AI hardware has been cooling down in the capital market. As Microsoft and Meta released their latest quarterly earnings after the U.S. stock market closed on July 29, 2026, the most direct reasons have finally come to light.
Revenue Continues to Grow Rapidly, While Profitability Diverges
Let us first take a look at the financial performance of the two companies.
Microsoft: In the fourth fiscal quarter of 2026 (ending in June), Microsoft's overall revenue reached $90 billion, a year-over-year increase of 18%, with a net income of $35.77 billion, up 31% year over year. One-time gains included: a $3.2 billion unrealized gain from the Anthropic investment, and voluntary retirement costs coming in lower than expected, partially offset by Xbox impairments.
Revenue from Microsoft Cloud, the core growth engine, reached $59.3 billion, a year-over-year increase of 27%. The highly anticipated Azure and other cloud services business generated substantial revenue with a growth rate as high as 43%, driven by significant AI contributions. For the full fiscal year 2026, Azure's annualized revenue surpassed $100 billion for the first time, growing by 33%.
Regarding earnings guidance, Microsoft expects robust cloud demand to continue in the first quarter of fiscal 2027 (ending in September), projecting revenue between $89.85 billion and $90.95 billion, with Azure business growth at approximately 45%.
Microsoft's management indicated that high infrastructure depreciation costs are beginning to exert structural pressure on profit margins.
Meta: Second-quarter revenue reached $60.8 billion, a year-over-year increase of approximately 28%, slightly beating market expectations. However, its costs and expenses remained high primarily because total quarterly expenses surged by 55% to $42 billion. This included up to $2.4 billion in legal litigation costs, $1.2 billion in employee layoff and restructuring compensation, as well as rigid infrastructure costs such as steadily soaring server depreciation and AI R&D talent compensation to sustain AI large model training and computing power expansion.
Multiple negative factors led to a 14% year-over-year decline in its net income, triggering market concerns over earnings quality.
Regarding earnings guidance, Meta projects total revenue for the third quarter of 2026 to be between $61 billion and $64 billion.
Capital Expenditures: Not Aggressive Enough
Naturally, the most scrutinized focus of this earnings report undoubtedly fell on capital expenditures (CapEx), particularly regarding the attitude toward CapEx after a substantial surge in memory prices.
Microsoft's total capital expenditures for the quarter, including finance leases, reached $41 billion, a year-over-year increase of 69%, and a quarter-over-quarter increase of 28.5% compared to $31.9 billion in the previous quarter.
Microsoft's CapEx guidance for fiscal 2027 is set at $175 billion, down from the previously expected $190 billion. Management explained that the reduction in CapEx is merely a change in accounting treatment; funds previously classified as 'asset purchases' are now partially reclassified as 'long-term leases,' resulting in lower cash expenditures displayed on the books for the current year.
In contrast, Alphabet just raised its full-year CapEx guidance to as high as $205 billion last week. Due to massive spending on AI servers and data center construction, Alphabet experienced negative cash flow for the first time.
Meta's CapEx for the second quarter was approximately $31.1 billion, a year-over-year increase of 83%. However, its full-year CapEx guidance was merely narrowed from $125 billion–$145 billion to $130 billion–$145 billion, without raising capital expenditures despite the substantial price hikes in server components, represented by memory.
Unlike Microsoft, Meta lacks an external cloud business to hedge against risks, relying entirely on advertising cash flow to sustain its AI infrastructure.
Morgan Stanley previously released an industry estimation report, forecasting the CapEx of leading overseas cloud providers: in 2026, industry-wide CapEx will achieve a rapid year-over-year growth of up to 83%, and even by 2027, the overall industry growth rate will still maintain a high level of 58%.
However, looking at the latest earnings reports disclosed by Microsoft and Meta yesterday, the CapEx guidance and data metrics released by the two giants are generally cautious and weaker than the market's previous optimistic expectations. Coupled with the steady rise in prices of upstream core components for AI servers, this further amplifies the cost pressure on cloud providers' computing power investments.
If the CapEx growth rate of global hyperscale cloud providers falls back to the low double-digit range in 2027, the core growth logic currently supporting the high valuation of the AI hardware sector may significantly loosen, potentially leading to a comprehensive valuation repricing across the entire computing power hardware industry chain.