In their latest earnings reports, Microsoft (NASDAQ: MSFT) and Alphabet (NASDAQ: GOOG) showed how central artificial intelligence has become to their businesses.

Both companies beat Wall Street expectations by wide margins, with Microsoft reporting $77.67 billion in Q1 FY26 revenue (+18.4% YoY) and Alphabet surpassing $100 billion for the first time in Q3 2025, earning $102.35 billion (+15.9% YoY).

Microsoft’s expanded partnership with OpenAI, including a $250 billion Azure commitment, and Alphabet’s 650 million monthly active Gemini users show how extensively each company is integrating generative AI across its ecosystem.

The results also highlight the growing costs of AI leadership, including higher capital spending and more complicated operations.

Why It Matters: Microsoft and Alphabet’s earnings reveal that AI is the organizing principle for how cloud, infrastructure, and software is built and delivered. The ability to deploy AI products at scale, through developer tools, productivity platforms, or cloud APIs, is now a key growth driver. That opportunity also brings pressure to handle capacity limits and rising capital costs. What sets leaders apart is their ability to turn AI demand into high-margin services while maintaining resilient infrastructure to support it.

• Cloud Growth Anchors Enterprise AI Demand: Both companies reported strong demand for AI-powered cloud services. Microsoft Cloud revenue rose 26% to $49.1 billion, with Azure up 40% year over year. Alphabet’s Google Cloud grew 34% to $15.2 billion, and its backlog reached $155 billion, a 46% sequential increase. The results show AI moving further into enterprise-scale deployment, with Alphabet signing more billion-dollar cloud deals in the first nine months of 2025 than in the previous two years combined. Microsoft also saw commercial bookings jump 112%, driven largely by its OpenAI contract.

• AI Adoption Is Broad and Increasingly Monetized: AI adoption is accelerating across enterprise and consumer products. Microsoft reported 900 million monthly users engaging with AI features, including 150 million using Copilot in areas such as security and productivity. GitHub Copilot passed 26 million users, with enterprise deployments saving hundreds of thousands of development hours. Alphabet’s Gemini app reached 650 million monthly active users, processing 1.3 quadrillion tokens each month, more than 20 times growth in a year. Its Gemini-based tools are reshaping advertising and customer support, while YouTube Shorts now generates higher revenue per watch hour than traditional ads.

• The Cost of Scale and Rising CapEx and Capacity Pressures: AI’s infrastructure demands are staggering. Microsoft invested $34.9 billion in capital expenditures in Q1 2026, with roughly half directed toward short-lived assets such as GPUs and CPUs. It plans to double its data center footprint within two years. Alphabet raised its full-year 2025 CapEx guidance to $91–93 billion, up from $85 billion, with about 60% allocated to servers. Depreciation costs are up 41% year over year for Alphabet, as both companies invest heavily in scalable AI infrastructure. Microsoft said it remains supply-constrained in Azure and expects those limits to continue through FY26, which could delay revenue recognition even as demand accelerates.

• Control Over the AI Stack Becomes a Differentiator: The two companies are doubling down on vertical integration. Microsoft extended its exclusive rights with OpenAI through 2032, covering IP, API access, and revenue streams, while using the partnership to expand Azure workloads. Alphabet is relying on its own TPUs (Tensor Processing Units) and full-stack AI models such as Gemini, Imagen, and Veo, now integrated across Cloud, Search, and YouTube. This control over models and infrastructure gives each company more flexibility to balance performance and cost,

• Resilience Amid Change as Margins and Cash Flow Hold Steady: Despite heavy investment, profitability remained strong. Microsoft’s earnings per share rose 23%, and it returned $10.7 billion to shareholders. Alphabet reported 35% EPS growth, $24.5 billion in free cash flow, and $14 billion returned through buybacks and dividends. Operational efficiency supported by AI continues to contribute. Microsoft reported ongoing margin gains in Azure and Microsoft 365, while Alphabet said nearly half of new code is now generated by AI, improving developer productivity and reducing internal costs.

Go Deeper -> Microsoft Earnings Report – MarketBeat

Alphabet Earnings Report – MarketBeat

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