Microsoft is the only company whose stock rose after earnings. What is supporting its share price?

After the US stock market closed on July 29, Microsoft released its Q4 fiscal year 2026 earnings. Revenue was $90 billion, up 18% year-over-year. Azure and other cloud services growth accelerated from 40% in the previous quarter to 43%. CEO Satya Nadella added a line in the prepared remarks for the earnings call that he hadn't had the chance to say before, stating that Azure's full fiscal year revenue "exceeded $100 billion," growing 41%. This was the first time the business crossed the hundred-billion-dollar threshold.

In the first ten minutes or so after the earnings were released, the stock rose less than 3% in after-hours trading. By the time the earnings call concluded, gains had expanded to around 8%. The stock price briefly rose from a closing price of $390.54 to over $422. No new revenue figures appeared in between; what emerged was a capital expenditure guidance read by CFO Amy Hood. She said capital expenditure for the calendar year 2026 is expected to be approximately $175 billion. Three months ago, under the same metric, that figure was $190 billion.

Over the past three months, the market has defaulted to the rule that "every extra dollar spent by cloud vendors deducts a dollar from their valuation." Jason Lemire, Chief Investment Officer at Bold Wealth Partners, put it bluntly before earnings week: "It used to be that more spending was better. Now, less spending is better." So when Microsoft replaced a $190 billion figure with $175 billion, the market almost instinctively breathed a sigh of relief.

Was that $15 Billion Saved?

No.

Hood added in the same sentence that this adjustment means "the investment expectation itself remains unchanged." She also explained the source of the difference. Starting from fiscal year 2027, Microsoft extended the depreciation life for data centers and office buildings from 15 years to 25 years. This action itself is about depreciation, but it consequently changed the classification of leases. With the longer lifespan, more newly signed data center leases will shift from finance leases to operating leases. Only finance leases are counted as capital expenditure.

The light-colored segment in the chart represents the part moved out of the statistical scope. The money still needs to be paid, and the server rooms still need to be built; it will just now appear as rent on the income statement, no longer as capital expenditure on the cash flow statement. Microsoft provided a supporting figure in the lease notes of its fiscal year 2026 10-K: as of the end of June, lease commitments not yet commenced were $329.1 billion, expected to commence gradually from fiscal year 2027 to 2033, primarily for data centers.

The change in depreciation life only appeared in the prepared remarks for the earnings call. It wasn't mentioned in the press release, and the 10-K doesn't contain the 25-year statement either; the accounting policy section of that document still states 5 to 15 years for buildings.

So, is Capital Expenditure Actually Slowing Down?

Not at all.

According to Microsoft's own oral metrics used on the earnings call—i.e., the metric including finance leases—this quarter's capital expenditure was $41 billion, up 70% year-over-year. The same quarter two years ago was $19 billion. For the full fiscal year 2026, it was $145.3 billion, 2.6 times that of fiscal year 2024. The company's guidance for the next fiscal quarter is "over $50 billion."

There's a common point of confusion here. On earnings day, some reports stated, "This quarter's capital expenditure was $35.8 billion, below market expectations of $36.1 billion," citing the "purchase of property and equipment" line on the cash flow statement, which excludes finance leases. Both metrics are correct; the difference is the $5.6 billion in finance leases for this quarter. From now on, whenever you see Microsoft's capital expenditure figures, first ask whether it includes finance leases – that's more useful than asking about the number itself.

For fiscal year 2027, the company only said three things. Capital expenditure will grow year-over-year; the first fiscal quarter will exceed $50 billion; free cash flow is expected to remain positive. The market-circulated figure of $255 billion to $260 billion is not company guidance; it was the sell-side consensus estimate before the earnings release, misrepresented as guidance by some media outlets.

Can the $678 Billion Backlog Cover These Investments?

Microsoft reported its commercial remaining performance obligations (RPO) balance at $678 billion, up 84% year-over-year. This figure was highlighted by many reports as evidence of AI demand. It is indeed evidence, but its structure is a bit softer than it appears.

The bar in the chart didn't grow slowly; it jumped up in a single quarter, Q2 of fiscal year 2026, with a sequential increase of $233 billion, corresponding to the contract with OpenAI. Hood provided another metric on the earnings call: excluding OpenAI, year-over-year growth was 25%. Commercial orders followed a similar pattern, growing 10% on a reported basis, but 18% excluding the impact of OpenAI.

The timeframe also needs careful consideration. According to the 10-K and earnings call commentary, the weighted average recognition period for this backlog is approximately 2.3 years. Only about 30% is expected to be recognized in the next 12 months, with the remaining 70% falling beyond one year. Moreover, this 70% portion grew 112% year-over-year. In other words, the $678 billion is more like a check payable over several years, while the cash for server rooms and graphics cards needs to be paid this year.

This quarter's operating cash flow was $55.4 billion, up 30% year-over-year, an all-time high. Free cash flow was $19.6 billion, down 23% year-over-year. Looking at the full year, free cash flow for fiscal year 2026 was $67 billion, down from $71.6 billion in the previous fiscal year. This is the first time Microsoft has seen a year-over-year decline in full-year free cash flow since entering this AI investment cycle.

Depreciation is already starting to impact the income statement. According to the fixed asset notes in the 10-K, depreciation expense for fiscal year 2026 was $34.3 billion, compared to $15.2 billion two years ago. Microsoft Cloud's gross margin fell to 65% this quarter from 68% a year ago, declining for four consecutive quarters. This line item is more worth tracking than capital expenditure, because capital expenditure can be shifted around through accounting metrics, but once equipment is operational, depreciation must be charged annually.

A Surprise in the Opposite Direction

Microsoft's non-GAAP earnings per share for this quarter was $4.74, lower than GAAP EPS of $4.81. This is opposite to the trend for most companies. The reason is that Microsoft's non-GAAP definition excludes the impact of the equity method for OpenAI. In fiscal year 2026, this impact was a net gain of $4.963 billion. According to the 10-K's explanation, this gain primarily came from a dilution gain when Microsoft's stake was diluted during OpenAI's restructuring in October 2025, not from operational earnings. The same line item in the previous fiscal year was a net loss of $3.62 billion.

Buried in the same footnote is another inconspicuous figure. Microsoft's revenue from the OpenAI commercial agreement in fiscal year 2026 was $24.1 billion. The accounts receivable from OpenAI at the end of the period stood at $6 billion. Microsoft currently holds approximately a 25% equity interest in OpenAI, calculated on a fully converted basis.

This quarter, Microsoft proved it could sell computing power. And the moment the market delivered an 8% gain, it acknowledged that Microsoft had shifted a portion of its computing expenditure out of the capital expenditure line item.