Microsoft’s AI Bet Is Paying Off — But the Technicals and the Lawyers Are Closing In

There is a paradox at the heart of Microsoft’s current stock market run. The company closed out its fiscal year with shrinking free cash flow, the kind of number that normally sends investors running for the exits. Instead, the shares have been climbing with an intensity that has left even seasoned tech traders doing a double take. The explanation lies in a simple bet: Microsoft is spending heavily today so that it can dominate artificial intelligence tomorrow, and so far, the market is buying that trade.

The fourth fiscal quarter, which ended June 30, delivered a clear verdict on whether that spending is working. Revenue hit $90.0 billion, up 18 percent year over year, while operating income rose at the same clip to $40.6 billion. Net income jumped 31 percent to $35.8 billion under US GAAP, with diluted earnings per share climbing 32 percent to $4.81. Adjusted EPS of $4.74 blew past the consensus estimate of $4.24, and revenue also topped expectations of $87.62 billion. The quarter was flattered by a one-time gain of 27 cents per share, including a $3.2 billion windfall from the company’s stake in Anthropic and lower costs tied to a voluntary early retirement program.

The standout performer was Azure, which crossed the $100 billion annual revenue threshold for the first time in fiscal 2026, growing 41 percent. That puts Microsoft’s cloud unit ahead of Google Cloud, though it still trails Amazon Web Services. Meanwhile, Microsoft 365 Copilot now counts more than 30 million paying users, up from over 20 million in April — evidence that the AI assistant is converting its massive Office installed base into a second growth engine alongside Azure.

For the current quarter, Microsoft has guided to revenue between $89.85 billion and $90.95 billion, implying growth of around 16 percent at the midpoint and coming in slightly above the analyst consensus of $89.66 billion. The Productivity and Business Processes segment is expected to contribute $36.7 billion to $37 billion, with commercial M365 cloud growth of roughly 16 percent on a currency-neutral basis.

A Rally That Has Run Ahead of Itself

The market’s response to all this has been emphatic. The stock closed Thursday at €433.65, up 2.64 percent on the day and a remarkable 29.35 percent higher over the past 30 days. Since hitting a yearly low of €307.10 in late June, the shares have gained more than 41 percent.

That kind of velocity inevitably leaves fingerprints on the technical indicators. The 14-day relative strength index stands at 77.3, firmly in overbought territory. The stock is trading about 23 percent above its 50-day moving average — a gap that underscores how far the price has detached from its medium-term trend. With 30-day annualized volatility running at 50 percent, this is a stock that can move quickly in either direction. Even after the rally, the shares remain roughly 9 percent below their 52-week high of €478.10, suggesting there is theoretically room to run — but the path there could be bumpy.

The Bull Case: Backlog and Balance Sheet

The most compelling argument for the bulls lies in the company’s remaining performance obligations — the contracted revenue backlog that provides visibility into future sales. That figure has risen sharply year over year, giving Microsoft a cushion of already-signed customer commitments to justify its current capital expenditure splurge. The money is coming; it just hasn’t arrived yet.

The company has also signaled that the cash flow picture should improve. Management announced expectations of positive free cash flow for the new fiscal year, aided by a change in how it accounts for data centers and office buildings. That shift is designed to reduce the drag that massive AI infrastructure investments have been placing on cash generation.

Should investors sell immediately? Or is it worth buying Microsoft?

Wall Street has taken notice. Goldman Sachs analyst Gabriela Borges raised her price target on July 30 from $610 to $640, maintaining a buy rating and describing the quarter as a turning point after a period of relative underperformance. Tigress Financial Partners went further, lifting its 12-month target from $595 to $690 in early August — a premium of nearly 16 percent — while reaffirming its buy recommendation.

The average analyst price target now sits at €487.82, only about 12 percent above the current level. That gap has narrowed considerably in recent weeks, a reflection of just how far and how fast the stock has traveled.

The Bear Case: Concentration and Courtrooms

The risks are equally hard to ignore. A securities class action lawsuit filed in early August targets Microsoft and several senior executives, alleging misleading statements about Azure and Copilot. The complaint references a 10 percent share price decline on January 28, 2026. A second suit, disclosed Thursday, names four executives personally and covers a class period from May 1, 2025 through January 28, 2026, accusing management of propping up the stock above $550 through false statements.

At the heart of the litigation is Microsoft’s tangled web of relationships with OpenAI and Anthropic. The company has invested over $13 billion in OpenAI and committed up to $5 billion to Anthropic, while both partners have agreed to purchase Azure capacity worth hundreds of billions of dollars in return. Critics describe this as a circular arrangement that inflates growth artificially. Deutsche Bank analysts, who maintain a buy rating on the stock, have previously flagged the concentration risk: roughly 45 percent of Microsoft’s $625 billion in contracted revenue obligations is tied to OpenAI alone.

A procedural milestone is fast approaching. Lead plaintiff motions in the class action must be filed with the court by August 11, which will mark the first concrete step in the litigation. Investors also face a near-term date on the calendar: August 20 is the ex-dividend date for the next payout of $0.91 per share, with payment scheduled for September 10.

The Verdict That Matters

The central question for investors is whether operational momentum — Azure’s growth, Copilot’s adoption, cloud margins — can keep pace with a valuation that looks technically stretched. The insider sales by Judson Althoff, CEO of Microsoft Commercial, on August 5 and again in June, follow the standard pattern of executive portfolio diversification and carry little signal about management confidence.

For now, the fundamental story appears strong enough to justify the overbought technical condition, provided Azure and Copilot maintain their growth trajectory and the company hits the margins it has guided for the current quarter. But if new details emerge from the class action proceedings — particularly around the OpenAI and Anthropic concentration risks — the stock could give back its recent gains just as quickly as it accumulated them. The market has placed its bet on the company building the biggest machine in the AI race. The coming quarters will determine whether that machine delivers.