Microsoft is spending heavily on AI but is also taking a 'responsible' approach to its financials, an analyst says

Shares of Sandisk, Micron and other chip makers were soaring on Thursday.

Microsoft's "responsible" commentary on artificial-intelligence investments seems like good news for the companies on the receiving end of that spending.

The company saw capital spending rise 70% in the latest quarter, inclusive of finance leases. But management signaled that it expects to record positive free cash flow in its new fiscal year, helping to soothe concerns that Microsoft $(MSFT)$ might enter cash-burn territory if AI costs become dramatically misaligned with AI revenues.

The commentary proved welcome news for investors in chip stocks, which had fallen well off their peaks in a dramatic July selloff that reflected fears about the sustainability of AI spending. Investors have become increasingly focused not just on AI capital expenditures in the near term but also on the sustainability of that spending going forward.

Micron Technology's stock $(MU)$ was up 17% in Thursday afternoon trading, while Sandisk's stock $(SNDK)$ jumped 24%. The stocks of storage makers Western Digital $(WDC)$ and Seagate Technology $(STX)$ also saw double-digit gains of 14% and 10%, respectively.

That said, the stocks are still below their highs achieved earlier this year.

Shares of AI chip makers were also on the rise Thursday, with Advanced Micro Devices $(AMD)$ up 13%, Marvell Technology $(MRVL)$ up 11.5%, Broadcom $(AVGO)$ up 4% and Nvidia (NVDA) up 2%. Intel's stock $(INTC)$ was up 12.9%.

D.A. Davidson managing director Gil Luria called out Microsoft's "responsible approach" with capital expenditures as a driver of Thursday's chip-sector action. The company paired its free-cash-flow commentary with improving cloud performance, a sign of AI monetization.

That "has made the market more comfortable with the AI investment cycle, which is supporting [semiconductor] stocks today," Luria told MarketWatch in an email.

Microsoft's improved growth in cloud revenue driven by its AI efforts "doesn't fit the premise that AI spend is overwhelming growth [and] cash flow and is unsustainable," Wedbush analyst Matt Bryson said in emailed comments.

Hendi Susanto, a research analyst at Gabelli, also thinks Microsoft's report has helped reignite chip stocks.

While investors "have high capex expectations, at the same time, they want growth to show up somewhat immediately," Susanto told MarketWatch.

One issue for the chip sector has been an excessive use of leverage among South Korean investors who perhaps got too excited about the country's major presence in the memory market. More recently, however, there have been attempts to limit those speculative bets.

"Often, once the towel is thrown in by those with too much leverage, that's exactly when the market bottoms," Andrew Rocco, a stock strategist at Zacks Investment Research, told MarketWatch.

In his view, Thursday's action is a combination of that deleveraging and investors seeing bargains in the chip trade given attractive valuations.

Samsung Electronics (KR:005930), one of those Korean memory companies, just delivered strong June-quarter performance and commentary on memory demand, which Susanto saw as another driver of Thursday's moves.

Samsung said that despite its focus on increasing production, it expects memory shortages to continue through next year.

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-Britney Nguyen