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Microsoft's Capex Surge: Stock Price Plummets
29 Jun
Summary
- Microsoft's stock fell over 20% in June, its steepest drop since December 2000.
- Revenue and earnings have consistently grown, yet the stock price has declined.
- Massive capital expenditure on AI data centers is reducing free cash flow.
Microsoft's stock has seen a dramatic fall in June, heading for its worst monthly performance since December 2000. This decline has significantly reduced the company's market cap, placing it behind other major tech firms. Despite this, Microsoft's underlying business remains robust, with revenue growth consistently within the 16-18% year-over-year range for eight consecutive quarters and earnings repeatedly surpassing Wall Street expectations.
The primary driver for the stock's recent underperformance is the surge in capital expenditure (capex), particularly for building data centers to support artificial intelligence initiatives. Last quarter, capex reached $38 billion, with projections estimating nearly $190 billion for 2026. This intense investment, shared by major hyperscalers, strains chip supply and drives up costs.
This aggressive spending directly impacts financial health, as increased capex of 63% year-over-year led to a 10% fall in free cash flow. Bank of America notes that hyperscaler capex now consumes almost 100% of operating cash flow, leaving little for shareholder buybacks or dividends. This contrasts sharply with the semiconductor sector, which has seen substantial gains, while Magnificent Seven stocks have lagged.
