Microsoft's High Capex Easier to Justify Than Tesla's

Microsoft and Tesla are two of the worst-performing stocks among the 'Magnificent Seven' for much of this year. However, since their recent earnings reports, they've taken drastically different paths. As of August 11th, Microsoft is up 6.5% year-to-date (YTD), while Tesla is down a significant 24% YTD.

One common concern among investors is the high capital expenditures (capex) both companies are incurring. While neither company's capex is comparable in scale, Microsoft spent $41 billion in its recent quarter, up 70% year-over-year, while Tesla spent $5.8 billion, up a staggering 142%, they're taking a noticeable toll on their finances.

Despite the high capex, Microsoft's spending is much easier to justify due to its robust free cash flow. After spending $41 billion in the quarter, Microsoft still managed to generate $19.6 billion in free cash flow. In contrast, Tesla's free cash flow came in negative, with the company burning through $1.1 billion.

The issue isn't necessarily the spending itself, but rather when investors can expect to see results from it. For Microsoft, concerns were that its heavy spending on data centers and AI infrastructure would erode cash flow and profits before a return on investment was seen. However, after its recent earnings report, which revealed Azure's first $100 billion year and a $678 billion backlog, many of those worries have been alleviated.