Microsoft's Heavy AI Capital Expenditures Signal Strong Cloud Demand
Microsoft reported strong Q42026 results, driven by robust cloud demand, with Azure crossing $100 billion in annual revenue for the first time. BofA Securities raised its price target on Microsoft to $600 from $500 while maintaining a Buy rating, citing that AI investments are translating into stronger growth and justifying a higher valuation multiple. The company spent nearly $116 billion on capital expenditures in FY2026—a 79.6% increase—primarily for cloud and AI infrastructure, which led to a decline in free cash flow by 6.4%. Despite concerns over high capex levels, Azure's growth accelerated from 39% in Q3 to 45% guidance for the next quarter. BofA noted that Microsoft’s Copilot service is also gaining traction with paid seats surpassing 30 million and a significant increase in revenue per seat. While hedge funds show mixed interest—with some increasing stakes while others are reducing—analysts argue it's now harder to dismiss AI demand, though the high capital intensity remains a concern.
Topics: AI investment capital expenditures cloud growth price target upgrade