Episode Details

Microsoft Corporation (MSFT) Q4 FY2026 — Microsoft (MSFT) reported fiscal Q4 2026 (quarter ended June 30, 2026) after the close on July 29, 2026, alongside its FY26 10-K. Revenue was $90.007B, +18% YoY (+17% constant currency) versus roughly $87.6B expected; GAAP diluted EPS $4.81 (+32%) and adjusted EPS $4.74 versus about $4.24 expected; operating income $40.6B (+18%) at a 45.1% margin. Azure and other cloud services grew 43% (43% cc), accelerating from 39/40/39/40 in the four prior quarters, and Azure crossed $100B of annual revenue for the first time. Microsoft Cloud revenue was $59.3B (+27%) but its gross margin fell to 65% — a fourth consecutive quarterly decline from 68%, which management attributes to sales mix shift to Azure and continued AI infrastructure investment. Commercial remaining performance obligation reached $678B (+84%; +25% excluding OpenAI) with a 2.3-year weighted-average duration. Microsoft 365 Copilot passed 30 million paid seats (from 15M two quarters ago) while M365 commercial seat growth stayed at +6% for a sixth straight quarter — so Copilot is ARPU, not seats. For the full fiscal year: revenue $331.8B (+18%), operating income $155.2B (+21%) at a 46.8% margin (+120bps), GAAP EPS $17.95 (+32%). The problem is cash: FY26 cash additions to property and equipment were $115.9B plus $24.6B of finance-lease additions (~$140.6B, 42.4% of revenue versus 22.9% in FY24), so free cash flow fell for a third straight year to about $67.0B (from $71.6B and $74.1B) and Q4 free cash flow dropped 23% to $19.6B. Leases signed but not yet commenced jumped from $92.7B to $329.1B. Depreciation is up 126% in two years to $34.3B. Microsoft funded all of it with zero new debt, drawing cash down 18.7% to $76.8B, lifting finance-lease liabilities 44% to $66.6B and stretching unpaid capex in payables by $19.8B to $26.7B. Return on invested capital fell from about 24.5% to 22.8% as invested capital grew 26.9% against 18.1% NOPAT growth. The quarter's beat also included a $3.2B Anthropic gain that is not mentioned once in the 10-K, and the FY27 extension of data-centre and office-building useful lives from 15 to 25 years was disclosed only on the call. The stock closed at $390.54 (-0.71%) on July 29 before the print and traded at $425.01 (+8.83%) in the after-hours session at 7:59pm ET. Our owner-earnings DCF — operating cash flow less expensed stock comp less a maintenance-capex charge of about $52.8B — lands at a base case near $385 at a 9% discount rate (bear $232, bull $497), so $425.01 is roughly 9% above our value; the reverse DCF says today's price requires owner earnings to compound near 10% a year for five years against our ~7%. Our call: HOLD, 3/5 — an A-grade franchise at a price that needs the AI capex to work. Wall Street is at a BUY consensus with a ~$538 average target (66 buy / 16 hold / 0 sell, 82 analysts, all dated on or before July 28 and therefore pre-print), implying about +27%, so we DIFFER and are materially more cautious. Microsoft just printed the best quarter in its history — and its stock spent the previous twelve months falling. Fiscal Q4 2026 (quarter ended June 30, 2026, reported after the close on July 29): revenue $90.007B, +18% YoY and +17% in constant currency, against roughly $87.6B expected. GAAP diluted EPS $4.81, up 32%; adjusted EPS $4.74 versus about $4.24 expected. Operating income $40.6B, +18%, at a 45.1% margin. Azure grew 43% — accelerating from 39, 40, 39 and 40 in the four prior quarters — and crossed $100 billion of annual revenue for the first time, with management stating plainly that customer demand continues to exceed supply. The contracted commercial backlog hit $678B, up 84%, and still up 25% excluding OpenAI. Microsoft 365 Copilot passed 30 million paid seats, tripling in three quarters, while M365 commercial seat growth stayed pinned at +6% for a sixth straight quarter — the Copilot story is ARPU, not seats. For the full year: revenue $331.8B (+18%), operating income $155.2