Microsoft's AI Ambitions Come at a Cost: Licensing Fees Hike and Extended Depreciation

Microsoft's recent moves have caught investors' attention, and not just because of its Azure growth. The company has increased Windows 11 licensing fees for PC makers by 7 to 10 percent, a move that signals the capital intensity of the AI era is reshaping even Microsoft's most mature profit engine.

The license hike pushes costs downstream to PC manufacturers and ultimately consumers. To spread the burden of its infrastructure spending across a longer horizon, Microsoft has also extended the estimated useful life of data centers and office buildings from 15 to 25 years starting in fiscal 2027. This accounting adjustment massages the timing of when those costs hit the books.

Despite these cost increases, Microsoft's bets on AI are paying off so far. The company reported revenue of $90.01 billion in the fiscal fourth quarter ended June 30, up 17.7 percent year over year, with earnings per share of $4.74 both clearing analyst expectations. The commercial backlog tells an even more compelling story: Microsoft's remaining performance obligations stand at $678 billion, a staggering 84 percent jump from a year earlier.

The broad analyst community shares the enthusiasm for Microsoft, with 62 buy ratings against just three holds and three sells, and a consensus price target of $560. Institutional demand is also on the rise: several asset managers have expanded or established positions in the company. However, not all signs are positive - free cash flow fell 23 percent to $19.6 billion in the fiscal fourth quarter.