Microsoft Growth Outpaces Market Valuation

Microsoft's fiscal year 2026 results are in, and they're impressive. The company reported revenue of $331.8 billion, a 18% increase from the previous year, and net income of $133.7 billion, up 31%. However, despite this growth, Microsoft's market cap has actually decreased by about 4.5% over the past year.

The main reason for this discrepancy is that investors are now paying less for each dollar of earnings. A year ago, they were willing to pay around 37 times earnings, but today that number has dropped to 27. This means that while the business itself is growing, the market's valuation of it is decreasing.

Microsoft's cloud services, including Azure, are a major contributor to this growth. Azure revenue topped $100 billion for the fiscal year, up 41%, and fourth-quarter revenue from Azure and other cloud services grew 43%. The company also has a massive backlog of contracted work, with a commercial remaining performance obligation (RPO) of $678 billion, up 84% year over year.

However, Microsoft's capital expenditures are a concern. The company spent $175 billion on property and equipment in calendar 2026, which exceeds its operating income for the fiscal year. This could indicate that investors are pricing in the doubt about future earnings, particularly with regards to AI computing demand.