Microsoft Corporation (NASDAQ:MSFT) and Meta Platforms, Inc. (NASDAQ:META) are both spending aggressively to secure leadership in artificial intelligence, yet their latest earnings reports have produced starkly different reactions.
Microsoft Corporation (NASDAQ:MSFT) jumped 15% on Thursday after the tech giant reported better-than-expected fiscal fourth-quarter results and issued a better-than-expected outlook for the first quarter of 2027. Meanwhile, Meta was down more than 8% as it missed investor expectations on earnings and issued weaker-than-expected revenue guidance.
Investors particularly rewarded Microsoft for its accelerating Azure cloud business and visible AI monetization, while Meta came under pressure due to rising costs and capital expenditure, disappointing guidance, and dwindling free cash flow.
Why Microsoft’s AI Spending is Being Rewarded
Microsoft’s recent quarter provided the strongest evidence yet that it’s AI and cloud infrastructure expansion is producing faster growth. On Wednesday, Microsoft posted revenues of $90.01 billion, up 18% year over year in the quarter, and beating estimates of $87.62 billion. Its net income of $35.77 billion was up from $27.23 billion from the same quarter a year ago.
For its Azure cloud business, it reported a 43% growth, which was also ahead of market expectations. The company also reported over 30 million paid seats for Microsoft 365 Copilot, its AI work assistant, increasing from 20 million as of April, suggesting how parts of its AI investments are paying off.
“Microsoft’s strong revenue performance, combined with accelerating Copilot adoption, signals that its data‑center build out is beginning to deliver returns,” Tracy Woo, principal analyst at Forrester.
Strong contracted demand further supported the investment case, with commercial remaining performance obligation rising 84% from a year earlier. Meanwhile, Microsoft Cloud revenue increased 27% to $59.3 billion, reflecting robust demand across its cloud computing platform, Azure, and also for its first-party AI applications and services.
The tech giant also forecast that Azure revenue would grow by approximately 45% in constant currency. Monetizing AI at several levels, investors could see greater visibility into the returns of Microsoft’s spending.
Why Meta’s AI Spending is Raising Concerns
Social media giant Meta Platforms, Inc. (NASDAQ:META)’s core business remained strong this quarter, with revenues climbing 28% year over year to $60.8 billion and exceeding the consensus estimate of $60.19 billion.
Continued strength in its advertising business led to this growth, with ad impressions increasing 14% year over year and the average price per advertisement rising 12%. Meanwhile, Meta’s Family daily active people metric also increased 3% to 3.60 billion in June.
However, total costs and expenses increased 55% to $42.03 billion from $27.08 billion, driven by $2.40 billion in legal fees and $1.18 billion in severance pay. Meanwhile, income from operations fell 8% to $18.78bn. This resulted in an operating margin of 31%, down from 43% a year ago.
Investors particularly punished Meta on the lack of visibility that its ambitious infrastructure and model investments will produce returns that justify their costs. The tech giant recorded $31.08 billion in capital expenditures during the quarter due to continued expansion its AI infrastructure.
Free cash flow fell sharply to $784 million, down from $8.55 billion in the same period last year. Analysts have shared their concern of how this excessive capital spending may have ripple effects across the broader AI supply chain.
In addition, Meta also narrowed its 2026 capital expenditure forecast, narrowing the range to between $130 billion and $145 billion from $125 billion to $145 billion.
The Real Difference between Microsoft and Meta
The contrasting reaction to earnings for Microsoft and Meta is significantly reflected in Wall Street commentary.
On Meta, TD Cowen analyst John Blackledge noted how “shares are down,” and that it likely reflects “the slight 3Q rev miss (at midpoint) alongside questions about timing / scaling of AI monetization amid massive capex cycle.”
JP Morgan noted its expects Meta to “continue to invest heavily N-T & we now project 2027 capex of $243B (+70% Y/Y), while our top-line estimates remain largely unchanged, thereby putting greater pressure on FCF.”
The firm is nevertheless positive on “Meta’s continued headroom in core ranking & recommendation improvements, model progression, & potential new forms of AI monetization”, but needs greater clarity on the product pipeline & spending outlook.
Wall Street was broadly positive on Microsoft, with Evercore ISI analyst Kirk Materne noting how Christmas came a bit early for its investors.
Bank of America analyst Tal Liani noted how the latest report shows Microsoft “as increasingly positioning Copilot as the orchestration layer for enterprise AI, enabling access to a broad portfolio of models while continuing to expand its own AI ecosystem.”
Meanwhile, Raymond James analyst Andrew Marok noted how the quarter isn’t likely to put all investor questions to rest, but “execution in the face of mounting doubts should quiet the loudest concerns for the time being.”
Josh Gilbert, online investing platform eToro’s lead APAC analyst, summarized the issue:
“Meta is spending like a hyperscaler without a hyperscaler’s business model.”
“Microsoft, Alphabet and Amazon can point their data centre dollars at cloud businesses that sell compute straight back out the door, but Meta doesn’t have the same outlet, so every dollar of build-out leans on the ads business.”
In essence, Microsft’s spending has a clearer and more immediate connection to revenue, while Meta is still struggling to explain what its eventual commercial model will be.
What Could Change the Investment Thesis
The investment thesis could shift for both companies depending on how effectively they are able to translate their AI spending into sustainable returns.
While Microsoft’s recent results have largely been positive for investors, the tech giant is also committing huge sums to AI infrastructure. This could pressure free cash flow and cloud margins if Azure and cloud growth slows.
The tech giant’s bull case rests on continued Azure acceleration, rising Copilot adoption, and growing contracted demand.
Meanwhile, Meta Platforms, Inc. (NASDAQ:META)’s bull case rests on strong advertising growth and AI-driven improvements in engagement, ad targeting, and more. On the other hand, surging capital expenditures, margin compression, and weak free cash flow visibility may hurt its investment case if it fails to build a commercial model beyond advertising that can justify the scale of its infrastructure build out.
Valuation, Hedge Funds, and Short Interest
Based on July 29 closing prices, Microsoft Corporation (NASDAQ:MSFT) traded at roughly 20x forward earnings, 8.7 times sales, and 14.9 times EV/EBITDA. This is compared to Meta’s approximately 17.7x forward earnings, 6.5x sales, and 13.8x EV/EBITDA.
While both tech giants carry multi-trillion-dollar market valuations driven by significant AI investments and cloud computing, Microsoft trades at a valuation premium to Meta.
Both companies also remain popular among hedge funds. According to Insider Monkey’s hedge fund data base, Microsoft was held by 282 hedge funds at the end of the first quarter, down from 312 in the previous quarter. Meanwhile, Meta was held by 262 funds, up from 256. However, these holdings predate the latest earnings report and do not capture the different post-earnings reactions.
Neither company faces exceptionally bearish positions either, though short sellers have a larger presence in Meta.
Overall, the contrasting reactions for Microsoft and Meta show that Wall Street is not necessarily opposing aggressive AI spending. However, investors are rather interested in supporting large infrastructure investments when companies can demonstrate a visible path to monetization.
While we acknowledge the risk and potential of MSFT and META as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than MSFT or META and that has 10,000% upside potential, check out our report about this cheapest AI stock.
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