Microsoft – On OpenAI Watch

Microsoft’s second quarter 2026 results showed strong headline growth but also revealed some underlying challenges. The company reported revenue of $81.3 billion, up 17% year-on-year, with cloud services contributing $51.5 billion, an increase of 26%. Operating income rose 20% to $38.5 billion. However, free cash flow fell sharply to $5.9 billion, down from $17.3 billion a year earlier. This was due to capital expenditure (capex) increasing nearly 66% to $37.5 billion. Roughly two-thirds of capex spending went into GPU and CPU assets for data centres, which have a relatively short useful life of six years. 

Commercial bookings were another highlight, more than doubling to $625 billion. Yet nearly half of these commitments are tied to OpenAI, Microsoft’s key partner in artificial intelligence. While bookings represent long-term contractual commitments rather than immediate revenue, the concentration risk is clear: a significant portion of Microsoft’s future growth depends on one partner whose ability to generate sustainable revenue is still uncertain. Last year it was estimated that Open AI generated approximately $20 billion in revenue and continued to be unprofitable.  

The results demonstrate Microsoft’s ability to scale its cloud and AI businesses rapidly, and its integration of OpenAI technology into Azure and productivity products position it well in enterprise AI adoption. AI is now embedded across Microsoft 365, where Copilot assists users in Word, Excel, PowerPoint, Outlook, and Teams, and is being built into Windows and Office at the operating system level. Azure provides enterprises with access to advanced machine learning models, enabling custom AI solutions across industries. Microsoft has also highlighted AI’s growing role in medicine, scientific research, and climate solutions.  

At the same time, the sharp decline in free cash flow underscores the strain of funding such aggressive expansion, and the reliance on OpenAI introduces vulnerability that could affect both Microsoft’s share price and the broader AI ecosystem if expectations are not met. Some observers even suggest that government intervention might be necessary if the sector falters, which could stabilize operations but potentially dilute shareholder value.  

Overall, the quarter reflects both strength and fragility. Microsoft is achieving rapid growth in cloud and AI, but at the cost of massive investment and concentrated exposure.