Microsoft reports fiscal fourth-quarter results on Wednesday with its stock down 18% so far this year, the worst performer among the major cloud plays. Short interest has climbed to its largest share of the public float since May 2015 as investors question whether a $190 billion capital-expenditure plan will deliver adequate returns.
Microsoft shares have lost 18% so far this year to rank as the worst performer among the major cloud plays, lagging the S&P 500 by about 26 percentage points over that span. Deutsche Bank analysts have noted that the performance reflects investor doubts over whether the company's record AI spending will lead to adequate returns.
Short sellers hold their positions into the print
Short selling has built up alongside that slide. About 92 million Microsoft shares are currently sold short, representing 1.27% of the company's public float, according to S3 Partners — the largest short interest as a percentage of float since May 2015 and the largest increase among the Magnificent Seven stocks. S3 also said there has been virtually no short covering ahead of the report, due after U.S. markets close Wednesday.
That pressure intensified recently after Alphabet raised its 2026 capital expenditure forecast and reported accelerating cloud growth. Alphabet slumped nearly 8% last week after the news, while Microsoft fell 3% as investors focused on the prospect of even larger AI infrastructure investments across the sector.
Azure growth and Copilot seats are the metrics to watch
To assess whether the AI spending is paying off, Benchmark analyst Yi Fu Lee pointed to Azure cloud growth as the key metric. Deutsche Bank analysts say 40% to 41% year-over-year Azure revenue growth in constant currency is the level the company needs to meet or exceed.
Growth in Microsoft 365 Copilot seats, which are individual user licenses, is another signal of progress on AI monetization, and it would include new licenses for extensions like GitHub Copilot and Dragon Medical. The company added approximately 5 million new seats in the third quarter, and TD Cowen analysts model close to 6 million more in the fourth quarter.
Free cash flow heads lower as the buildout runs on
Wednesday's report covers the fourth quarter of fiscal 2026, for which analysts tracked by FactSet expect $16.8 billion in free cash flow, down 34.2% from a year before. Deutsche Bank analysts anticipate that free cash flow could drop near breakeven levels in fiscal 2027, which has just kicked off.
Management's treatment of its spending forecasts is the other thing Lee is watching. Microsoft projected in April that it would see $190 billion in capital expenditures this calendar year, and he said any raise to that outlook would have to be justified by a clear path to returns.
In all likelihood the debate over whether the spending is worthwhile will not get resolved in a single quarter. Lee framed it as a long-term bet, telling MarketWatch: "if you don’t spend the money to build for the future", in two or three years Microsoft would not have the IT AI cloud infrastructure to power frontier labs.
Sources: MarketWatch, CNBC
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