Bloomberg reported that Microsoft has tightened oversight of some outside AI data center projects, and the Financial Times said it won't exercise an option to more than double its Nscale deal. A Motley Fool analyst argues the shift does not fix Microsoft's falling free cash flow, and he finds the stock's price still high.
Microsoft has tightened oversight of some projects from neoclouds, firms that rent out AI computing capacity, according to a Nov. 5 Bloomberg report. The projects include those of Nebius Group, IREN and the privately held Nscale, and Microsoft is backing away from ones it finds risky, the report said.
The Financial Times reported the same day that Microsoft won't exercise an option to more than double the size of its Nscale deal at a Texas data center. Microsoft hasn't confirmed either report.
Meanwhile, IREN said that a customer-requested design change and vendor timing pushed its goal of over $4 billion in annualized revenue into early 2027. Its quarterly filing says Microsoft asked for a network design change across the deployments.
The stock trades near $535, about 4% below its Nov. 4 record close of $555.80.
Free cash flow keeps falling
Microsoft's free cash flow was around $60 billion over the last four reported quarters, down from about $78 billion in the four quarters ended September 2025. That is a fall of about 23%.
In the fiscal first quarter, cash from operations rose 29% year over year to $58 billion. However, cash paid for property and equipment was $39.4 billion, more than twice the year-ago amount.
Renting less may not help right away
The article's author, Daniel Sparks, thinks that cutting outside deals would not help right away. Leases are paid over many years, so a dollar of rented capacity can weigh much less on this year's free cash flow than a dollar of chips and buildings bought outright.
According to Bloomberg, Microsoft is focused on expanding its own data centers. If more money goes there, the short-term hit to free cash flow may grow, and management expects capital expenditures to pass $50 billion in the fiscal second quarter.
Microsoft had $364.6 billion in leases that hadn't started as of Sept. 30, mostly for data centers, up from $106.2 billion a year earlier.
Sparks finds the price too high
Demand does not appear to be the problem. Azure revenue rose 48% year over year in the fiscal first quarter, and management expects 49% to 50% growth in constant currency in the fiscal second quarter.
Sparks sees the price as the biggest problem: Microsoft's market cap of around $4 trillion is about 66 times the free cash flow it produced over the same stretch. He says he would want to buy closer to $465, and the reports don't change that.
Source: The Motley Fool
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