Microsoft shares hit one-year closing high as Azure growth and AI returns take centre stage

Microsoft (Nasdaq: MSFT) closed at US$543.45 on Tuesday (October 13), surpassing the previous closing record of US$542.07 set on October 28, 2025, and marking its first record close in nearly a year. The shares reached an intraday high of US$551.15, taking the company's market value back above US$4 trillion. According to Bloomberg data, the stock has risen more than 50% from its June low, adding about US$1.5 trillion in market value.

The catalyst for the rally was the results for the fourth quarter of fiscal 2026, covering April to June, announced on July 29.

Quarterly revenue reached US$90 billion, up 18% year on year and above the market expectation of about US$87.6 billion.
Full-year revenue exceeded US$331 billion, also an 18% year-on-year increase.
Revenue from Azure and other cloud services rose 43% year on year, accelerating from 40% in the previous quarter and beating the market forecast of about 40%.
Microsoft's shares jumped about 15.5% on the following day, July 30, to close at US$451.10. The company's market value increased by about US$450 billion that day, a record one-day gain for an individual stock, according to Bloomberg data.

The shares had previously suffered a steep decline. According to Yicai, Microsoft's market value fell from about US$4.03 trillion on October 28, 2025, to US$2.74 trillion on June 29 this year. Bloomberg said the stock fell 17% in June alone, its worst monthly performance since 2000, as investors worried that massive AI infrastructure spending might not generate sufficient returns. Bloomberg said market sentiment towards Microsoft's position in AI subsequently continued to improve. But the details of its financial results show that Microsoft has not moved beyond its heavy investment phase: capital expenditure is still set to rise, while free cash flow fell in the latest quarter, as outlined below.

Azure up 43%: management's explanation

Chief financial officer Amy Hood said Azure's stronger-than-expected growth was mainly driven by three factors:

Improved efficiency in CPU and GPU clusters;
Process improvements that accelerated the delivery of new capacity, allowing additional Azure capacity added during the quarter to be converted into revenue quickly; and
Higher-than-expected usage after GitHub Copilot switched to usage-based billing in June.

Chief executive Satya Nadella said Microsoft had cut the time needed to bring new GPUs online after delivery by nearly 50% in key regions over the past financial year. The company added about 1 gigawatt (GW) of capacity and 31 data centres during the quarter, taking the full-year total to 88.

Hood also cautioned that Azure's year-on-year growth rate would fluctuate from quarter to quarter depending on the timing of capacity coming online and the mix of contracts. She expects Azure to grow by about 45% on a constant-currency basis in the first quarter of FY27, with growth accelerating further in the first half of the financial year. However, customer demand remains ahead of available capacity.

From seat-based pricing to "seats plus usage"

The bigger structural change lies in Microsoft's pricing model.

Paid M365 Copilot seats rose to more than 30 million, up from more than 20 million in April. Net additions more than doubled quarter on quarter.
The number of customers with more than 50,000 seats increased more than sevenfold year on year, while the number of companies deploying Copilot to most knowledge workers rose nearly 75% quarter on quarter.
HSBC Holdings (stock code: 0005) committed to purchasing 200,000 seats, while AstraZeneca, Boeing, Procter & Gamble and several other companies each bought 60,000 or more.
NHS England is rolling out Copilot to 505,000 healthcare workers and staff. A trial showed that users saved an average of 43 minutes per day.
Microsoft's new E7 package combines Copilot, E5, Entra and Agent 365. Just two months after its launch, hundreds of corporate customers had bought millions of seats. EY deployed it to 400,000 employees, making it the largest deal to date.
Average revenue per user (ARPU) increased during the quarter, driven by Copilot, E5 and early E7 adoption, while paid commercial seats rose just 6% year on year.

Previously, companies paid for Copilot by seat regardless of how much it was used, limiting revenue to the number of seats sold. Nadella said Microsoft was expanding from seat-based pricing to a model combining seats and usage:

The Cowork feature began charging by usage in July, with thousands of customers already paying to use it.
Usage-based credits in the Dynamics 365 customer service segment quadrupled quarter on quarter.
GitHub Copilot switched to usage-based billing on June 1, while the basic subscription price remained unchanged. Microsoft said its revenue growth accelerated by more than 60% quarter on quarter.
According to TIKR, citing a Microsoft announcement on October 1, the date on which new Copilot Business subscriptions sold through cloud solution providers will default to usage-based billing was pushed back from November 2 to December 1. The default monthly cap is 4,000 credits per user, with each credit priced at US$0.01.

Usage-based billing also has cost implications. GitHub previously said its old system, based on "premium requests", was becoming difficult to sustain as inference costs rose. Hood said higher GitHub Copilot usage had temporarily weighed on the segment's gross margin, but the margin improved during the quarter after the pricing change in June.

At the application development level, the number of Foundry customers rose to 100,000, with revenue more than doubling year on year. The number of customers processing an annualised volume of 1 trillion tokens quadrupled year on year.

US$175 billion: a 2026 calendar-year capital expenditure forecast, not FY27 guidance

The US$175 billion figure is Microsoft's capital expenditure forecast for calendar 2026, from January to December.

Hood said that from FY27, Microsoft would extend the estimated useful life of data centres and office buildings from 15 years to 25 years.
In future, more data-centre leases will shift from finance leases to operating leases. Finance leases are included in capital expenditure, while operating leases are not.
As a result, the capital expenditure forecast for calendar 2026 was adjusted from about US$190 billion to approximately US$175 billion. Hood stressed that excluding this impact, the forecast remained unchanged, meaning the underlying investment plan had not been reduced.
The accounting change affects only the timing of future depreciation and is expected to have a negligible impact on FY27 operating profit.

For FY27, Hood only said that capital expenditure would increase year on year and did not provide a full-year figure. Capital expenditure for the first quarter of FY27 is expected to exceed US$50 billion, including the impact of the lease reclassification. Capital expenditure including finance leases stood at US$41 billion in the latest quarter, up about 70% year on year, with roughly two-thirds allocated to short-term assets such as CPUs and GPUs.

Higher capital expenditure has already affected cash flow:

Free cash flow was US$19.6 billion in the latest quarter, down 23% year on year, while operating cash flow rose 30% to US$55.4 billion.
For the full year, operating cash flow was US$182.9 billion. After deducting about US$115.9 billion in property and equipment additions, free cash flow was approximately US$67 billion, below the roughly US$71.6 billion recorded a year earlier, based on the financial statements.
Hood expects free cash flow to remain positive in FY27 but gave no figure. She said the full-year operating margin would fall by less than one percentage point year on year.

Who benefits and who faces pressure

On the supply chain side:

Microsoft said it would be among the first cloud providers to deploy AMD Helios and NVIDIA Vera Rubin, the next generation of rack-scale AI infrastructure.
Microsoft's internally developed Maia 200 chip delivers 30% better performance per dollar than the latest-generation hardware in its fleet. It now supports both OpenAI and Microsoft's own MAI models.

If Microsoft continues to demonstrate returns, market attention on major cloud providers could shift from the AI arms race for computing power towards commercial deployment.

Risks remain. Capital expenditure is not a one-off expense but an ongoing burden across multiple quarters. If Azure growth slows materially, the market could once again cut valuations, as it did when the shares plunged 17% in June alone. Hood said most capital expenditure was directed towards CPUs and GPUs, which have shorter delivery cycles, allowing procurement to be slowed if demand weakens.

What to watch next

Azure growth. Management guided to about 45% growth in the first quarter of FY27 on a constant-currency basis. Whether growth can remain above 40% will be crucial. A fall below 30% could indicate that AI-driven incremental revenue is peaking.
Copilot usage mix and gross margin. As usage-based fees replace seat-based charges, will overall revenue become more or less elastic? Hood said rising M365 Copilot usage had caused a slight decline in the gross margin of the productivity and business processes division.
Actual capital expenditure in the first quarter of FY27. This is expected to be announced with the results on the 28th of this month. The guidance is for "more than US$50 billion" and includes the lease reclassification impact, so it will need to be assessed against whether revenue growth is keeping pace.
Free cash flow. It stood at US$19.6 billion in the latest quarter, down 23% year on year, and about US$67 billion for the full year. With capital expenditure set to rise further in FY27, cash flow could face additional pressure.
Investment gains and customer concentration.
- Microsoft holds stakes in OpenAI and Anthropic, with changes in their fair value directly affecting net profit. It recorded a US$3.2 billion gain from Anthropic in the latest quarter, while the non-GAAP measure excluded the impact of its OpenAI investment.
- Commercial remaining performance obligations (RPO) reached US$678 billion, up 84% year on year, or 25% excluding OpenAI.
- Nearly 90% of full-year Microsoft Cloud revenue came from customers other than frontier-model companies.

It took about four months for Microsoft to climb from its June low to Tuesday's record close. The real test is whether its steadily expanding capital expenditure can generate a commensurate increase in revenue and cash flow.