Focus: U.S. Stocks Q4 2025 Earnings Season Satya Nadella and Mark Zuckerberg If quarterly earnings releases were a competition, Mark Zuckerberg was undoubtedly Wednesday's winner. One could even say investors are beginning to accept Meta Platforms Inc.'s "all-in," high-stakes investment strategy in artificial intelligence. The company, which owns Facebook and Instagram, reported a 24% year-over-year increase in Q4 revenue, surpassing market expectations, and projected that Q1 revenue growth would accelerate further to 30%—a growth rate not seen since Meta's high-speed expansion period in 2021. Admittedly, part (though not all) of this growth benefited from a weaker U.S. dollar, which boosted the value of overseas revenue when converted. Executives also elaborated that Meta's advertising business grew with the help of AI technology. Investors reacted enthusiastically: Meta's stock surged as much as 10% in after-hours trading.
Microsoft, which also reported earnings on Wednesday, faced a completely different situation. Due to a slight slowdown in its Azure cloud business, the company's overall revenue growth dipped marginally from 18% last quarter to 17%, causing its stock to drop over 6% in after-hours trading. For much of the past year, Microsoft's stock performance has been less than stellar, making this sell-off particularly pronounced. During the earnings call, analysts pointed out that investors are primarily concerned about two issues: whether Microsoft's massive investments in AI will yield returns, and its cloud business's over-reliance on customers adopting AI. However, investors should consider the bigger picture: Microsoft's software business inherently carries higher profit margins than Azure's server rental operations. The company's current core mission is to persuade its software customers to purchase its AI-enabled feature modules, a task that is already showing early signs of success. Microsoft disclosed that it has 15 million paid subscribers for its Copilot for Microsoft 365—while this number is modest relative to its overall scale (Microsoft reported 400 million Microsoft 365 paid subscribers in 2024), it undoubtedly represents a solid start.
Another market concern is the pressure on Microsoft's profit margins. The company's overall gross margin saw a slight decline in the latest quarter, with the root cause being its cloud business. Microsoft revealed that gross margin for the "Intelligent Cloud" segment, which includes Azure, fell by over 4 percentage points, impacted by rising AI infrastructure costs. In a securities filing, Microsoft admitted that although Azure's growth rate is higher than other parts of the Intelligent Cloud segment, this performance actually drags down the segment's overall margin. Furthermore, commentary during the earnings call indicated that Microsoft's margins will face even greater pressure in the March quarter.
Nevertheless, when it comes to the degree of margin pressure, Meta's situation is arguably more severe. In Q4, the company's operating expenses surged 40% year-over-year (primarily due to increased labor costs and AI server investments), causing its operating margin to contract by 7 percentage points. Additionally, as Meta warned three months ago, the company's spending scale will expand significantly this year: it expects 2026 capital expenditures to skyrocket to $115-135 billion from $72 billion in 2025, while operating expenses are also projected to increase by approximately 40% year-over-year. This implies that, even assuming business performance remains favorable throughout the year, its cash flow could noticeably shrink by the end of the year.
To be fair, Meta executives project that despite the substantial increase in operating expenses, 2026 operating profit will still be higher than 2025's. However, it must be said that, given accounting rule calculations, operating profit is somewhat of an accounting figure, whereas free cash flow is a more practical metric. By this measure, Meta's free cash flow for 2025 fell 16% year-over-year to $43.6 billion. Considering the massive planned increase in capital expenditures this year, its free cash flow will likely shrink further. The fact that the company's debt doubled in Q4 is clearly no coincidence.
Ultimately, for both companies, growth is important, but the cost supporting that growth is the more critical core issue.
Tesla's Strategic Pivot Will Tesla still be selling cars a decade from now? Given the current trajectory, the answer is not a foregone conclusion.
Elon Musk announced on Tesla's analyst call Wednesday that the company will cease production of its Model S and Model X luxury models, both of which have consistently seen poor sales performance. Tesla's current primary models in production are the Model 3 and Model Y. Musk stated that the company will convert its California production line, previously used for Model S and Model X, into a manufacturing base for its Optimus robot, ultimately aiming for an annual production capacity of 1 million robots.
Meanwhile, Musk and other executives repeatedly emphasized Tesla's Full Self-Driving (FSD) software and its nascent robotaxi service during the call. Multiple segments of the discussion made Tesla sound more like a subscription-based software company than an automobile manufacturer. Tesla's Vice President of Vehicle Engineering, Lars Moravy, said the company is transitioning into a "mobility service provider"; while CFO Vaibhav Taneja stated that the core engine for future growth will be "autonomous driving software," not car sales.
Furthermore, Tesla is phasing out the option for a one-time lifetime purchase of its FSD software. Starting February 14th, owners will only be able to access the autonomous driving features via a monthly subscription. Given this shift, why wouldn't Tesla fully transform into an automotive service subscription business? It wouldn't be surprising if, in the future, consumers only interact with Tesla products by hailing a robotaxi or leasing a vehicle that includes an autonomous driving subscription.
Another telling detail from the call: when asked why Tesla is investing $2 billion in Musk's AI company xAI, he gave a characteristically Muskian answer: xAI's Grok model will serve as the "command center" for managing future fleets of Optimus robots. Clearly, the core of this strategy has already moved beyond car sales.
Other Financial News
Amazon announced on Wednesday that it will lay off 16,000 employees. This round of job cuts follows a previous large-scale layoff in October of last year, when Amazon announced it would cut approximately 14,000 corporate roles.
Reuters reported that China has approved the first import applications for Nvidia's H200 AI chips. For weeks, the market had been uncertain whether China would approve imports of these high-performance chips and to what scale. This approval coincides with Nvidia CEO Jensen Huang's visit to China this week.
Salesforce's stock fell 7% in after-hours trading following its Q4 earnings release. The likely reason is that the enterprise software provider's revenue growth forecast for the current fiscal year is flat compared to the previous year, failing to meet investor expectations. Salesforce's subscription revenue grew 21% last fiscal year, while the forecast for this fiscal year is 20% to 21%.
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