Microsoft and Meta both told investors on July 29 that AI spending is rising sharply. The decisive difference was not that one company is spending while the other is not; it was that Microsoft could point to faster Azure growth and a large commercial-contract pipeline while Meta’s profit miss exposed how quickly infrastructure, legal costs, and restructuring can swamp an advertising business that is still growing at an exceptional rate.
The comparison published by 24/7 Wall St. gets the broad earnings split right, but some of its cleanest-looking numbers need more caution. Microsoft’s reported $4.74 per-share result was its non-GAAP figure, while GAAP diluted EPS was $4.81. More importantly, Microsoft disclosed that several discrete items added $0.27 to GAAP EPS versus its prior guidance, including a $3.2 billion gain from its Anthropic investment. That makes the “beat” real, but it also means a sizeable share of the headline EPS outperformance did not come from Azure, Microsoft 365, or Copilot sales.
Meta’s $6.18 EPS result, meanwhile, was below the $7.19 FactSet consensus reported by the Associated Press. But calling that a straightforward AI infrastructure failure similarly leaves out the mechanics: Meta booked $2.40 billion in legal-proceeding charges and $1.18 billion in severance tied to its May reduction of roughly 8,000 jobs. Those items do not make the margin compression disappear, but they matter when comparing a single quarter’s earnings to Microsoft’s investment-related gain.
Meta reported $60.80 billion in second-quarter revenue, up 28% year over year. Advertising revenue was $59.36 billion, up 27%, while Family of Apps revenue reached $60.37 billion. The company’s core ad metrics were strong: impressions grew 14% and average price per ad increased 12%.
Those are not the figures of an ad business losing relevance because advertisers have exhausted the value of Meta’s targeting and ranking systems. In fact, the numbers suggest Meta’s AI work is already helping the company’s existing revenue engine, even if the company has not separated a discrete “AI revenue” line. Zuckerberg’s claim that AI is improving the core business is therefore supported by the direction of ad pricing and volume, though it is impossible from Meta’s disclosures to isolate how much of either metric came specifically from generative AI tools rather than broader product changes, demand, or currency effects.
The problem for Meta was cost growth. Expenses rose 55% to $42.03 billion, nearly twice the rate of revenue growth, and operating margin fell from 43% to 31%. The legal and severance charges accounted for $3.58 billion of the increase, but they were not the only force at work. Meta spent $31.08 billion on capital expenditures and finance-lease principal payments in the quarter, versus roughly $17 billion a year earlier.
That left free cash flow at just $784 million, down from $8.55 billion in the same quarter of 2025. This is the figure that changes the practical reading of Meta’s quarter. The company remains highly profitable and produced $31.86 billion in operating cash flow, but almost all of it was immediately committed to servers, data centers, and related infrastructure.
Meta has narrowed its 2026 capital-expenditure outlook to $130 billion to $145 billion, raising the low end from $125 billion while holding the upper bound. Its full-year expense outlook is now $165 billion to $169 billion. The capital plan was not meaningfully pulled back after the layoffs; the company has redirected resources while continuing to build at a pace that will keep cash conversion under pressure.
Microsoft also said Microsoft 365 Copilot exceeded 30 million paid seats. For Windows and Microsoft 365 administrators, that is a meaningful signal: Copilot has moved far beyond a limited add-on sold to early adopters. Yet the company still does not disclose Copilot revenue, revenue per seat, retention, active usage, or how many of those seats are bundled under broader enterprise agreements. Thirty million paid seats demonstrates commercial distribution; it does not, by itself, establish that Copilot is producing high-margin standalone software revenue.
The earnings comparison also requires keeping GAAP and non-GAAP results separate. Microsoft reported GAAP net income of $35.77 billion, or $4.81 a share, and non-GAAP net income of $35.29 billion, or $4.74 a share, after excluding the impact of its OpenAI investment. The company’s $3.2 billion Anthropic gain was still part of the quarter’s discrete EPS benefit, as were lower-than-expected costs from its voluntary retirement program; Xbox severance and impairment charges offset part of that uplift.
Axios reported that Microsoft’s quarterly capital expenditures rose 70% to $41 billion. Microsoft’s cash-flow statement separately shows $35.80 billion of additions to property and equipment. The difference is significant when comparing the company with Meta: Meta’s $31.08 billion figure explicitly includes both property and equipment purchases and finance-lease principal payments. Treating Microsoft’s $35.80 billion property-and-equipment figure and Meta’s $31.08 billion all-in figure as directly comparable “quarterly capex” understates the difficulty of making a clean side-by-side comparison.
Microsoft itself acknowledged that about two-thirds of its capital spending is going into short-lived assets, primarily CPUs and GPUs. That is a more important detail than the raw spending total. The company is not merely building long-lived data-center shells; much of its outlay is tied to hardware that will require replacement as workloads and chip generations change.
But describing the entire RPO balance as “contracted AI demand” goes further than Microsoft’s disclosure supports. RPO is a commercial-contract measure covering future revenue under a broad range of customer commitments. It includes cloud services, Microsoft 365, Dynamics, security products, support arrangements, and other enterprise offerings; Microsoft did not disclose what portion of the $678 billion is Azure AI consumption, Copilot, conventional cloud capacity, or non-AI productivity software.
That limitation does not make the number less valuable. It changes what it proves. The RPO demonstrates that Microsoft’s commercial customers have committed to spend heavily with Microsoft over future periods, giving it an unusually large base from which to fund AI infrastructure. It does not prove that all—or even most—of the balance is attributable to generative AI.
Meta has no equivalent RPO because its primary business does not sell multi-year enterprise software contracts. Its advertisers generally buy through auctions and campaign budgets that can be adjusted rapidly. Comparing Meta’s lack of a backlog line to Microsoft’s RPO is therefore comparing two distinct revenue models, rather than identifying a reporting deficiency at Meta.
The more useful comparison is this: Microsoft’s enterprise contracts help convert data-center capacity into recognized revenue over time, while Meta must keep demonstrating that its infrastructure spending raises ad engagement, conversion rates, and pricing enough to pay back the build-out. Meta’s 27% advertising growth provides evidence that the process is working; the free-cash-flow collapse shows how expensive that proof has become.
The split should not be read as a verdict that Microsoft has solved AI economics while Meta has failed. Microsoft has clearer enterprise monetization signals, but it is also spending aggressively on rapidly depreciating compute equipment and benefited in the quarter from an Anthropic-related gain. Meta’s earnings were hit by unusual legal and severance costs, but its recurring expense base and capex plan remain large enough that advertising growth must stay unusually strong to preserve margins.
For IT buyers, Microsoft’s results reinforce a near-term reality: Azure capacity, Microsoft 365 Copilot licenses, and enterprise AI services are now central to Microsoft’s financial performance, not experimental side projects. That strengthens the company’s incentive to keep expanding GPU capacity and moving Copilot deeper into Windows, Microsoft 365, security, and business applications.
Meta enters the next quarter with a simpler test. Its third-quarter revenue guidance will matter, but the real indicator is whether another quarter of AI-assisted ad growth can coexist with cash flow recovering from the $784 million trough. Microsoft has shown it can sell AI capacity into existing enterprise contracts; Meta now has to show that its enormous infrastructure bill can keep producing better ad economics without permanently resetting the profit margin investors once took for granted.
Meta’s $6.18 EPS result, meanwhile, was below the $7.19 FactSet consensus reported by the Associated Press. But calling that a straightforward AI infrastructure failure similarly leaves out the mechanics: Meta booked $2.40 billion in legal-proceeding charges and $1.18 billion in severance tied to its May reduction of roughly 8,000 jobs. Those items do not make the margin compression disappear, but they matter when comparing a single quarter’s earnings to Microsoft’s investment-related gain.
Meta’s advertising machine still expanded faster than its earnings
Meta reported $60.80 billion in second-quarter revenue, up 28% year over year. Advertising revenue was $59.36 billion, up 27%, while Family of Apps revenue reached $60.37 billion. The company’s core ad metrics were strong: impressions grew 14% and average price per ad increased 12%.Those are not the figures of an ad business losing relevance because advertisers have exhausted the value of Meta’s targeting and ranking systems. In fact, the numbers suggest Meta’s AI work is already helping the company’s existing revenue engine, even if the company has not separated a discrete “AI revenue” line. Zuckerberg’s claim that AI is improving the core business is therefore supported by the direction of ad pricing and volume, though it is impossible from Meta’s disclosures to isolate how much of either metric came specifically from generative AI tools rather than broader product changes, demand, or currency effects.
The problem for Meta was cost growth. Expenses rose 55% to $42.03 billion, nearly twice the rate of revenue growth, and operating margin fell from 43% to 31%. The legal and severance charges accounted for $3.58 billion of the increase, but they were not the only force at work. Meta spent $31.08 billion on capital expenditures and finance-lease principal payments in the quarter, versus roughly $17 billion a year earlier.
That left free cash flow at just $784 million, down from $8.55 billion in the same quarter of 2025. This is the figure that changes the practical reading of Meta’s quarter. The company remains highly profitable and produced $31.86 billion in operating cash flow, but almost all of it was immediately committed to servers, data centers, and related infrastructure.
Meta has narrowed its 2026 capital-expenditure outlook to $130 billion to $145 billion, raising the low end from $125 billion while holding the upper bound. Its full-year expense outlook is now $165 billion to $169 billion. The capital plan was not meaningfully pulled back after the layoffs; the company has redirected resources while continuing to build at a pace that will keep cash conversion under pressure.
Microsoft’s Azure numbers were strong, but its earnings beat had help
Microsoft’s fiscal fourth quarter was undeniably stronger on the operating metrics Wall Street watches for AI monetization. Revenue rose 18% to $90.0 billion, Microsoft Cloud revenue rose 27% to $59.3 billion, and Intelligent Cloud revenue rose 32% to $39.3 billion. Azure and other cloud services grew 43%, and Microsoft said Azure’s annual revenue passed $100 billion for the first time.Microsoft also said Microsoft 365 Copilot exceeded 30 million paid seats. For Windows and Microsoft 365 administrators, that is a meaningful signal: Copilot has moved far beyond a limited add-on sold to early adopters. Yet the company still does not disclose Copilot revenue, revenue per seat, retention, active usage, or how many of those seats are bundled under broader enterprise agreements. Thirty million paid seats demonstrates commercial distribution; it does not, by itself, establish that Copilot is producing high-margin standalone software revenue.
The earnings comparison also requires keeping GAAP and non-GAAP results separate. Microsoft reported GAAP net income of $35.77 billion, or $4.81 a share, and non-GAAP net income of $35.29 billion, or $4.74 a share, after excluding the impact of its OpenAI investment. The company’s $3.2 billion Anthropic gain was still part of the quarter’s discrete EPS benefit, as were lower-than-expected costs from its voluntary retirement program; Xbox severance and impairment charges offset part of that uplift.
Axios reported that Microsoft’s quarterly capital expenditures rose 70% to $41 billion. Microsoft’s cash-flow statement separately shows $35.80 billion of additions to property and equipment. The difference is significant when comparing the company with Meta: Meta’s $31.08 billion figure explicitly includes both property and equipment purchases and finance-lease principal payments. Treating Microsoft’s $35.80 billion property-and-equipment figure and Meta’s $31.08 billion all-in figure as directly comparable “quarterly capex” understates the difficulty of making a clean side-by-side comparison.
Microsoft itself acknowledged that about two-thirds of its capital spending is going into short-lived assets, primarily CPUs and GPUs. That is a more important detail than the raw spending total. The company is not merely building long-lived data-center shells; much of its outlay is tied to hardware that will require replacement as workloads and chip generations change.
The $678 billion backlog is evidence of demand, not an Azure-only AI order book
Microsoft’s commercial remaining performance obligation, or RPO, increased 84% to $678 billion. It is an extraordinary number, and it gives Microsoft a visibility advantage that Meta’s advertising-driven model cannot replicate in the same format.But describing the entire RPO balance as “contracted AI demand” goes further than Microsoft’s disclosure supports. RPO is a commercial-contract measure covering future revenue under a broad range of customer commitments. It includes cloud services, Microsoft 365, Dynamics, security products, support arrangements, and other enterprise offerings; Microsoft did not disclose what portion of the $678 billion is Azure AI consumption, Copilot, conventional cloud capacity, or non-AI productivity software.
That limitation does not make the number less valuable. It changes what it proves. The RPO demonstrates that Microsoft’s commercial customers have committed to spend heavily with Microsoft over future periods, giving it an unusually large base from which to fund AI infrastructure. It does not prove that all—or even most—of the balance is attributable to generative AI.
Meta has no equivalent RPO because its primary business does not sell multi-year enterprise software contracts. Its advertisers generally buy through auctions and campaign budgets that can be adjusted rapidly. Comparing Meta’s lack of a backlog line to Microsoft’s RPO is therefore comparing two distinct revenue models, rather than identifying a reporting deficiency at Meta.
The more useful comparison is this: Microsoft’s enterprise contracts help convert data-center capacity into recognized revenue over time, while Meta must keep demonstrating that its infrastructure spending raises ad engagement, conversion rates, and pricing enough to pay back the build-out. Meta’s 27% advertising growth provides evidence that the process is working; the free-cash-flow collapse shows how expensive that proof has become.
Wall Street rewarded Microsoft’s evidence, but the standard is now higher for both companies
The immediate market response showed investors preferred Microsoft’s presentation of the AI spend. Axios reported that Microsoft shares rose 16% on July 30, adding roughly $450 billion in market value in what Bloomberg characterized as the largest one-day market-cap gain on record. Meta initially fell in after-hours trading following its report, as investors weighed lower earnings, elevated spending, and third-quarter revenue guidance of $61 billion to $64 billion.The split should not be read as a verdict that Microsoft has solved AI economics while Meta has failed. Microsoft has clearer enterprise monetization signals, but it is also spending aggressively on rapidly depreciating compute equipment and benefited in the quarter from an Anthropic-related gain. Meta’s earnings were hit by unusual legal and severance costs, but its recurring expense base and capex plan remain large enough that advertising growth must stay unusually strong to preserve margins.
For IT buyers, Microsoft’s results reinforce a near-term reality: Azure capacity, Microsoft 365 Copilot licenses, and enterprise AI services are now central to Microsoft’s financial performance, not experimental side projects. That strengthens the company’s incentive to keep expanding GPU capacity and moving Copilot deeper into Windows, Microsoft 365, security, and business applications.
Meta enters the next quarter with a simpler test. Its third-quarter revenue guidance will matter, but the real indicator is whether another quarter of AI-assisted ad growth can coexist with cash flow recovering from the $784 million trough. Microsoft has shown it can sell AI capacity into existing enterprise contracts; Meta now has to show that its enormous infrastructure bill can keep producing better ad economics without permanently resetting the profit margin investors once took for granted.
References
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Published: July 31, 2026 at 4:30 PM UTC
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