Azure roaring, Copilot accelerating, market concerns about Microsoft Corporation's (MSFT.US) AI spending are about to turn the page.

In 2026, when technology giants are betting billions of dollars on artificial intelligence (AI) infrastructure, Microsoft Corporation (MSFT.US) delivered a comprehensive third quarter earnings report that exceeded expectations, sending a clear signal to the market: AI demand is no longer a problem, and large-scale capital expenditure is gradually transforming into tangible revenue. Although its annual capital expenditure plan of $190 billion still worries some investors, more and more analysts believe that this risk has largely been absorbed by the continually low stock price, providing an attractive entry point for long-term investors. With the roaring engine of Azure, AI monetization capabilities provide reassurance The financial data shows that Microsoft Corporation's quarterly revenue reached $82.9 billion, an 18% year-on-year increase; operating profit increased by 20%, adjusted earnings per share increased by 21% to $4.27. For a company with a market capitalization of over $3 trillion, this growth rate is far from that of an ordinary mature software company. These numbers indicate that Microsoft Corporation is still in a high-speed compounding growth phase, far from becoming an obsolete traditional software vendor. Microsoft Corporation's cloud business revenue reached $54.5 billion, a 29% year-on-year increase, with core growth engines such as Azure and other cloud services revenue growing by 40% year-on-year (39% at fixed exchange rates), not only maintaining a high growth rate but also exceeding market expectations. Management stated that demand continues to exceed available capacity, whether in terms of workloads, customer base, or geographic distribution. The most noteworthy thing is that Microsoft Corporation's AI business's annualized revenue has exceeded $37 billion, a 123% year-on-year increase, responding to external doubts about the commercial prospects of AI with tangible revenue figures. Remaining performance obligations (RPO) reached $627 billion, a 99% year-on-year increase, of which about 25% is expected to be recognized as revenue in the next 12 months. This provides Microsoft Corporation with good revenue visibility, although this data needs to be interpreted with caution commitments related to OpenAI will impact overall growth, and excluding the OpenAI factor, business RPO growth is much lower. However, it seems that there are no longer many doubts on the demand side. This strong performance has been widely recognized on Wall Street. After the financial report was released, Oppenheimer reiterated its "outperform market" rating for Microsoft Corporation's stock. Cowen analysts, after meeting with Microsoft Corporation's investor relations officers, also maintained a "buy" rating and a target price of $540, highlighting the growth prospects of Azure. Morgan Stanley expressed confidence in the continued high growth range of Azure in a previous forward-looking report, believing that its channel research, GPU supply improvements, and chief information officer survey data all released positive signals. As the Copilot business evolves towards the forefront, enterprise deployments accelerate to dispel doubts For a long time, compared to the dazzling performance of Azure, the commercialization process of Microsoft Corporation's AI assistant Copilot for productivity tools has been a market concern. However, this quarter's data has powerfully addressed this concern. Microsoft Corporation's 365 Copilot paid seats have surpassed 20 million, a 250% year-on-year increase, marking the fastest growth since its launch. The number of customers with over 50,000 Copilot seats has quadrupled year-on-year; Accenture Plc Class A (ACN.US) now has over 740,000 seats, and many global giants including Bayer (BAYRY.US), Johnson & Johnson (JNJ.US), Roche (RHHBY.US), and Mercedes (MBGYY.US) have pledged to deploy over 90,000 seats. More importantly, the frequency and depth of user engagement have significantly increased. Copilot's per user query volume increased by nearly 20% quarter-on-quarter, and management stated that Copilot's weekly activity is on target. Although Microsoft Corporation has not disclosed the profit situation of all Copilot products, the broader trend is moving towards a "subscription seat + usage-based consumption" hybrid model in the fields of production, programming, security, and business applications. Basic subscriptions bring predictable revenue to Microsoft Corporation, while usage-based pricing allows it to profit from higher-intensity AI workloads. GitHub Copilot has already taken the lead in this direction. Over time, more Microsoft Corporation AI products may follow this model. UBS Group AG analysts noted in a recent report that, although maintaining a "buy" rating on Microsoft Corporation, improvement is needed in the market outlook for M365/Copilot for the stock to truly achieve a higher valuation. This quarter's strong enterprise demand and rapid deployment provide a key footnote to break this deadlock. $190 Billion Capital Expenditure: A Bold Bet and Demand-Driven Rational Layout AI growth is both a risk and an opportunity. More usage means greater revenue potential, but it also requires more GPU, CPU, storage, and data center capacity. Cost per token, resource utilization rates, and pricing discipline are becoming more critical factors in Microsoft Corporation's investment logic than in early software subscription cycles. Microsoft Corporation's capital expenditure in the third quarter was $31.9 billion, with about two-thirds going to short-term assets (mainly GPUs and CPUs), reflecting a significant portion of the investment in assets with a short lifespan, fast renewal cycle, and significant depreciation pressure in AI infrastructure construction. Operating cash flow was $46.7 billion, a 26% year-on-year increase; free cash flow was $15.8 billion. Microsoft Corporation remains a company with strong cash generation capabilities, but infrastructure spending is consuming a larger share of operating cash flow. Management expects capital expenditures in the fourth quarter to exceed $40 billion, and expects capital expenditures in the calendar year 2026 to be approximately $190 billion, with about $25 billion in incremental increase directly attributable to rising hardware component prices. These numbers have sparked mixed emotions in the market. Morningstar analysts stated bluntly after the financial report, "Alphabet Inc. Class C has won the right to massive AI spending, but Microsoft Corporation has not." However, contrasting with some investors' concerns, Microsoft Corporation's management explanations have shown a clear business logic: the demand for Azure continues to exceed its available computing power capacity, and almost every additional piece of infrastructure can quickly be converted into revenue rather than idle assets. Microsoft Corporation is also improving construction efficiency. Management stated that since the beginning of the year, the time from the arrival of new GPUs in its largest regions to online deployment has shortened by nearly 20%. The inference throughput of the most commonly used Copilot model has increased by 40%. The Maia 200 chip has been deployed in Iowa and Arizona, reportedly increasing the Token count per dollar by over 30% compared to the latest silicon chips in Microsoft Corporation's existing hardware. Although this has not eliminated the risk of capital expenditure, the spending appears to be driven by demand rather than speculation. Goldman Sachs Group, Inc. holds a positive view on the capital expenditure logic of Microsoft Corporation. Its previous analysis pointed out that Microsoft Corporation's computing power allocation is clearly planned, with about 70% dedicated to inference and Azure workloads and 30% to Copilot and internal research and development, with the allocation of new GPUs tending towards greater balance, enhancing the certainty of investment. As a result, Goldman Sachs Group, Inc. even raised its target price for Microsoft Corporation to $610. Relative valuation advantages are evident, risk-return ratios are being reassessed In absolute terms, Microsoft Corporation is not cheap, but when compared to Alphabet Inc. Class C, its valuation seems quite reasonable. Alphabet Inc. Class C may be the closest comprehensive comparable company, as both companies combine high-margin core businesses with aggressive investments in AI and cloud infrastructure. However, in the past year, Alphabet Inc. Class C's stock price has surged over 120%, while Microsoft Corporation has fallen by nearly 8%, indicating a divergence in trends that is not consistent with its fundamental performance. If Microsoft Corporation had a significantly higher valuation or weaker operational performance, this difference would be easier to understand. However, according to Seeking Alpha's industry comparison data, Microsoft Corporation's FY1 non-GAAP P/E ratio, FY2 P/E ratio, FY3 P/E ratio, forward EV/EBITDA, and market-to-cash rate are all lower than Alphabet Inc. Class C. Revenue growth is roughly equivalent, but Microsoft Corporation's profit margin level is superiorMicrosoft Corporation's EBIT profit margin is approximately 46.8%, compared to Alphabet Inc. Class C's approximately 32.7%; the EBITDA profit margin is also much higher than Alphabet Inc. Class C. Trefis quantified this gap in a report in April: measured by rolling P/E ratio, Microsoft Corporation is at 23 times, while Alphabet is as high as 29 times. Considering that Microsoft Corporation has a stronger profit margin structureits EBIT profit margin is as high as 46.8%, significantly higher than Alphabet's approximately 32.7%this valuation discount seems difficult to fully explain from a fundamental perspective. Concerns about Microsoft Corporation's profit margins mainly focus on the downward trend in its cloud business gross margin. This quarter, affected by AI infrastructure investments and increased AI product usage, the company's overall gross margin and cloud business gross margin both declined year-on-year, to 68% and 66%, respectively. Management's guidance for the cloud business gross margin for the next quarter also points to a level of around 64%, and if this decline continues into the next quarter, it may be seen as a warning signal. However, thanks to effective cost control and personnel optimization (a decrease in the number of employees year-on-year), Microsoft Corporation's operating profit increased by 20%, with the operating profit margin increasing slightly to 46%, and management expects the operating profit margin for the full fiscal year 2026 to increase by about 1 percentage point year-on-year. Although the capital expenditure race in the AI field will continue to be a long-term issue hanging over the heads of technology giants, and the short-term pressure on gross margins cannot be ignored, for Microsoft Corporation, its AI investment is showing a closed loop from demand confirmation to revenue realization. While Azure continues to move forward robustly, Copilot accelerates its deployment, and relative valuation advantages begin to emerge, the market may be in the process of repricing this software giant. As some bullish analysts have said, after a long period of stock price consolidation and relative undervaluation, the risk of AI capital expenditure may no longer be a variable that needs to be excessively feared.