Microsoft Corporation (NASDAQ:MSFT) shares advanced 2.3% over the past week, significantly outperforming the broader market as investors increasingly anticipate a moderation in artificial intelligence-related capital expenditures. The stock climbed from $385.10 to $393.82 during the period, while the Nasdaq Composite slipped 2.8% and the S&P 500 fell 1.5%. On Friday, Microsoft shares declined 1.8%, closing at $393.82.
The outperformance is notable given the broader tech sell-off. Certain active managers have been rotating into hyperscalers and software shares, moving away from chip stocks amid concerns about valuation and growth sustainability. The focus has shifted to cash conversion metrics, with Microsoft using 66% of its operating cash flow for property and equipment payments in the March quarter, leaving free cash flow at $15.8 billion.
UBS Group (NYSE:UBS) expects the sector's spending cycle to decelerate. The bank forecasts hyperscaler capital expenditure growth at 76% for 2026, slowing to 25% in 2027 and just 6% in 2028. This could create an imbalance that allows Microsoft to profit from continued cloud capacity sales even as construction slows, potentially improving free cash flow generation.
At Friday's close, Microsoft's price-to-earnings (P/E) ratio stood at 23.4x, below those of three leading AI competitors: Alphabet (NASDAQ:GOOGL) at 26.5x, Amazon.com (NASDAQ:AMZN) at 29.6x, and Nvidia (NASDAQ:NVDA) at 30.9x. The reduced multiple reflects tangible expenses, with Microsoft expecting approximately $190 billion in capital expenditures for 2026, including $25 billion due to increased component costs.
Azure revenue grew 40% last quarter, while Microsoft Cloud revenue rose 29% to $54.5 billion. The company has surpassed 20 million paid seats for its 365 Copilot product, and its AI segment now has an annual run rate of $37 billion, representing a 123% year-over-year increase. However, Microsoft Cloud gross margin declined to 66%, indicating continued pressure on the income statement.
Microsoft Chief Financial Officer Amy Hood expressed confidence in the return on these investments, projecting capital expenditures for the fourth quarter would exceed $40 billion. Alexis Bossard, global equities manager at Edmond de Rothschild Asset Management, noted a similar shift, stating, “Once they stop increasing their capex, it will definitely be a relief for hyperscalers.”
Alphabet is set to report earnings on Wednesday, with investors watching for signs that cloud demand continues to support significant AI investment. Microsoft is scheduled to announce fourth-quarter financial results after markets close on July 29. The company expects revenue between $86.7 billion and $87.8 billion, with Azure’s constant-currency growth projected at 39% to 40%.
Risks remain, including the possibility that capital expenditure relief may be delayed beyond investor expectations. Microsoft anticipates capacity limitations will persist into 2026, even as it moves forward with planned investments. A slowdown in Azure’s growth could offset last week’s relative gains, making the upcoming earnings reports critical for the stock’s trajectory.
