was mainly As and A-minuses.
Revenue rose 19% to $92.28 billion, ahead of the $90.62 billion analysts expected and above the top of the company's own guidance.
Earnings per share were $4.92 against the $4.71 forecast, and operating margin reached 49.8% against 48.6% expected.
Azure, its cloud computing platform, grew 48%, up from 42% last quarter and 39% to 40% through most of fiscal 2026.
Analysts had expected 45.2%, so the capacity Microsoft has been building appears to be filling with customers.
Capital expenditure including finance leases, where Microsoft rents rather than buys equipment, was $45.2 billion, below the $50.67 billion forecast and the company's guidance to exceed $50 billion.
Free cash flow was a positive $18.6 billion, against Alphabet's negative $9.1 billion.
Commercial remaining performance obligation, the value of signed contracts not yet recognised as revenue, was $677 billion, up 73% on a year earlier, so much of the revenue behind the spending is already contracted.
Reasons for caution
The contract backlog was roughly flat on June's $678 billion, and commercial bookings fell 12% against large Azure commitments a year earlier.
The capex shortfall may be timing rather than restraint, with the spending landing in the December quarter instead.
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Microsoft did not disclose Copilot seat numbers, its AI assistant for Microsoft 365, so the conference call is the first chance to judge the new pricing.
Second-quarter guidance will matter too, with consensus at $95.64 billion in revenue and 46.0% Azure growth.
Broker view
Yorkville Ives, the broker, kept its "outperform" rating and $615 price target, about 16% above the $531.33 share price quoted in its note.
Analyst Dan Ives said Azure's acceleration answered the question of whether new capacity would fill with demand.
He said the capex shortfall left free cash flow well ahead of Street estimates.
The broker also wants the fiscal 2027 capex outlook, set against the $219.2 billion consensus.
