The most dramatic stock rally in Microsoft’s recent history came with a footnote that investors are only now beginning to scrutinize. When the software giant reported fiscal fourth-quarter results that sent shares soaring by roughly a quarter — the biggest single-day gain in nearly two decades — the headline numbers looked spectacular. But peel back the GAAP layers, and a more nuanced picture emerges: a meaningful slice of that profit growth came not from selling software or cloud services, but from the way Microsoft accounts for its artificial intelligence investments.
The numbers themselves are undeniably strong. Revenue for the quarter ending in June reached $90.0 billion, up 18 percent year over year, while net income climbed 31 percent to $35.8 billion on a GAAP basis. Diluted earnings per share rose 32 percent to $4.81, comfortably beating the $4.24 consensus. For the full fiscal year, Microsoft booked $331.8 billion in revenue and $133.7 billion in net income, both growing at double-digit rates. Azure, the crown jewel of the company’s cloud ambitions, expanded 43 percent on a currency-neutral basis and crossed the $100 billion annual revenue threshold for the first time. The backlog of contracted but unrecognized revenue in the commercial segment — a key forward-looking metric — jumped 84 percent to $678 billion.
Yet the earnings quality debate is already reshaping how some investors view the quarter. Adjusted for one-time effects tied to Microsoft’s stake in OpenAI, profit growth for fiscal 2026 was 22 percent, not 31 percent. The swing is stark: OpenAI contributed a loss of $3.6 billion to Microsoft’s books in fiscal 2025, but added $5.0 billion in profit in fiscal 2026. In the fourth quarter alone, a $3.2 billion book gain from the Anthropic position — combined with lower costs from voluntary early retirement programs — added $0.27 to diluted EPS. The operating margin came in at roughly 46.8 percent, while capital expenditures reached about $41 billion for the quarter. Free cash flow, meanwhile, declined 23 percent year over year.
That divergence between reported profits and underlying operations has not gone unnoticed by some of the market’s most closely watched investors. Michael Burry, the investor famed for betting against subprime mortgages before the 2008 financial crisis, has exited his entire Microsoft position, which he had held since April 2026. In the same filing period, he closed his Oracle short position with a gain and trimmed his bearish wager against Palantir. The valuation context is instructive: Microsoft trades at roughly 25 times forward earnings, compared with 18.1 times for Oracle and a lofty 86.2 times for Palantir.
The insider and institutional flows tell a similarly mixed story. Takeshi Numoto, Microsoft’s EVP and Chief Marketing Officer, disclosed plans to sell 10,595 shares worth approximately $4.84 million. Company insiders collectively disposed of around 28,600 shares during the first quarter, according to regulatory filings. Yet several institutional investors were busy building positions in the same period — before the post-earnings surge. Lowe Brockenbrough & Co. increased its stake by 7.3 percent to just over 150,000 shares, Dimensional Fund Advisors added 10.5 percent to reach more than 29 million shares, and Leith Wheeler Investment Counsel expanded its comparatively small holding by over 1,100 percent. S&CO Inc. raised its stake by 10.4 percent to 190,197 shares, while KBC Group NV also added to its position.
Should investors sell immediately? Or is it worth buying Microsoft?
Wall Street’s sell-side remains largely undeterred by the accounting questions. Tigress Financial raised its price target to $690 from $680 on Wednesday, the highest on the Street, with analyst Ivan Feinseth citing robust growth across Microsoft’s AI and software ecosystem. Goldman Sachs had earlier in the week placed Microsoft on its “US Conviction List,” reaffirming a buy rating with a $640 price target. Both calls came in the immediate aftermath of the earnings release. More cautious voices exist, however — some estimates from late July run as low as $450, with concerns centered on rising cloud infrastructure costs. The consensus rating stands at “Moderate Buy” with an average price target of $558.87, still well above current trading levels.
For the current quarter, Microsoft has guided to revenue between $89.85 billion and $90.95 billion, implying growth of 16 to 17 percent. Management expects Azure to accelerate further to 45 percent currency-neutral growth, and capital expenditures are projected to exceed $50 billion as the company races to meet AI infrastructure demand. Microsoft 365 Copilot, the company’s AI assistant, now counts over 30 million paying users — double the prior quarter.
Several overhangs complicate the bullish narrative. A securities class action, with a lead plaintiff deadline of August 11, accuses Microsoft of misleading statements about AI capacity and Copilot adoption between May 2025 and January 2026. Separately, the Bank of England, the PRA, and the FCA have designated Microsoft Ireland Operations as a critical third-party provider to the UK financial sector, bringing direct supervisory oversight. Reports also suggest further performance-based job cuts may follow the 4,800 positions eliminated in early July, which represented 2.1 percent of the workforce.
The stock’s technical position reflects the tension. In German trading, shares were at €422.55 on Wednesday, down 1.25 percent, and remain 11.62 percent below the 52-week high from late October. The Relative Strength Index sits at 75.2 — firmly in overbought territory — after a 30-day gain of 23.38 percent. The dividend calendar offers income investors a near-term anchor: Microsoft pays $0.91 per share, with the ex-date on August 20 and payment on September 10.
The central question hanging over Microsoft’s valuation is one of quality versus quantity. The company is growing — solidly, even impressively — but the gap between GAAP earnings and operational performance has widened into a chasm that increasingly demands explanation. As the debate over how much of the profit surge is genuine operating leverage and how much is investment accounting continues, the market’s willingness to pay 25 times forward earnings for that distinction will be tested in the quarters ahead.
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