Microsoft Corporation (NASDAQ: MSFT) delivered a strong set of quarterly results for its fiscal 2026 third quarter, but the stock continues to lag its Magnificent Seven peers as questions mount over the sustainability of its capital expenditure trajectory and its evolving relationship with OpenAI. Year to date, MSFT has fallen approximately 15.7 percent, making it one of the weakest performers among the group.
Revenue grew 18 percent year over year in the quarter to March 31, with operating income rising 20 percent and non-GAAP diluted earnings per share climbing 21 percent. Azure and other cloud services delivered revenue growth of 40 percent, while Microsoft’s AI business surpassed an annualised revenue run rate of $37 billion, representing a 123 percent increase.
The headline numbers were impressive, but capital expenditure projections have alarmed investors. Microsoft indicated it expects quarterly capex to exceed $40 billion in its fiscal fourth quarter, and plans for calendar year 2026 point to total capital spending of around $190 billion. For context, the company’s full year capex for fiscal 2025 was $64.5 billion, meaning its quarterly budget is now approaching what once represented an entire annual spend.
That spending pace is already compressing free cash flow. MSFT generated $15.8 billion in FCF during the latest quarter, a decline of 22.2 percent year over year, even as operating margins remained strong. A significant portion of that capex is directed toward GPU and CPU procurement to power data centre expansion, with two-thirds of the $31.9 billion quarterly figure going toward those components.
The shifting dynamic with OpenAI has added another layer of complexity. Commercial bookings fell 46 percent on a constant currency basis due to reduced commitments from the AI firm, which has now expanded its cloud partnerships beyond Microsoft to include Amazon Web Services. That development removes one of the key competitive moats investors had assigned to MSFT.
However, the revised OpenAI agreement provides Microsoft with royalty-free access to the company’s intellectual property through 2032, alongside revenue sharing through 2030. Results for Copilot suggest the restructured arrangement is beginning to pay off. Microsoft 365 Copilot paid seats increased 250 percent year over year, while GitHub Copilot enterprise adoption tripled and command-line interface usage nearly doubled on a monthly basis.
At a forward price to earnings ratio of approximately 24.4 times, MSFT trades at a meaningful discount to Alphabet (NASDAQ: GOOGL) and Amazon (NASDAQ: AMZN), both of which carry forward multiples above 34. That discount reflects the market’s concerns over spending intensity and competitive positioning in custom AI chips, an area where Microsoft currently trails its hyperscaler peers.
For investors with a long time horizon who believe AI spending will generate durable returns, the current discount may represent an attractive entry point. For those seeking a cleaner growth story with less uncertainty, other names in the AI infrastructure space may offer a more straightforward risk-reward profile at present.
Ewan is a reporter at the Foreign Policy Journal, primarily covering US current affairs and news related to NYSE-listed stocks. He has over two decades of experience in journalism and digital publishing.
