Big Tech companies increasingly have to justify their heavy artificial-intelligence spending to investors, and Microsoft’s stock has proven a major battleground for this trend. 

Shares of Microsoft have lost 18% so far this year to rank as the worst performer among the major cloud plays. The stock has also lagged the S&P 500 by about 26 percentage points over that span. The performance reflects investor doubts over whether the company’s record spending on AI will lead to adequate returns, Deutsche Bank analysts have noted. 

When Microsoft reports earnings on Wednesday, investors will be eager to gauge the returns on an ever-more-expensive AI buildout. Microsoft and its rivals have been scrambling to buy up artificial-intelligence hardware at a time when prices for key memory components have skyrocketed, raising questions about profits. 

Deutsche Bank analysts anticipate that Microsoft’s free cash flow could drop near breakeven levels in its 2027 fiscal year, which has just kicked off. Microsoft’s report on Wednesday will cover the fourth quarter of fiscal 2026, during which analysts tracked by FactSet expect that the company will record $16.8 billion in free cash flow, down 34.2% from a year before. 

Investors will also be looking to see how management treats its spending forecasts, Benchmark analyst Yi Fu Lee told MarketWatch. Microsoft projected in April that it would see $190 billion in capital expenditures this calendar year, and he said that any raise to that outlook would have to be justified by a clear path to returns. 

Alphabet just boosted its spending forecast last week, raising speculation that rivals may do the same.

What to watch in Wednesday’s earnings

To assess whether Microsoft’s AI spending is paying off, a key metric to watch is Azure cloud growth, according to Lee.

Deutsche Bank analysts say that 40% to 41% year-over-year Azure revenue growth in constant currency looks like a “reasonable bogey” for the report, meaning that this is the level the company needs to meet or exceed. 

The growth in Microsoft 365 Copilot seats, which are individual user licenses, will be another signal of the company’s progress on AI monetization. That seat growth would include new licenses for Copilot extensions like GitHub Copilot and Dragon Medical. In the third quarter the company added approximately 5 million new seats, and TD Cowen analysts model that Microsoft added close to 6 million more in the fourth quarter.

The long-term impact

One thing working in the company’s favor is that Microsoft appears to be slowly diversifying away from its reliance on OpenAI. Lee noted that Microsoft is pursuing a broader strategy around proprietary AI models, expanding its frontier AI partners and vertically integrating infrastructure that spans cloud, data, security and application layers. 

In all likelihood, the debate over whether Microsoft’s AI spending is worthwhile won’t get resolved in a single quarter. 

“Our thesis is that if you don’t spend the money to build for the future, in two or three years, you will not have the IT AI cloud infrastructure to power these powerful frontier labs,” Lee said.