Microsoft delivered a stellar Q1 beat with Azure cloud revenue jumping 40%, crushing both Amazon Web Services and analyst expectations. But investors weren't celebrating - the stock tumbled 4% in after-hours trading after CFO Amy Hood warned that capital spending will accelerate this fiscal year, not slow down as previously promised. The mixed reaction highlights Wall Street's growing anxiety about AI infrastructure costs, even as the payoff becomes increasingly clear.
Microsoft just delivered one of its strongest quarters yet, but investors are spooked by what's coming next. The tech giant crushed Q1 expectations with $77.67 billion in revenue and earnings of $3.72 per share, handily beating Wall Street's forecasts. But the real story was Azure's blistering 40% growth rate, significantly outpacing what analysts expected from Amazon Web Services competition.
Yet Microsoft's stock fell nearly 4% in extended trading. The culprit? CFO Amy Hood's bombshell warning that capital expenditure growth will actually accelerate this fiscal year, not decelerate as she'd previously indicated. "The capex growth rate for fiscal 2026 will be above the rate in 2025," Hood told investors, completely reversing her July guidance about spending slowdowns.
The numbers tell Microsoft's AI transformation story. The Intelligent Cloud unit generated $30.9 billion, up 28% and crushing the $30.25 billion consensus. Azure's 40% expansion demolished analyst predictions of 38.2% growth, showing Microsoft is winning the cloud wars against Amazon Web Services and Google Cloud. For context, Microsoft disclosed last quarter that Azure and other cloud services generated over $75 billion in fiscal 2025 alone.
But this success comes with staggering costs. Microsoft spent $34.9 billion on infrastructure in Q1 - well above the $30 billion Hood projected in July. The company's OpenAI partnership alone cost $3.1 billion this quarter, equivalent to 41 cents per share. "We're racing to build out the infrastructure necessary to support AI demand," Hood explained, signaling no letup in spending.
The OpenAI investment is starting to pay strategic dividends beyond just revenue. On Tuesday, OpenAI completed its corporate restructuring, formally cementing Microsoft's 27% stake worth approximately $135 billion in the newly structured for-profit entity. The nonprofit arm retains 26%, while employees and other investors hold the remaining 47%. This gives Microsoft enormous influence over the AI leader that's driving much of the industry's innovation.
