The latest Big Tech earnings brought plenty of fireworks. In midday trading on Thursday, Microsoft stock had surged 17% while Meta Platforms shares had sunk 9%.
Both companies are spending well over a hundred billion dollars this year on capital expenditures for new artificial-intelligence data centers. And both companies are seeing increased sales growth that is beating Wall Street expectations -- a sign that there has been a return on all that investment.
But in the current market, none of that really matters. Thursday's stock reaction came down to one story -- cash flow and capital expenditure spending. On that front, Microsoft and Meta had very different things to say.
In the latest quarter, Meta's cash flow was near zero after capex, while Microsoft had just shy of $20 billion, still enough to buy back some shares. Meta has halted share repurchases for three quarters in a row now.
Perhaps most importantly, Microsoft didn't raise its 2026 capex guidance, while Meta continues to push it higher.
That alone drove much of Thursday's divergent stock moves.
But there is some important context here that investors need to know. Microsoft stock has had a rough year, down 19% coming into earnings on dual bearish narratives. Many believe that AI will disrupt enterprise software and its high-margin subscription pricing model. In fact, Microsoft's business software segment beat revenue expectations for the 16th quarter in a row, and operating margin was up a bit on the year. Microsoft's business software got more profitable, pushing back on the negative software story.
Moreover, paying users of the company's flagship AI software product doubled in the past six months after slow initial adoption.
Encouragingly -- for investors -- the capex is mostly destined for Azure, Microsoft's cloud unit which rents the servers out over the internet. Azure sales growth is accelerating, and though depreciation expenses are mounting, Microsoft is making up for it with operational efficiencies. Operating margin in the company's Intelligent Cloud segment -- home to Azure and server software products -- was even with last year.
Meanwhile, Meta is seeing its best sales growth since its lockdown-fueled boom in 2021. Even though it's the most mature social media company in the world with 3.6 billion users, it was able to increase ad impressions in the second quarter by 14% and average ad prices by 12%, with total revenue up 28%.
Some of that is surely due to improvements from AI. But the lion's share of Meta's AI investment is going into research and development. Much of the depreciation from the company's capex gets counted as R&D expense, which was up 67% since last year and was 36% of revenue in the quarter. Meta's operating margin was down 12 percentage points from last year, and it badly missed earnings per share expectations.
The bigger issue for Meta is that it lacks a cloud unit like Azure to directly monetize some of its capex. Meta is alone among the big spenders in that all of its new AI servers are being used for internal purposes.
On the earnings call, Meta CEO Mark Zuckerberg indicated that the company would someday have a cloud segment, but Chief Financial Officer Susan Li said in a follow-up call with analysts that "we're really focused on using the compute for our own training and inference use cases first."
Meta is effectively putting all its money in one bucket. In a market that's skittish about AI, it has little room for error.
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