EARNINGS BREAKDOWN
🧑‍⚖️ Microsoft Soars 16% and Meta Sinks 9% as Markets Put AI Spending on Trial

📊 Last night Microsoft and Meta reported earnings, so it's time for another special edition Weekly Buzz breaking it all down!

🔍 On Sunday when we covered Google earnings, I wrapped it up with a question: was Google's first-ever negative cash flow quarter (and stock crash) a warning sign for all of Big Tech, or just post-earnings jitters?

💡 Well, yesterday we got some good news. It looks like the market has started grading the tech giant on one number: free cash flow, and because of this, we saw two very different stories yesterday:

• Microsoft ($MSFT) jumped 16% after reporting soaring AI revenue and positive cash flow.

• Meta ($META) fell 9% after cash flow plummeted

📊 So let's break down both earnings reports and what this new era means for your portfolio…

🚀 Microsoft Jumps 16% After Proving It Can Spend Big On AI While Printing Cash

😅 Coming into this week, Microsoft was having a rough year, down ~19%, making it one of the worst performers in the Mag-7. But yesterday’s earnings report sparked new hope for the turbulent stock.

📊 By the numbers:

• ✅ Revenue hit $90.0 billion vs. $87.6 billion expected, up 18% year-over-year

• ✅ EPS came in at $4.74 vs. $4.21 expected (boosted by a $3.2 billion gain on its Anthropic stake)

• ✅ Azure (Microsoft’s AI Cloud Revenue) grew 43% vs. 40% expected, accelerating from last quarter's 40%

• 🔮 For Q1, Microsoft guided to $89.85–90.95 billion in revenue (+16%) and 45% Azure growth, both above expectations

☁️ Microsoft also reported Azure crossed $100 billion in annual revenue for the first time, a number Microsoft had never disclosed before, and one that puts it firmly between Amazon's AWS and Google in the AI-driven Cloud race.

💰 Now for the number everyone was watching: capex, aka AI spending. Microsoft spent a massive $41B in this quarter, up 69%, and plans to increase that to $50B in the current quarter, and even more next year.

🤔 So why did the market cheer Microsoft's massive AI spending when it punished Google for the exact same thing last week?

💰 The Last Hyperscaler Still Printing Cash

💵 The difference is in the cash flow. Even with the massive spending, Microsoft generated $19.6 billion in positive free cash flow this quarter (down 23%, but still positive), with Microsoft CFO Amy Hood committing to staying cash-flow positive through fiscal 2027.

😰 That makes Microsoft the only cloud giant not burning cash, with Amazon going cash-flow negative in Q1 and Google following suit last week.

💬 As Bryan Hayes, analyst at Zacks Investment Research, put it:

🤝 And the Demand Looks Real

⭐️ Microsoft also had some strong evidence that this spending is paying off. CFO Amy Hood told investors "customer demand continues to exceed available capacity" and had the receipts to back her up:

• Microsoft's contracted future revenue (its "backlog") rose $51 billion to $678 billion, and every dollar of that increase reportedly came from customers other than AI labs like OpenAI

• Microsoft 365 Copilot passed 30 million paid seats, up from 20 million just last quarter (analysts expected ~26 million)

• GitHub Copilot now has 50 million users

• Microsoft added 31 data centers this quarter alone, 88 this year

🎯 Analyst Reactions

💬 The backlog detail matters a lot: with roughly 45% of Microsoft's existing backlog tied to OpenAI, the bears' big worry has been concentration risk. This quarter's growth coming entirely from everyone else is exactly the answer investors wanted. As Brad Reback, analyst at Stifel, told the WSJ:

🐻 The doubters (aka bears) are still around though. John Belton at Gabelli argues markets have decided Azure is "not a very exciting business", renting out compute is capital-intensive and lower-margin than the software empire Microsoft was built on.

👀 And even after the jump, the stock is still down double digits this year, trading under 20x forward earnings vs. its 10-year average of 27.

🎯 As a result, analysts are still very bullish on Microsoft, with the stock rated a ‘Strong Buy’ with an average $550 price target, 41% above the current price.

🙋‍♂️ Personally, with ~3% of my portfolio in Microsoft, I’m a happy shareholder and am encouraged to see the market isn’t treating all AI spending the same. I think this is very good news for the ‘AI bubble’ fears as it shows that fundamentals matter.

👀 And speaking of that, let’s switch gears to the other giant that reported earnings yesterday, which faced a very different market reaction to Meta… but first, a quick word from our sponsor this week, Dynamic!

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EARNINGS BREAKDOWN
📉 Meta Drops 9% as Its Cash Pile Runs Dry

📈 3 weeks ago, Meta had its best week since 2024, jumping 15% on a leaked memo that Meta’s AI build-out was much more efficient than the market thought and that Meta was working on its own custom AI chip (full story here).

🥲 Well, this week Meta reported its earnings, and unfortunately nothing was confirmed about the efficiencies or the AI chip, with Meta focusing instead on its core metrics.

📊 By the numbers:

• ✅ Revenue hit a record $60.8 billion vs. $60.3 billion expected, up 28% year-over-year

• ✅ Ad revenue hit $59.3 billion, with impressions up 14% and price-per-ad up 12%

• ❌ Earnings per share came in at $6.18 vs. $7.14 expected

• ❌ Net income fell 14% to $15.8 billion

• 🔮 Q3 revenue guidance of $61–64 billion put the midpoint below Wall Street's $63.2 billion

📉 Despite the strong revenue numbers, Meta stock dropped 9% this morning, so let’s dive into why…

🧑‍⚖️ Legal Costs Sink Earnings

🤔 The most obvious red blotch in the report was the missed earnings per share expectations. So how does a record revenue quarter lead to falling net income and missed earnings expectations?

💰 The biggest culprit was a whopping $2.4B in legal charges for Meta’s lost legal battles on its addictive design and child safety.

😰 While these legal battles were mostly just headlines before, now they’re showing up on the earnings, with Meta warning that they could “significantly impact our business and financial results” and drive material loss, with legal costs reportedly driving a 13% year-over-year drop in earnings per share.

📑 And with over 2,664 pending cases, investors are rightfully worried that these legal costs could continue to drain Meta for some time.

💸 Cash Flow Plummets Below $1B

💰 Outside of legal worries, the other big story here was the same as the one with Microsoft and Google: plummeting cash flow.

This quarter Meta reported $784M in cash flow, down from $8.55 billion in the same quarter last year, and the lowest since 2022. For context, Meta generated $46 billion in free cash flow in all of 2025. This year, analysts expect less than $1 billion, with 2027 projected to go negative.

💬 As Ryan Lee, SVP of product and strategy at Direxion, put it:

🤑 This is of course driven by Meta’s ever-increasing AI spending, with Meta raising the floor of its 2026 capex guidance to $130-145B (up from $125-145B) as it continues to build out massive data centres in Texas, Louisiana, and Alberta.

🤔 So… Is Meta’s Spending Paying Off?

🤔 The big question of course is whether all this spending will pay off, and that’s where things are probably the most uncertain for Meta compared to the other Big Tech giants.

😅 Zuck ran a full PR blitz in the days before earnings, arguing everyone should have their own "personalized super-intelligence," which has long been part of Zuck’s reason for this massive spending.

🤖 But until then, Meta has been trying to make money on its AI investments through subscriptions to its AI chatbot and paid agents to help businesses run their companies (and, of course, by driving efficiency in its ads business).

👀 The challenge is that the return on investment is much less clear than it is for a company like Microsoft, which can point to its 43% increase in AI-driven Azure Cloud revenue… and the market is growing incresingly impatient with Meta.

☁️ What About Meta’s Cloud?

✨ And speaking of Microsoft’s Cloud revenue, another headline investors were excited about a few weeks ago was Meta’s entry into the Cloud race, with Bloomberg reporting that Meta is building a cloud computing business to sell its excess AI infrastructure, putting it up against Amazon’s AWS, Microsoft’s Azure, and Google Cloud.

⚙️ Well, on the earnings call we got some more clarity about these plans. On renting out raw compute, Zuck confirmed demand is real, saying Meta has received "quite a number of offers" from companies wanting to buy Meta's spare computing power at a premium, but says Meta would rather use the capacity itself:

🤝 But on the other hand, for the first time, Meta committed to selling its AI models and tools to other companies, starting by making Muse Spark "easier for companies to integrate".

🤹 Is Meta Doing Too Much At Once?

So where does this leave us? Well, I think it’s summed up best by Mike Proulx, research director at advisory firm Forrester Research, who said “Meta may be trying to do too much at once,” adding:

And with all the massive AI spending, Meta needs some of these bets to start paying off, and soon.

🤞 Zuck Says the Best Is Yet To Come

🤖 Zuck thinks this payoff will come first from Meta’s AI agents, calling them "the next wave of our product line in the months and years to come".

📅 CFO Susan Li even put a rough date on when we'll know if the bets are paying: "By 2028, we'll have turned over a lot of cards." And Zuck closed with his own conviction: "I get that this is a big bet across the industry. My personal bet is that the people who invest in this will feel very good and be rewarded over time."

💡 The market's message this week was clear: show us sooner. But with the ad machine still growing 28% at record scale, the question isn't whether Meta can afford to keep betting, it's whether investors are ok to wait for Zuck’s plans to pay off.

🗓️ Earnings Season Continues

👀 And that wraps up Meta and Microsoft’s earnings! Stay tuned for Amazon and Apple’s earnings tonight (which I’ll cover this Sunday).

💰 So far, it seems the biggest difference between the winners and losers is cash flow. Meta and Google saw plummeting cash flow, and the stocks got punished. Microsoft’s committed to positive cash flow and saw a jump.

🤖 The good news is, investors seem to be ok with high AI spending so long as cash flow isn’t suffering.

💡 Interestingly, this means that Big Tech is not being treated equally, and we may see a divergence across the different tech giants as each follows a different approach to the rapidly changing AI landscape.

📊 For my portfolio, I’m going to be using this context to re-evaluate the Mag 7 names I hold and whether I still think they’ll be the winners in the next 5 years, and encourage you all to do the same!