Microsoft's stock price has seen a huge spike upwards as a result of its FY26 earnings report, which outstripped expectations by a considerable margin.
While Xbox and Windows were down 4% overall, with Xbox specifically down 11%. But these consumer-facing businesses are not what moves Microsoft's stock price in 2026. The core of Microsoft's operation, essentially Azure and AI, is vastly beating expectations.
Microsoft's stock has seen declines over the past year as investors worried the company was over-extending on its AI build out. Google has seen some volatility as its cash flows flipped negative — a historic first for the firm, as it continues to race to build out its AI stack.
Microsoft has also seen similar fears, but the FY26 report showed its Azure AI delivery is actually accelerating growth — and not just capital expenditure.
CEO Satya Nadella is positioning Microsoft's AI as a more "efficient" option over competitors, as cost increasingly drives conversations around the tech. OpenAI and Anthropic's assistants win out in benchmarks, but are orders of magnitude more expensive than Microsoft's home-grown models, as well as Chinese incumbents. Nadella stated to investors that Microsoft's home-grown chips and models are driving up to "40%" efficiency gains, beating out its previous reliance on OpenAI's ChatGPT.
Microsoft's overall revenue increased 18% YoY, to an insane $90 billion, its operating income hit $40.6 billion, up 18%, and Azure saw growth hit 45%, beating expectations by 5%. Microsoft 365 Copilot hit 30 million paid seats, up 20 million since the Spring. Microsoft also reported a pretty staggering 84% YoY increase in contracted AI revenue, which now represents an eye-watering $678 billion demand backlog.
Despite committing almost $116 billion in capital expenditure the past year, Microsoft still managed to keep operating cash flows positive to the tune of $55 billion, a 30% jump. Its free cash flow was down YoY to $19.64 billion, but still beat out expectations.
It's the type of fiscal discipline Wall Street really likes, and they rewarded Microsoft with a record-breaking stock rip. Microsoft's market capitalization increased by $450 billion in a single day, beating out a previous world record set by NVIDIA.
Increasingly it seems like the AI business is coalescing around a small handful of companies, namely Microsoft and Google. Meta has seen its stock price take a beating this past year, as investors fear it has fallen too far behind to keep up.
Great stock gains in the short term ... but questions remain
Perhaps philosophically, there's still a pretty large question mark hanging over the AI build out. Socially, data centers have become increasingly unpopular, owing to their vast negative impact on local communities, in terms of both noise and electricity prices. Indeed, AI data centers are also massive carbon emitters, and the benefit to society in general remains fairly unclear. Many of the lofty promises from the likes of OpenAI's Sam Altman have failed to materialize in real terms, and there's still a big discrepancy over how it could impact the global economy, and the social contract in general.
If AI puts millions, or billions even out of work, that'll simply create a consumption and productivity bottle neck that no amount of AI data centers could feasibly close. Microsoft itself has laid off thousands of workers this year, and will likely lay off many thousands more next year too. Microsoft and other big tech companies seemingly have no answer for this.
In the short term, investors stand to make a lot of money. But ... umm, will the AI build out actually be good for humanity in the long term? Does anyone actually care? I guess that's not something that tech billionaires worry themselves thinking about too much, eh?
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