Key Takeaways:
Microsoft jumped 19% to $460 as cloud growth proved AI converts to cash; Meta fell 6% on weak free cash flow.
"The market is rewarding companies that can show AI investment turning into revenue, profit and cash flow," Stephen Evans, chief investment officer at Pave Finance, said.
Amazon rose 15% to $271, Alphabet gained 7% to $356 and Oracle climbed 10% as the three cloud providers posted combined second-quarter revenue growth of 48%. Microsoft's Azure grew 43%, while Amazon Web Services rose 37% with an operating margin of 39%. Meta, lacking a public cloud business, slid to $556 after its $31.08 billion in capital expenditure left just $784 million in free cash flow, down 91% from a year earlier.
The divergence marks a shift in how Wall Street prices AI spending. AI infrastructure companies now contribute about one-third of S&P 500 second-quarter earnings-per-share growth, a share Goldman Sachs projects will exceed 50% by late 2026 and 2027. The bank keeps its year-end target of 8,000 for the index and forecasts 2027 EPS of $385.
Microsoft's quarter was the clearest proof that AI spending converts to revenue. Azure revenue grew 43% in the fiscal fourth quarter, pushing annual cloud revenue past $100 billion for the first time. Commercial remaining performance obligations — contracted but unearned revenue — reached $678 billion, up 84% from a year earlier, and Microsoft 365 Copilot paid users topped 30 million. The stock added roughly $450 billion in market value in a single day, a record for US equities.
Amazon Web Services showed a similar dynamic. CEO Andy Jassy said computing equipment pays back in under three years on average, while AI customer contracts typically run beyond five years. AWS signed a deal with Anthropic in April worth more than $100 billion over a decade. Jassy has floated a long-term vision of AWS becoming a $1 trillion annual revenue business, versus the roughly $170 billion analysts expect this year.
Meta faces the opposite problem. Its $60.8 billion in second-quarter revenue beat estimates, but earnings per share of $6.18 missed the $7.22 consensus. The company raised the lower end of its 2026 capital expenditure guidance to $130 billion, and free cash flow collapsed to $784 million. Zuckerberg has said building a cloud business is under consideration, but Meta remains far behind the three major providers.
The earnings season is forcing a re-rating of AI exposure: companies with a direct cloud monetization channel are winning, while those spending without one face scrutiny. Investors will watch Nvidia's Aug. 26 earnings for the next signal on whether the AI capital expenditure cycle extends into 2027.
This article is for informational purposes only and does not constitute investment advice.
