REDMOND — Microsoft reported that its earnings per share grew 32 per cent last year. It also reported that they grew 22 per cent. Both numbers are in the same document, both are correct, and the ten points between them are a stake in a private company that is also one of Microsoft’s largest cloud customers.
The company does not hide this. It publishes the adjusted figure alongside the headline one and explains the reconciliation. What almost nobody does is read the second number, which is the one describing the software business.
Microsoft rose 0.93 per cent to $487.73 on Monday afternoon while the semiconductor index fell 2.32 per cent. The shares are 11.9 per cent below their 52-week high, which puts them in the middle of the megacap pack.
MSFT Stock Today: Where Microsoft Sits
| Company | Price | Session | Below 52-week high |
|---|---|---|---|
| Microsoft (MSFT) | $487.73 | +0.93% | -11.9% |
| Amazon (AMZN) | $261.87 | +1.25% | -8.8% |
| Apple (AAPL) | $311.45 | +0.68% | -9.6% |
| Alphabet (GOOGL) | $348.32 | +1.02% | -14.8% |
| Meta Platforms (META) | $560.21 | +1.87% | -29.2% |
| Nvidia (NVDA) | $209.44 | -2.46% | -11.5% |
| PHLX Semiconductor Index (SOX) | 11,468.51 | -2.32% | -21.7% |
| Dow Jones Industrial Average | 53,431.33 | +0.29% | -2.4% |
| Live intraday quotes, not settlements. Distance from the 52-week high is Eastern Herald’s calculation from the quoted price. Microsoft is a member of both the Dow and the Nasdaq 100. | |||
Two Numbers for One Year
Microsoft’s fiscal year ended on June 30. In the annual report it filed with the Securities and Exchange Commission, revenue was $331.8 billion, up 18 per cent, operating income $155.2 billion, up 21, and net income $133.7 billion, up 31.
| Line | FY2026 | FY2025 | Change |
|---|---|---|---|
| Total revenue | $331,839 | $281,724 | +18% |
| Total cost of revenue | 106,374 | 87,831 | +21% |
| Gross margin | 225,465 | 193,893 | +16% |
| Research and development | 35,562 | 32,488 | +9% |
| Sales and marketing | 26,710 | 25,654 | +4% |
| General and administrative | 7,956 | 7,223 | +10% |
| Operating income | 155,237 | 128,528 | +21% |
| Other income (expense), net | 10,697 | (4,901) | +$15.6bn swing |
| Net income | 133,749 | 101,832 | +31% |
| Diluted earnings per share | $17.95 | $13.64 | +32% |
| Figures in millions of US dollars except per-share amounts, as filed. Percentage changes are Eastern Herald’s calculation from the filed figures and are rounded. Two things in this column do the work. Cost of revenue grew faster than revenue, so gross margin narrowed from 68.8 per cent of sales to 67.9 while the three operating expense lines grew between 4 and 10 per cent. And the $15.6 billion swing in other income, the line carrying the OpenAI mark, is why net income grew 31 per cent on 18 per cent revenue growth. | |||
Diluted earnings came to $17.95 a share against $13.64, a rise of 32 per cent. On the adjusted basis, which excludes net gains and losses from the OpenAI investment, the same year produced $17.28 against $14.13, a rise of 22.
The reason the two diverge so widely is that the OpenAI line changed sign. In fiscal 2025 net losses on that investment reduced net income by $3.6 billion and diluted earnings by $0.49. In fiscal 2026 net gains increased them by $5.0 billion and $0.67.
Run the arithmetic on the growth rather than the level and it sharpens. Earnings per share rose $4.31 on the reported basis and $3.15 on the adjusted one. The $1.16 difference, roughly 27 per cent of Microsoft’s entire per-share earnings growth, came from a swing in the marked value of a stake rather than from selling anything.
None of that is improper and Microsoft is unusually clear about it. It is simply a different claim from the one the headline supports, and it matters because the investment being marked up belongs to a company that buys Microsoft’s cloud.
The Backlog Has a Clock on It
The number that has drawn most attention is the commercial remaining performance obligation, contracted revenue signed but not yet recognised, which rose 84 per cent to $678 billion. Total remaining performance obligation, including the non-commercial portion, was $684 billion.
The filing also answers the question that usually goes unasked about a backlog, which is when it arrives. The commercial figure carries a weighted average duration of approximately 2.3 years, and Microsoft expects to recognise about 30 per cent of it over the next twelve months.
Thirty per cent of $678 billion is roughly $203 billion, against $331.8 billion of revenue in the year just reported. That is a very large forward book with a short fuse on it, and it is a stronger disclosure than most of Microsoft’s peers make about their own pipelines.
The Cloud Is Getting More Expensive to Run
Inside the segment table is a line that complicates the growth story. Intelligent Cloud, the segment that contains Azure, produced revenue of $137.8 billion, up 30 per cent. Its cost of revenue was $57.9 billion, up 44.
Cost growing half again as fast as revenue is what capacity being bought at rising prices looks like when it reaches an income statement. Operating income for the segment still grew 28 per cent, so the economics are working, but the gap between 30 and 44 is the memory and infrastructure bill arriving in the one place it cannot be capitalised away.
Azure and other cloud services revenue grew 41 per cent. Microsoft does not disclose Azure revenue in dollars, only its growth rate, so anyone quoting a dollar figure for Azure is estimating rather than reading. Microsoft Cloud as a whole, which is broader than Azure, reached $214.4 billion, up 27 per cent.
Elsewhere the picture is ordinary. Productivity and Business Processes grew 16 per cent to $140.0 billion. More Personal Computing shrank 1 per cent to $54.1 billion, with Xbox content and services down 5 and Windows original-equipment and devices revenue slightly lower.
Why Monday Was a Microsoft Sort of Day
The session rotated out of semiconductors and into large technology with visible cash generation. Amazon rose, Meta rose, Alphabet and Apple rose, and every chip and memory name fell. Our Nasdaq column found half the largest Nasdaq companies higher.
Microsoft is the least exciting version of that trade and possibly the most durable. It sells software subscriptions with switching costs, it has the backlog to show for the spending, and it is not exposed to memory prices the way a device maker is. It is exposed to them through Intelligent Cloud’s cost line instead, which is slower and harder to see.
The circularity is not unique to Microsoft either. Eastern Herald has traced the same pattern in Nvidia helping finance the buildout it supplies and in AMD granting OpenAI an option over up to 160 million of its own shares. Microsoft’s version is the oldest and by some distance the best documented, because the SEC requires it to be.
What This Column Cannot Tell You Yet
We do not know how much of the $678 billion is OpenAI. A backlog concentrated in one counterparty is a different asset from one spread across thousands of enterprises, and Microsoft discloses the size and duration of remaining performance obligation but not its customer concentration. If a large share is committed by a company Microsoft also holds a stake in, and whose mark-up supplied a quarter of this year’s earnings growth, the quality of the backlog differs materially from what the headline implies.
We also cannot tell you what Microsoft paid for the compute behind that 44 per cent rise in Intelligent Cloud cost of revenue. The segment reports one cost line, not a bill of materials, so the split between more capacity and dearer capacity is not recoverable from the filing. It is the same question Meta’s capital spending guidance leaves open, and neither company has chosen to answer it.
Related Posts
