Microsoft and Meta both reported revenues that exceeded market expectations. However, while Microsoft absorbed the burden of significant artificial intelligence (AI) investments backed by strong cloud growth, Meta faced deteriorating profits and free cash flow due to soaring costs, leading to mixed market evaluations of their AI investment returns.
On July 29, Reuters reported that Microsoft’s revenue for the fourth quarter of its fiscal year rose 18% year-over-year to $90 billion, surpassing the market estimate of $87.62 billion.
The quarterly earnings per share (EPS) also exceeded expectations at $4.74, compared to the forecast of $4.24. However, this EPS figure included a $3.2 billion gain from its investment in AI company Anthropic.
The cloud business drove the performance growth, with revenue from the Intelligent Cloud segment, including Azure, reaching $39.31 billion, a 31.6% increase from the previous year. Azure's growth rate improved from 40% in the previous quarter to 43%, and annual Azure revenue surpassed $100 billion for the first time. The number of paid users for the AI service 'MS 365 Copilot' also exceeded 30 million.
Due to expanded investments in AI infrastructure, quarterly capital expenditures rose 69% year-over-year to $41 billion. Free cash flow decreased by 23% to $19.64 billion, but the sharp growth of Azure and substantial profits alleviated concerns about investment burdens. Consequently, Microsoft’s stock rose about 8% in after-hours trading following the earnings announcement.
Meta also reported strong revenue figures. In the second quarter, revenue increased by 28% year-over-year to $60.8 billion, exceeding the market estimate of $60.17 billion. However, expenses surged by over 55%, leading to an 8% decline in operating income to $18.78 billion and a 14% drop in net income to $15.85 billion. The EPS was $6.18, falling short of the expected $7.22.
Notably, due to increased investments in AI infrastructure, free cash flow plummeted 91% from $8.55 billion a year earlier to just $784 million. While revenue grew, Meta failed to demonstrate corresponding profits and cash generation from its expanded investments, which weighed on its stock. As a result, Meta’s shares fell about 7% in after-hours trading.
Mike Proulx, a senior analyst at Forrester, told Reuters, "Meta's AI investments were easy to view positively when margins were expanding, but now the cost burden is reflected in performance, making it harder to welcome these investments."
This earnings report highlighted that the ability to translate massive AI spending into revenue and profits is what differentiates market evaluations among big tech companies. Microsoft proved the success of its AI investments by maintaining Azure's growth and high free cash flow despite significant expenditures. In contrast, Meta's rising revenue was overshadowed by cost pressures that eroded profits and cash flow, raising concerns about the potential for investment recovery.
Stephen Evans, Chief Investment Officer at Fave Finance, told CNBC, "One company is making substantial investments while increasing profits, but the other is allowing AI investment costs to erode profitability. He added, "Microsoft's results show that concerns about growth slowing were overblown," and noted that while Meta's advertising business remains robust, it must demonstrate better cost control and consistent returns on AI investments to regain investor confidence.
* This article has been translated by AI.
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